Open-access content 30th April 2012
Can actuaries help to slice through the bureaucracy surrounding pensions, asks Kelvin Chamunorwa
The UK government's ‘red tape challenge’, which aims to review regulations on a rolling basis and cut those that are unnecessary, is currently focusing on pensions.
If there is a DWP regulation, code of practice or any element of the Pensions Regulator's work that is felt to be outdated, ineffective or obsolete, the challenge is to raise this with government and provide suggestions as to how it can be reformed. European legislation that results in UK 'gold-plating' is also in scope, but state pensions and auto-enrolment are out.
Speaking at the National Association of Pension Funds' (NAPF) 2011 Trustee Conference in December, pensions minister Steve Webb, pictured, said the presumption is that all pensions regulation will be scrapped unless it can be justified and that regulation that is burdensome, out of date or could be made simpler should be changed. This challenge forms part of the coalition's pledge to reinvigorate private pensions.
Most rules in place were introduced to protect pension scheme members at some level, therefore it is important that any review does not reverse any of these safeguards or create additional loopholes.
Regulation, and, in particular, frequent changes to it, increases the cost and administrative burden of pension arrangements, and can discourage provision of private pension benefits or reduce competitiveness where pension provision is compulsory. Some would argue that the cost is actually ultimately borne by pension scheme members, rather than employers, through lower benefits elsewhere.
The effect of the regulatory environment is one of the reasons for the decline of defined benefit arrangements in the UK over the past decade. Arguably, it has also served to increase protection of pension scheme members - for example, increasing the role of member-nominated trustees and introducing the Pension Protection Fund through the Pensions Act of 2004. The aim of the challenge is not necessarily to reverse the trend of defined benefit provision.
The NAPF estimates that there have been 850 items of pensions-related regulation or legislation since 1995. While it is impossible for every part of pensions regulation to be reviewed, the principle is encouraging.
The 2012 budget announced in March did not result in an overhaul of pension rules, despite speculation that it would restrict higher-rate tax relief, reduce the amount of tax-free lump sums that could be taken and further reduce the annual allowance. This was largely welcomed by the pensions industry, but such speculation causes changes in member behaviour. Less frequent changes to key pension rules would reduce the occurrence of such changes and increase member confidence. Some commentators are even calling for a moratorium, whereby key legislation is kept unchanged for a specified period of time.
From an occupational pension point of view, it has been suggested that the intention to equalise guaranteed minimum pensions should be scrapped, as this is seen as likely to increase costs for schemes, yet with minimal impact on an individual member level. The Association of Consulting Actuaries has called for reforms in the private sector to allow employers to easily adjust pension ages as longevity improves, without the need to close good schemes.
The reason why legislation evolved in the first place should not be forgotten - the Maxwell and personal pensions mis-selling scandals remain fresh in many minds. Reducing public confidence in pensions will not help to encourage pensions saving. The interim code of practice on transfer incentive exercises, aimed at protecting members' interests and reducing the effect of information asymmetry, highlights the need for more regulation in some areas. However, having regulations, codes of practice and guidance is potentially more onerous than basic legislation with greater scope for discretion. The government has a balancing act between saving pensions and possibly reducing the security of benefits.
As principal advisers to pension arrangements in many cases, actuaries should take up the challenge to have a say in revamping the pensions landscape. This is an opportune time to engage with the government and make suggestions on relevant parts of regulation that we deal with day-to-day, giving specific examples to reinforce our arguments. It would be a positive development indeed if pensions simplification meant exactly that.
Kelvin Chamunorwa is a consultant at Towers Watson and a voluntary adviser for The Pensions Advisory Service. The views expressed in this article are his own.