Today’s Autumn Statement has provoked many responses from the pensions industry. While the entire industry has branded the reduction of the lifetime and annual allowance a mixed message from a government trying to get more people to save for retirement, opinions vary on the consultation on discount rates.

Pension relief cut
The annual allowance will be cut from £50,000 to £40,000, while the lifetime allowance will be reduced from £1.5m to £1.25m. Many feel that the reduction in the annual and lifetime allowances will undermine public confidence in pensions, just at a time when the government is hoping to get millions of people saving for retirement via auto-enrolment.

Scottish Life business development manager Fiona Tait said that this further restriction to the annual allowance will hit more people than just ‘the wealthy’. “It also hits many of those who are members of good final salary schemes and, in addition, those who have left it late to save for their retirement. This second group includes entrepreneurs and others whose primary focus is to build their own business, and who now may have much less to live on in retirement than they planned.

“Automatic-enrolment should be a very positive thing for most employees, but unfortunately we seem to have more negative than positive noises coming from the government. This latest change may only directly affect business owners, directors and senior employees, but it sends entirely the wrong message to everyone else as well.”

Broadstone Pensions & Investments managing director Matthew Phillips also believes the government is sending out a mixed message. “By cutting the annual allowance the Chancellor will make no difference to the country's finances. However, he has succeeded in sending out a completely mixed message on pension saving,” he said. “Why make pension saving seem less attractive to individuals when the outcome is such a small return for the Exchequer? If the government is concerned about the wealthy ‘getting away’ with tax relief, why not lower the amount but increase the relief for everyone to encourage saving?”

However, J.P. Morgan Asset Management European head of strategy Paul Sweeting said that retirement is about more than just pensions. “Other tax-favoured vehicles such as ISAs have an important role to play in providing retirement income. It is important that individuals are aware of this, and plan for retirement using the full range of investment vehicles available.”

PwC head of pensions advisory Raj Mody spoke of a “direct blow to the pensions savings culture” and said it could put pressure on the few remaining DB schemes to close, while employers might also be inclined to lower contributions to DC schemes to avoid inadvertently breaching thresholds.

"The trouble with repeated reductions in the allowances is that everyone will suspect further erosion to the system any time the UK economy runs into difficulty and the government needs to raise more tax revenue. Constant changes to pensions means employers and employees are much more likely now to throw in the towel and stick closer to the minimum savings required.

He added that it is unfair that DC savers will be hit harder by these changes. "Someone saving the maximum of the £40,000 annual allowance into a DB scheme would receive a pension of £2,500 a year, but a DC saver investing the same amount, may only be able to secure a pension of around two thirds of that amount, because of current annuity prices. The cut in annual allowance means savers in DC schemes, who want to contribute the maximum amount, could be losing out on £300 of pension payments a year.”

NAPF chief executive Joanne Segars concluded: “What we desperately need is stability, so that people can trust the pensions system and get on with saving for their old age, instead of being treated like a cash point when things go wrong. This raid also adds an extra layer of admin and cost for the businesses trying to run final salary pensions.”

Consultation on discount rate
Osborne has also announced a consultation into discount rates used to value pension liabilities, which the industry is in agreement over.

Chair of The Pensions Regulator Michael O’Higgins said the regulator works according to the legislative framework set by government and parliament and that it is for them to decide if that framework changes.

"We welcome the wider debate that a transparent consultation will bring to these fundamental issues, the outcomes of which will need to be clearly understood and worked through. Whatever the outcome of the consultation, trustees will need to continue to act according to their fiduciary duties."

But PwC’s Mody said that allowing TPR to smooth or put a floor on the discount rates would not be necessary or even that helpful. “This would just mask the underlying problem, risk leading to ill-informed decision-making and could store up future issues for pension schemes and companies.

"There are smarter and more contemporary techniques for dealing with the current low-yield environment, which allow companies to achieve more realistic assessments of their deficit and therefore reduce short-term cash burdens, as well as enhancing returns on their assets.”

Partner in the pensions team of law firm Macfarlanes Jane Marshall disagreed and said: "It is good news that the Pensions Regulator's statutory objectives may be expanded to include a specific objective to consider the affordability of deficit recovery plans. It is equally good news that the DWP is to consult on the smoothing of asset and liability values. This would recognise that private sector final salary pensions are only affordable at all if the impact on the sponsoring employer is part of the equation.

"Successive governments have turned voluntary pension promises into legal guarantees: responsible governments create a workable framework in which promises can be honoured without endangering investment and jobs. The alternative is the likelihood of more businesses failing as a result of the weight of their pension liabilities and members receiving reduced benefits."

NAPF director of policy Darren Philp said that a new statutory objective for the regulator could "ultimately deliver a more proportionate regulatory regime that recognises wider economic factors. We have long held concerns that the regulator is more focused on keeping funds out of the Pension Protection Fund, without due regard to the pressures on companies and the impact on workplace pensions.”

Mercer partner Deborah Cooper added: “What is most important is that this uncertainty about how financing pension schemes should operate in the future is resolved as quickly as possible, because it makes it difficult for trustees and employers to take informed decisions about how they run the scheme and manage risk and could create an uneven playing field between different 'tranches' of scheme valuations.

"We agree that the Pension Regulator's objectives needs to be reviewed, and that employer affordability could be a key consideration in doing so, since valuations are long-term planning exercises. But just adding a new, employer related objective might not in itself be a solution. The proposed new objective to consider employer affordability needs to be considered against the regulator's existing objectives, which already conflict since it has to balance trustee actions, which are driven by trustee objectives and responsibilities, with protecting the PPF. The proposed objective, whilst sensible in isolation, could send the regulator's head spinning and result in a very confused set of regulatory actions.

"The current valuation regime implicitly permits 'smoothing' but via recovery plans rather than smoothed measures of asset and liability values. Whilst market based measures are not necessarily realistic, the apparent comfort provided by stable measures can be misleading and hide a lot of information. It the regulator's objectives overall can be amended so that it must take a more balanced view of where risk should sit in the statutory funding system, then we think that the arguments about smoothing could become redundant.“

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