By Ilonka Oudenampsen
Many industry figures have responded to George Osborne’s Budget speech today, in which he announced that the Government will go through with a flat-rate £140 a week state pension, and that it will launch a consultation on Lord Hutton’s report on public sector pensions and a consultation on merging National Insurance contributions with income tax.
Robert Graves, head of pensions technical services at Rowanmoor Pensions and chairman of the Association of Member-Directed Pension Schemes, said: “The lack of pension detail in today’s Budget was conspicuous through its absence and what little detail there was had already been much discussed by the industry. However, there are some occasions when less is more – and this is one of them as we should be pleased there have been no more changes announced.
“We will await with interest the consultation on amalgamating income tax and NI and early access to pensions, but for now there is little for the industry to digest that wasn’t already in the public domain.”
Paul McGlone, principal consultant at Aon Hewitt, said: “Today’s Budget only revealed the tip of the pension iceberg: 90% of the detail is yet to be established. The abolition of contracting out, the introduction of a £140 a week pension, the review of public sector pensions, the automatic increasing of state pension age, the integration of income tax and NI - these are all easily understood in principle, but will be hugely complex to introduce in practice.”
Robin Hames, head of technical at Bluefin, said: “We may find that in the Government's desire to introduce simplification it will really only replace one set of complications with another. It looks like rights already built up may be maintained, and this will add complication to transitional measures. We've seen this before, and our fervent hope is that the Government takes its time to consider all the ramifications. It will also be interesting to see how they cope with measures of longevity. You don't want to end up in the situation where the poorest pensioners, i.e. those with the shortest lifespans, only enjoy a few years of their pension."
Single tier state pension
Jonathan Lipkin, head of research at the Investment Management Association, said: “Today’s Budget brings an important element to the new pensions settlement. A single tier state pension – combined with auto-enrolment and annuitisation reform – marks a radical shift. The continuing move to greater individual responsibility for pension saving will be complemented by a solid state foundation and the freedom to determine options for retirement income.
“With auto-enrolment and NEST now on their way, awareness of, and interest in, long-term saving will increase. Industry, government and regulators must work together to ensure a flourishing environment that encourages saving for the long term.”
Ending contracting out for DB schemes
Towers Watson believes that more employers will close defined benefit (DB) schemes to existing members, now that DB schemes will soon be unable to contract out of the State Second Pension.
Ending contracting out means DB schemes will no longer be able to replace part of the State Pension as well as topping it up. As a result, employees building up new rights to benefits from these schemes will lose their National Insurance rebates, as will their employers. This will make it more expensive for employers to continue offering these schemes on existing terms.
John Ball, head of UK pensions at Towers Watson, said: “Having declined so rapidly, what is left of private sector benefit pension provision was never going to stand in the way of the Government’s ambitions for the State Pension. If the Government waits a few years to bring this in, there may be less than one million active members in private sector defined benefit schemes who will be affected. Unfortunately, it is again employers who provided good pensions who will face disruption as the Government tries to fix the system for everyone else.”
Duncan Howorth, CEO, JLT Benefit Solutions, said: “Moving to a single tier state provision would end contracting out for DB pension schemes. Whilst this would necessitate a massive overhaul for schemes still open to some members, this short term burden could be more than offset by the long-term benefits and the change could mean a triple boost for employers: the existing rebate for contracted out DB schemes does not represent fair value for the benefits that schemes are required to provide; by contracting back in and reducing benefits accordingly, employers will be sharing pension risk with the state; and reduced benefits means it is less likely employees will be hit with an annual allowance tax charge from April 2011 and, therefore, there will be fewer people drawing on the “Scheme Pays” facility to cover the charge.”
State Pension Age
Today's budget confirmed that in future, given the continuing increases in life expectancy, the Government will bring forward proposals to manage future changes in the state pension age more automatically, including the option of a regular independent review of the implications of longevity changes.
If life expectancy continues to rise at the current rate, younger people may have to wait until they are 75 or more before they can retire. By 2071, assuming the same rate of mortality improvement continues, the state pension age will have risen to 77. So, young adults born in 1994 who are aged 17 today may face up to 61 years of work.
John Lawson, head of pensions olicy at Standard Life said: "We will look back on those who retired at 60 after a 40-year working life as the most fortunate generation in history. Their fathers and mothers had long working lives of over 50 years, and it looks likely that their children will also face much longer working lives than is the norm today.”
Aon Hewitt’s Paul McGlone said: “The proposal to increase the State Pension Age automatically is welcome and long overdue. Those who monitor life expectancy have known for decades that the State Pension Age was becoming more and more untenable, but successive governments have shied away from tackling the issue for fear of being unpopular. Only now that the matter is so pressing that it can no longer be ignored has it been openly discussed, and because it has been left so long we have little choice but to make changes quite quickly. With an automatic process we should get more notice of required changes, remove the political motivations, and have a system that everyone recognises to be objective and fair.”
Public Sector pensions and the Hutton Report
Clare Hobro, pension consultant at Aon Hewitt, said: "The government confirmed its intention to increase average employee contributions in public sector pensions by 3% p.a., with the taxpayer picking up the rest of the impact of revising the discount rate. What's not clear is who will bear the pain of the loss of around 5% of relevant earnings when - as looks likely - contracting out ends?
"Will the taxpayer pick up the tab or will public sector employees face a further hike or reduction in benefit accrual? Any benefit changes should be tied in with the post-Hutton proposals, but given the state pension changes are likely to take longer than the timetable envisaged by Hutton, there will either be a messy two-stage process, a delay in the Hutton timetable, or public sector employees will be hit by the contracting-out effect even before it is abolished.”
Merging NI contributions and income tax
Ros Altmann, director general at Saga, said: “When the Chancellor merges income tax with National Insurance, he will exempt pensioners from the tax increase that they would otherwise face. National Insurance rates will be 12%, but pensioners are exempt from this. If the merger went ahead, basic tax paying pensioners would have faced a 60% tax hike from 20% to 32%. This will not now happen.”
Rob Thomas, associate at Barnett Waddingham, said about merging NI contributions with income tax: “Salary sacrifice will almost certainly end. A common method for the payment of pension contributions involves ‘sacrificing’ an equivalent amount of salary so that savings in national insurance contributions can be made on the amount of salary sacrificed. If NI does not exist because it has been merged into one overall tax the benefits to employees and employers around salary sacrifice is lost. This would also have a knock on effect to some flexible benefit schemes.
“Ending salary sacrifice will hit many employers pretty hard. This is at a time when pension scheme costs are going to rise due to auto-enrolment and contracting out is going to cease for final salary schemes if there is no second tier state pension to contract out from. This will mean that many employers utilising salary sacrifice for the payment of pension contributions will be hit by increased NI costs which may be in addition to increased pension costs as a result of other pension reforms taking place.”