The coalition government’s radical shake up of both workplace and state pensions is continuing at a startling pace, raising new issues for trade unions wishing to both advise members and represent them in the governance and administration of their pension funds.
In his March 2014 Budget, chancellor George Osborne sent shock waves through the pensions industry when he revealed that, from April 2015, millions of people in defined contribution pension plans (otherwise known as money purchase pension plans) will no longer be obliged to buy an annuity with their savings pot when they are ready to withdraw it. Instead, people will be able to withdraw money from their pension as and when they like, only paying ordinary income tax on their withdrawals, compared to the 55% tax charge currently in place.
The government says 18 million people will be able to benefit from these changes, including individuals transferring from private sector defined benefit schemes (see page 40)
Then, in early June 2014, the government revealed its intention to pursue the idea of “defined ambition” pension schemes for Britain’s workplace savers (see box page 6). These include “collective” pension systems similar to those seen in the Netherlands, Denmark and Canada, where rather than people having their pension paid into individual pots, they pay into a massive fund with thousands of others. The idea is that because more people are invested, the charges levied on individual savers will be smaller, allowing people to keep more of their contributions.
These two developments, which have been criticised by the TUC as “pulling in opposite directions”, come as other changes are starting to have an effect. These include increased retirement ages to qualify for the State Pension, the introduction of the workplace pensions auto-enrolment system which started in 2012 and is now being extended to smaller workplaces, and the planned introduction of a new single-tier State Pension from April 2016, outlined in the Pensions Act 2014.
Together with new pension schemes for public sector workers and the drive for greater quality in defined contribution pensions, there is plenty that is new on the pensions front. And further changes set out in the Pension Schemes Bill published in June 2014 mean that the pace of change will not slacken.
This new Labour Research Department pensions guide examines the new framework of retirement pensions that is being created and the implications of the proposed changes for occupational pensions, private pensions and the State Pension. It looks at and explains:
• the new State Pension — winners and losers;
• auto-enrolment — developments to date;
• private and public sector pensions;
• defined contribution pensions;
• defined benefit pensions;
• value for money and charges;
• pension pots and retirement options;
• annuities and alternatives;
• quality governance of pension schemes and the role of trustees;
• new Pensions Regulator duties;
• regulating public sector pensions; and
• defined ambition and hybrid pensions.
Relevant current and forthcoming legislation and government proposals are referred to throughout the booklet as well as Guidance from the Pensions Regulator. Case studies involving trade unions are also used to illustrate the importance of union reps in influencing practical, beneficial changes to workplace pensions.
Different types of workplace pension are also referred to throughout this booklet (see box page 6). The differences are significant because they affect the way pension entitlement builds up, what members might get, how the schemes are run and how they are regulated. The Pension Schemes Bill (June 2014) provides a new legal framework for workplace pensions in the private sector, defining them in terms of what they “promise”. Any reference to an “occupational” scheme means one run by trustees.
Types of workplace pension
Defined Benefit (DB): These schemes offer a full pension promise of a pre-determined level of pension, usually linked to length of membership and what the member earns. Contributions are invested by trustees on behalf of members, to pay for pensions. They include traditional Final Salary pensions and also Career Average Re-valued Earnings (CARE) pensions (based on earnings over a member’s career, adjusted to keep up with prices or earnings increases).
Defined Contribution (DC): These schemes, otherwise known as money purchase pensions, build up individual investment pots that can be used to provide a retirement income but they make no promise about the level of pension that could be received. These include personal pensions arranged by the employer (such as Group Personal Pensions and Stakeholder Pensions) as well as trust-based DC pensions. Different rules apply depending on whether a DC scheme is trust-based (run by a trustee board, see page 71) or contract-based (no trustees, see page 73).
Hybrid: This refers to a range of different types of scheme that are part-DB and part-DC, and to Cash Balance pensions (see page 43).
Defined Ambition (DA) or Shared Risk: This is a new category of pension proposed in the Pension Schemes Bill. Designs will vary but they all make some promise about some of the benefits on offer, but not a “full pensions promise” (see page 41). They include Collective Benefits pensions that allow for the scheme’s wealth (assets) to be pooled across the membership, for example, Collective Defined Contribution schemes (CDC).
Public sector: Public sector schemes are defined benefit (DB) pensions established by regulation and law (most recently the Public Sector Pensions Act 2013). Some invest contributions in a similar way to private sector DB schemes and are known as funded (for example, the Local Government Pension Scheme). Most (like the NHS, teachers, civil servants and armed forces) are known as unfunded or “pay as you go”; their contributions go directly into current government resources, and members’ pensions are paid directly from current government income.
Trust-based or “occupational”: Run by trustees who are the legal owners of assets held in trust, with a “fiduciary duty” to look after the interests of members, overseen by the Pensions Regulator.
Contract-based: Private pensions (for example, Group Personal Pensions and Stakeholder schemes) based on a contract between member and provider, with no trustees, overseen by the Financial Conduct Authority.