Multi employer pension schemes – no storm in a tea cup!
In all of the latest gender related nonsense from Europe you’d have been forgiven for missing the latest tale of woe from the world of multi-employer pension schemes.
We’re grateful to Jennie Kreser of Silverman Sherliker for publishing an excellent article on the fate that has befallen the Wedgwood Museum – home of all that is great and good in the world of the eponymous pottery. Have a read of the article here – it’s well worth looking at. Jennie has a great style and brings complex issues to life in a clear and understandable way. You can subscribe to Jennie’s blog here.
We work with a number of employers in the Third Sector who are members of multi-employer pension schemes. Many of them will recognise this tale of woe. It is one that has befallen some charities who have found themselves having to close due to the imposition of huge (relative to their reserves) pension debts.
The Section 75 Debt regulations were primarily designed to avoid employers dumping pension liabilities by restructuring the business or group. The Law of Unintended Consequences means that not only are we seeing perfectly viable charitable organisations in danger of closing but also the possible loss of part of our national heritage.
The government are currently consulting on a change to these regulations but as far as we are aware no mention has been made of relaxing the regulations in situations like this. Clearly, something needs to be done.
Meanwhile, if you are in Staffordshire you may want to pop along to the museum before the shelves are bare!
A gender for change
You may remember that we wrote about the European legal case that was on the horizon that could have a massive impact on the pensions and financial services industry. Well today is the day and the European Court of Justice has published it’s decision. You can read the full press release here.
From December 2012 unisex rates must be used when looking at premiums and benefits. What does this mean?
Is it just Sheila’s Wheels?
If you have listened to the TV or radio or read the newspapers they are very much concentrating on the impact that same sex rates will have on car insurance rates. Here’s a good example from the BBC.
However, this judgement will go well beyond car insurance. It’s not just younger women drivers who will suffer the cost of the European unisex quest.
In fact the use of separate male and female rates stretches across the financial services industry.
Buying a Pension
One major impact will be in the rates that you can get when you come to use your pension pot to buy a pension at retirement. As women statistically live longer than men up until now for the same pot of money on the same basis at the same age a man will get more income. This was to reflect the fact that on average the man would be drawing his pension for less time.
From no later than December 2012 the rates will have to be the same. That’s going to create a bit of turmoil in the pension market over the next couple of years. It will also mean that those who are thinking about using their pension pot to buy a pension soon will need to get some advice regarding the timing of that decision.
From a pension scheme perspective the Financial Times have published an article commenting on the impact for company pension schemes that use annuities to provide income when a member retires.
One way or another if you are an employer with a pension scheme of any description you are going to have to sit down and look at the implications for your scheme. Even if you have a Stakeholder or Personal Pension Plan you may wish to alert members who may be considering taking benefits about this change.
Life Assurance, Income Protection & Critical Illness
These benefits – whether you take them out yourself or offer them through a company scheme – take into account gender differences. The different genders have statistically different claims histories and typical conditions. For life assurance for example it’s cheaper to insure a woman due to the longer life expectancy. In other words at nay age it’s less likely that a woman will die than a man of the same age if both are in good health.
We’re likely to see a change in the cost of these benefits as unisex rates start to be used. If you are looking at any personal cover it will be worth getting advice regarding whether it is wise to do this before December 2012 – particularly if you are a woman.
The Need for Advice
It’s clear that the impact of this judgement will be felt by far more than younger women drivers who may have to pay higher premiums. It will have a wide ranging impact for most individuals and their employers.
This will be a good test for how good your current adviser is. Firstly, to see how long they take to tell you about this and, secondly, how quickly they come up with a strategy for you!
Over time the financial services industry will work out how it intends to comply with the judgement. As we say all too often on this blog……watch this space!
For whom the Scheme Pays? Final Salary Schemes and High Earners
As we mentioned in our last post we were worried when we started the blog whether there would be enough to write about! We certainly needn’t have worried.
This article is really focused on employers who run final salary schemes and are likely to have members of their scheme who are long-serving and who probably earn over about £60,000. Equally it will apply to you if you are one of those members. Otherwise you may want to click away or speed read this post.
This month the Government will publish a piece of legislation that is rather bizarrely called “scheme pays”. Well why not – someone has to pay after all!
Scheme pays relates to will make it much easier for individuals to pay annual allowance charges that they may face. Great news for members facing a big tax bill but employers need to keep an eye on the cost implications for the scheme. The charge results from the annual allowance for pensions tax relief being reduced from its current level of £255,000 to £50,000.
The problem is that most employers thought that faced with the prospect of a big tax bill most members would opt for a cash payment rather the increased benefits. Now there’s likely to be a fly in that particular ointment. Scheme pays will make it possible for members to make the pension scheme pay most of the tax bill for them. Other than in exceptional circumstances can the scheme refuse.
Scheme pays will take much of the sting out of the annual allowance charge by reducing the cash flow strain on the individual. The current approach that most employers are adopting of offering affected people, particularly in final salary schemes, a choice of whether to maintain their full pension and pay the tax (stay-and-pay) or take a restricted benefit with a cash top-up, will find that for their people stay-and-pay is the better choice.
This is bad news for employers. This is because the cost of providing the benefits and the cost of administrating scheme pays will be significant. Draft legislation has already been published that means a scheme must provide the member with a Pensions Savings Statement. This will calculate the pension amounts for that tax year, and the three preceding years. Coupled with the difficulties of an annual ‘scheme pays’ event, the administration costs could well be thousands of pounds a year for each individual member involved.
Employers may well need a Plan B or even C to cope with all this. Plan B may be to loo at any offer you have made members to make it more attractive if the cash being offered is not enough to make this worthwhile for the member.
Plan C will apply to those employers who want to reduce costs and is simply to remove the choice altogether. Given current economic conditions employers may well look at introducing a system that makes sure that benefits granted each year are not more than the annual allowance.
Coupled with the reduction in the Lifetime Allowance that we wrote about in our earlier post Pension Snakes & Ladders this all means if you are running a final salary scheme and have higher earners you need to be looking at all this to make sure that you understand the implications.
If you would like some help with this, or if your existing consultant hasn’t highlighted this yet, 44 Financial would love to assist. Drop us a line at talk2us@44financial.co.uk.
Keeping you in the loop in so many ways!
When we started this blog we wanted to make sure that our clients and contacts were able to get access to information on things that affect them – quickly and concisely.
Having worked at a number of big benefit consultancies over the years we realised that mostly they were pretty poor at keeping their clients briefed on issues that they need to be aware of. Newsletters were normally issued weeks or even months after the event – sometimes even after the time to act had passed! We decided that 44 Financial was going to be different.
We want our clients to be able to be up to speed in an electronic age when things come fast and furious. That’s why we use mediums like LinkedIn and Twitter to help you follow the information from us that we think you need to know.
One worry that we had about our blog was – would there be enough “stuff” to sustain a regular flow. Well we needn’t have worried. The benefit landscape is changing fast and furious and there is more than enough to keep us occupied.
We’ll try to keep it relevant and fresh and warn you if something may not apply to everyone – e.g. something that relates only to final salary schemes. We won’t spam you and we hope that you will feel that we do a great job and recommend us to your contacts,
If you want to keep up to speed there are a few ways you can follow what we are saying.
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Pension Snakes & Ladders – are you protected?
You may remember, back in the days when we thought that Pension Simplification would be just that, the government introduced a limit on the amount of money you could build up in registered pension schemes. This is known as the lifetime allowance. It started off at £1.5m in 2006 and has gradually grown to £1.8m in this tax year.
If you were affected by this limit, or thought you might be in the future, you could apply for protection. Not the type of protection you get from guys with sharp suits, wide lapels and violin cases but protection from the nasty tax charges that bite when you exceed the lifetime allowance.
In th
is new era of financial austerity high earners are bearing their share of the financial pain. The Finance Bill 2011 will introduce a new lifetime allowance of £1.5m from 2012. It’s the Treasury’s version of pension snakes and ladders.
So basically we are back where we started? No, not quite. The government have said that a new type of protection will be introduced. They’ve called it Fixed Protection. It will allow individuals to take advantage of the current £1.8 million lifetime allowance so long as they build up any further benefits. If you’ve claimed protection under the 2006 rules you can still have up to the £1.8m limit.
If you employ high earners with substantial pension benefits it’s worth looking at those whose pension values are between £1.5m and £1.8m
If you are an employee and you think that you may be affected you really should get some specialist advice.
Well there you have it. Pensions Simplification? As if!