New pension laws fail to dispel fears By Ben Hall
Financial Times Published: November 19 2004 17:46
The Pensions Act, which scraped through parliament with hours to spare on Thursday, may prove to be one very long law of unintended consequences.
The act, designed to restore confidence in occupational pension schemes, is probably the most complex and highly amended piece of legislation since the much maligned Financial Services Act of 2000.
After some 1,000 amendments, the Pensions Act has doubled in length to
400 pages. Critics fear that in trying to protect final salary schemes it may in fact encourage sponsoring employers to close them.
The act provides a form of insurance for members of such occupational schemes through a new Pension Protection Fund. Itcreates a new Pensions Regulator to focus on fraud, maladministration and underfunding while minimising interference in well-run schemes.
The act is also supposed to make it easier for companies to run schemes and to provide pensions information to their employees. It changes the funding rules, clarifies benefit rights and offers incentives for people to defer taking their pension.
The need for a Pension Protection Fund, which will provide a form of pension insurance for workers whose employers go bust, was highlighted by the collapse of Allied Steel and Wire in 2002. That incident mobilised Labour MPs and the trade unions.
The need for the PPF was an "intuitive" response, says Steve Webb, the Liberal Democrat spokesman on work and pensions.
From the time when it was published as a bill, the aims of the new legislation have enjoyed broad support at Westminster and among employers, unions and the pensions industry.
The legislation in the new act builds on the Myners report on funding requirements and Alan Pickering's report on the need for greater simplicity. The act also complements the Treasury's tax simplification plans for pensions and encompasses a new EU directive.
The multiple sources for the act and the arcane nature of pension rules explain much of the complexity of the legislation.
But even Labour figures acknowledge that, when published in February, the bill was a rushed job and had not been properly thought through. "Downing Street saw the pensions crisis and said: ?We must do something'," said one official.
With a pensions bill before parliament, ministers were tempted to use it to solve all sorts of problems, such as closing down scams and setting up the government's £400m financial assistance scheme for victims of fund wind-ups.
Extra measures were added by government late in the process, often introduced in the Lords, so parts of the bill received little scrutiny from MPs. Examples include the requirement that 50 per cent of pension funds trustees should be fund members and the abolition of limited price indexation rules on final salary schemes.
Elsewhere, ministers rejected opposition amendments only to reintroduce them at a laterstage, such as making the PPF provide the same benefits for unmarried couples as the schemes that it covers.
What most worries business and pension funds is not knowing how the act will work in practice. There is uncertainty, for example, over how the PPF will work and how much it will cost.
The CBI, the employers' lobby group, is particularly angry that the cost of the PPF funded by levies on occupational funds could rise after ministers decided late in the day that it, rather than a £400m government aid scheme, should help workers whose employers are already on the brink of insolvency.
"We're sailing unchartered waters here," says Ken Macintyre of the National Association of Pension Funds. "The calls on the PPF are unpredictable."
Although the PPF is supposed to pay out 90 per cent of benefits in the event of a fund winding up, the government has retained powers to cut pay-outs.
There is also widespread concern about how the regulator will interpret its far-reaching powers to investigate and penalise attempts to dump pension obligations.
Most experts would agree that dealing with "moral hazard" is tricky. The government made some last-minute concessions and gave assurances that only malpractice would be prosecuted, while the regulator has offered to "clear" business transactions in advance. But how quickly will this be done, and when can clearance be revoked? Some lawyers and business groups fear that corporate transactions could be paralysed.
"The government's view was to take the widest possible powers and use them sensibly," says François Barker, a partner at Hammonds, the law firm. "That is quite a lot to take on trust."
Many details on how the PPF and regulator will work will come in 100 secondary regulations spawned by the act over the coming months. This could explain why business has recently stepped up its complaints. "Business did win some concessions, but these have failed to compensate for disappointments," says John Cridland, the CBI's deputy director-general.
Ministers take a certain pride in the fact that they have navigated ground-breaking legislation through parliament, providing new safeguards for workers. They also claim that it will reduce the burden of regulation on well-run schemes.
While supporting much of the new act, the Tories believe it is a "sticking plaster over the gaping wound" caused by Labour's pension policy, above all the £5bn hit on pension funds from the abolition of advance corporation tax. They and many others believe the costs and red tape associated with the changes could put off employers from sponsoring new schemes and therefore hasten the demise of final salary pensions.
"I am convinced we will be revisiting and revising this bill for years to come," says Steve Webb.
Pension simplification, Page M25
Find this article at: