Schemes must be transparent, non-complex and focused on member outcomes, if the industry is to retain consumer confidence, writes ACA chair Jenny Condron.
It is not clear to me, however, that all of our efforts really add as much value as they could.
It is no wonder that pensions administration is creaking under the pressure of schemes’ unscalable complexity
There have, of course, been critical events that have resulted in change for good; a focus on strong scheme governance for defined benefit and defined contribution schemes, and on DB funding, is to everyone’s benefit.
However, with every intervention, we do not always appear to take time to challenge whether the ultimate impact on member outcomes merits the additional complexity and cost being introduced.
To my mind there are three areas where early action needs to be concentrated (when, of course, we have a ‘strong and stable’ government).
Opportunity to simplify DB
Late last year, and with great input from Faith Dickson on behalf of the Association of Pension Lawyers, the Association of Consulting Actuaries produced a joint paper with Royal London on simplifying DB benefits.
With the catalyst of guaranteed minimum pension equalisation and conversion, the industry has the opportunity to achieve material simplification of the pension promises made.
Layer on layer of legislative change alone can add as many as 12 tranches to DB schemes. It is no wonder that pensions administration is creaking under the pressure of schemes’ unscalable complexity, with the potential for slow delivery and incomprehensible paperwork issued to members at the point they most need clear guidance from the industry.
We need to be bold in helping others in the sector understand the impact GMP conversion could have on the delivery of simpler DB pensions. It is an enormous challenge and it will not be a quick one. But with resulting lower ongoing costs, improved benefit security and clarity for members on the pensions they can expect, we must try.
Rather than every scheme developing their own version of simplified benefits, the ACA has proposed a ‘model scheme’ that could be adopted industry-wide. We are working with scheme sponsors, chairs of trustees and professional trustees to encourage its adoption, and we are seeing a lot of support for this.
We look forward to further guidance from HM Revenue & Customs and the Department for Work and Pensions, as well as legislation when parliamentary timetables permit, to help us make progress.
Pension tax not fit for purpose
The second area of focus is in relation to pensions taxation. In recent weeks there has been much coverage of the repercussions of pension tax thresholds within the NHS. The impact is, of course, industry-wide – not just on the high earners, but on those who are long-serving, those who receive a late career promotion, or who simply have doggedly done what they believed to be the right thing in planning and saving for their retirement.
Not only do we not have a level playing field for DB and DC accrual, we are operating in an environment where few of us can simply explain how the pensions tax system will impact on any individual, now or at retirement.
Everyone expects to pay tax, but it is essential that the system is transparent for it to be considered fair, and change is long overdue. We stand ready to assist the government in simplifying the regime.
New funding code must not be a burden
The final area is in relation to DB security, and we are delighted to be asked for our input in the development of a new funding code. In discussions with our clients, most already recognise the need to focus on the ‘end game’.
The potential for discussions on long-term objectives to be crystallised into a more detailed business plan, with regular measurement of progress against agreed targets, is to be welcomed. What is as yet less clear is how such goals will intertwine with technical provisions.
Collectively, we must ensure that the new code makes a material difference to benefit security. It must resonate with schemes large and small. Above all, we cannot burden schemes with more valuation costs – lengthier negotiations, more difficult documentation to be agreed etc – when the true goal is that the cash available should be going towards improving benefit security, not on adviser fees.
There is an underlying theme to each of these points – simplicity. It takes enormous effort to achieve, much like writing Churchill’s ‘short letter’. However, unless we strive for this, we risk undermining still further consumer confidence that, as an industry, we are focused on achieving better member outcomes, rather than disengaging further an already bewildered public.
Jenny Condron is chair of the Association of Consulting Actuaries
