With auto-enrolment arriving soon and plans for a simplified state pension, its a busy time for the National Association of Pension Funds, but its chief executive is upbeat about opportunities and challenges, finds Nick Mann
This is shaping up to be a pivotal year for UK pensions. Already, 2012 has seen plans announced for a simplified state pension that better takes into account the ageing population, while workplace pension schemes have been forced to face up to record deficits caused by the economic crisis. But those events could be put in the shade by the advent of auto-enrolment in October - bringing up to 10 million people into workplace retirement saving at a time when pensions participation has otherwise been falling for years.
The National Association of Pension Funds (NAPF) is on the frontline when it comes to facing up to those issues and, having been chief executive of the body since 2006, Joanne Segars is ideally placed to pinpoint what is needed to create a sustainable, popular system of retirement saving. The percentage of people saving into a workplace pension fell from 46% to 38% between 1999/2000 and 2009/10 and it's this decline that, arguably, presents both the biggest challenge and the biggest opportunity for the pensions sector.
Segars, who received an OBE for services to the pensions industry in 2003, is in no doubt about the reasons for the drop in participation levels. "One factor is a lack of confidence in financial services generally and pensions in particular," she says. 'We're also seeing, in some quarters, a declining appetite from employers for providing pensions as the cost of providing pensions has increased but also as the shape of the labour market has changed."
But, as befits someone who takes a 'glass half full' approach to the current pensions situation, Segars sees auto-enrolment as the chance to reverse this decline. Sitting in the NAPF's headquarters in the heart of the City of London just weeks before the UK's biggest employers begin to auto-enrol their workforces, she enthuses about her organisation's strong support for the change, and the "big, big benefits" it could bring.
Getting auto-enrolment up and running isn't the end of the task, however. The staged approach to the system means that the UK's smallest employers won't be brought under its auspices until 2017. It's those small members that are a particular focus for the NAPF, not least because they're being expected to implement a system that is, Segars says, less than straightforward.
Close work between stakeholders means the system is less complicated than it could be, but she acknowledges that it is still complex. "That's why employers and trustees will need some guidance. But it also needs good communication, to help individuals and employers through the process."
Fundamentally interlinked with auto-enrolment is, Segars says, state pension reform. Plans to introduce a single-tier pension of £140 a week, as well as automatically linking the state pension age to increases in longevity, were announced in the March Budget. Hopes that a white paper on the proposals would be published this summer were dashed in July, when pensions minister Steve Webb revealed it would be delayed until the autumn owing to the "scale, complexity and importance" of the proposals.
Segars hopes the proposals will be published soon after Parliament's summer recess, saying "they've got to get a move on".
The single-tier state pension, which the NAPF prefers to call the foundation pension, is "essential to make workplace pensions - defined benefit (DB) or defined contribution (DC) - successful", she says. "It gives people a clear foundation: this is how much you're going to get from the state, £140 a week. What you get to save on top of that is yours. That way, it's much easier to say to people who are about to be auto-enrolled into a workplace pension 'it pays to save, you're not going to lose out, you're not going to find it's all going to be means-tested away'."
Equally key to the success of workplace pensions is schemes' ability to fund the benefits their members expect on retirement. Workplace pension schemes are under pressure, as the challenging economic situation contributes to record deficits. Among the factors regularly cited as a key influence on those escalating deficits is the Bank of England's asset purchase programme, better known as quantitative easing.
To date, the Bank has purchased £375bn of gilts in a bid to revitalise the UK economy by increasing banks' liquidity and lowering the cost of borrowing. However, even before July's latest £50bn bout of QE, the NAPF estimated the initiative had added well over £200bn to the cost of funding DB pension schemes by reducing yields on the gilts that pension funds have traditionally invested so heavily in. "Quantitative easing has added to the cost of running pension schemes," says Segars, but stresses that "we're not saying 'stop QE'".
"Some of our comments on the impact of QE on pensions have been interpreted as us picking a fight with the Bank of England," she says. "That isn't the case: we've said all along that if the purpose of QE is to get the economy back on its feet, then that's good for pensions."
"For us, the question is: 'what's the short-term impact on pensions?' Does the Bank just have to buy gilts that pension funds are desperate for? Are there other assets the Bank could buy? It's an asset purchase scheme, not a gilt purchase scheme."
Given Segars' keenness to stress the NAPF's commitment to economic recovery, it's no surprise the organisation is playing a key role in plans to get UK pension funds investing in much-needed infrastructure development. The plans were originally announced in George Osborne's Autumn Statement last November, soon after which the NAPF began working with the Treasury, its agency Infrastructure UK and the Pension Protection Fund to create a platform through which funds can make that investment.
Infrastructure fund
Segars says that, since then, "what we've been doing along with the PPF is to put some flesh on the bones of those words and to try to turn them into reality. The aim is to create a £2bn infrastructure fund, for pension funds, by pension funds, which meets or overcomes many of the concerns pension funds have with infrastructure investment currently, and which deter pension funds from investing in infrastructure."
There are many reasons why infrastructure should be a natural investment option for pension funds, says Segars, not least its low-risk, long-term nature, while it should also offer inflation-linked returns. The NAPF and its partners are focusing on assets that aren't linked to gross domestic product - infrastructure such as regulated utilities and roads that don't rely on usage in the same way as, for example, ports do.
The formal launch of the investment platform is some way off yet, but Segars is positive about progress. 'We've been having discussions with pension funds. They have all said 'this is the sort of thing we need'. We're talking to them with a view to encouraging them to become founding investors, so we can put the infrastructure platform together. We hope to launch early next year.'
Infrastructure isn't the only issue where the NAPF is working closely with government. It's not often a trade association is in so much agreement with those running the country as in the NAPF and coalition government's shared view on the planned revision of the European Institutions for Occupational Retirement Provision Directive. Plans to place more stringent capital requirements on pension schemes have led to concerns that the revised directive will create a 'Solvency II for pensions' by mirroring new rules being introduced for the insurance industry.
Together with the CBI and Trades Union Congress (TUC), the NAPF wrote to the president of the European Commission, José Manuel Barroso, in February, warning that taking this approach could add billions to pension deficits and cause DB schemes to close. Then, in July, pensions minister Steve Webb stressed the government's continued opposition to any such move. Segars, who previously held the pensions brief at the TUC for 13 years, says the unity of purpose on this issue is "quite remarkable".
She is cautious about comments from the European Commissioner responsible for the Directive, Michel Barnier, that the revision won't involve a 'straight lift' of the Solvency II rules faced by insurers. "What he's also said, and what's clear from consultations from the European Insurance and Occupational Pensions Authority and others, is that Solvency II is the starting point," she says.
"So while he's saying there will be no 'copy-paste' - as they say in Europe - there's a sort of copy-paste, and it borrows heavily from Solvency II."
Getting the Directive right
Segars stresses the importance of taking time to consider exactly how the Directive should be revised. "This is a measure that will impact on millions of individuals, working people all across Europe, and employers and trustee bodies," she says. "So we must get it right, and we've been concerned that the Commission wanted to rush this. They're now taking a slower timetable, which is good, but are still keen to see proposals next year."
Of particular importance will be the assessment of the macroeconomics of any changes that is set to be carried out as part of the revision process. "Given that the focus in Europe has to be on growth, jobs and economic recovery, it's important to understand what the economic impact of applying Solvency II-like rules to pensions would be," she says. "They'd be damaging in terms of investment - if everybody has to come out of equities into gilts then you're disinvesting from the real economy, so what does that mean for investment opportunities and pension funds? It's not good."
In light of this, she remains hopeful that the NAPF's view will prevail, noting that the unity of opposition isn't just a UK phenomenon. Europe-wide business and trade union bodies are also lining up to attack any moves towards Solvency II-like plans. "That strength of opposition, that solidarity of pension groups, employers and social partners was strong enough to make the commission think again," she says. "But it doesn't mean we can take our eye off the ball - we've got to be vigilant."
Europe isn't the only area where the NAPF can claim to have government on its side. The current government's buzz phrase for the future of workplace pensions is 'defined ambition'. Sitting somewhere between DB, which places the risk on the employer, and DC, which places the risk on the employee, this could be seen as 'the middle way'.
"We've got a polarised environment, with pure DB and pure DC, and that's what the regulatory environment supports," says Segars. "There's not a huge amount of activity in that space between pure DB and pure DC. As soon you start to do anything that gives a form of guarantee, you have the full weight of DB legislation sitting on you - Pension Protection Fund levies and everything."
"We've argued for a long time that there ought to be scope to create an environment to populate some of that middle ground," she says. "It could be DC with guarantees, so you're at least guaranteed to get your contributions back - you can look at it as what some people call 'DB-minus'," she says. "Then you've got 'DC-plus', and it sort of merges in between. The guarantees thing is in that DC-plus space."
The NAPF's support for defined ambition is not unqualified. "We need to be wary about mandating employers to do that, because I think they would be wary if they think 'we're being dragged towards DB' or wary that successive governments could come along and layer things on," she says.
Based on previous experience, it seems there's every chance the government will take these concerns into account when it sets out formal plans for defined ambition later this year. Segars says a lot of the NAPF's success in lobbying for policy change is "about persistence and not giving up". "I think we are influential and have a good and constructive relationship with government," she says.
Taking a constructive rather than confrontational approach has paid dividends for the NAPF to date, and Segars is in no doubt that the organisation will continue to succeed in its aims in the future.
As a former journalist herself, she's aware of the negative news stories surrounding pensions, but she says: "It's a bit dull if we say the end of the world is nigh and just throw in the towel. It makes good headlines, but it doesn't get the job done."
Reeling off a long list of reasons to be positive - auto-enrolment, state pension reform, improving annuities, defined ambition - she adds: "There are lots of reasons to be optimistic and we have to be - the alternative doesn't bear thinking about."
But, as befits someone who takes a 'glass half full' approach to the current pensions situation, Segars sees auto-enrolment as the chance to reverse this decline. Sitting in the NAPF's headquarters in the heart of the City of London just weeks before the UK's biggest employers begin to auto-enrol their workforces, she enthuses about her organisation's strong support for the change, and the "big, big benefits" it could bring.
Getting auto-enrolment up and running isn't the end of the task, however. The staged approach to the system means that the UK's smallest employers won't be brought under its auspices until 2017. It's those small members that are a particular focus for the NAPF, not least because they're being expected to implement a system that is, Segars says, less than straightforward.
Close work between stakeholders means the system is less complicated than it could be, but she acknowledges that it is still complex. "That's why employers and trustees will need some guidance. But it also needs good communication, to help individuals and employers through the process."
Fundamentally interlinked with auto-enrolment is, Segars says, state pension reform. Plans to introduce a single-tier pension of £140 a week, as well as automatically linking the state pension age to increases in longevity, were announced in the March Budget. Hopes that a white paper on the proposals would be published this summer were dashed in July, when pensions minister Steve Webb revealed it would be delayed until the autumn owing to the "scale, complexity and importance" of the proposals.
Segars hopes the proposals will be published soon after Parliament's summer recess, saying "they've got to get a move on".
The single-tier state pension, which the NAPF prefers to call the foundation pension, is "essential to make workplace pensions - defined benefit (DB) or defined contribution (DC) - successful", she says. "It gives people a clear foundation: this is how much you're going to get from the state, £140 a week. What you get to save on top of that is yours. That way, it's much easier to say to people who are about to be auto-enrolled into a workplace pension 'it pays to save, you're not going to lose out, you're not going to find it's all going to be means-tested away'."
Equally key to the success of workplace pensions is schemes' ability to fund the benefits their members expect on retirement. Workplace pension schemes are under pressure, as the challenging economic situation contributes to record deficits. Among the factors regularly cited as a key influence on those escalating deficits is the Bank of England's asset purchase programme, better known as quantitative easing.
To date, the Bank has purchased £375bn of gilts in a bid to revitalise the UK economy by increasing banks' liquidity and lowering the cost of borrowing. However, even before July's latest £50bn bout of QE, the NAPF estimated the initiative had added well over £200bn to the cost of funding DB pension schemes by reducing yields on the gilts that pension funds have traditionally invested so heavily in. "Quantitative easing has added to the cost of running pension schemes," says Segars, but stresses that "we're not saying 'stop QE'".
"Some of our comments on the impact of QE on pensions have been interpreted as us picking a fight with the Bank of England," she says. "That isn't the case: we've said all along that if the purpose of QE is to get the economy back on its feet, then that's good for pensions."
"For us, the question is: 'what's the short-term impact on pensions?' Does the Bank just have to buy gilts that pension funds are desperate for? Are there other assets the Bank could buy? It's an asset purchase scheme, not a gilt purchase scheme."
Given Segars' keenness to stress the NAPF's commitment to economic recovery, it's no surprise the organisation is playing a key role in plans to get UK pension funds investing in much-needed infrastructure development. The plans were originally announced in George Osborne's Autumn Statement last November, soon after which the NAPF began working with the Treasury, its agency Infrastructure UK and the Pension Protection Fund to create a platform through which funds can make that investment.
Infrastructure fund
Segars says that, since then, "what we've been doing along with the PPF is to put some flesh on the bones of those words and to try to turn them into reality. The aim is to create a £2bn infrastructure fund, for pension funds, by pension funds, which meets or overcomes many of the concerns pension funds have with infrastructure investment currently, and which deter pension funds from investing in infrastructure."
There are many reasons why infrastructure should be a natural investment option for pension funds, says Segars, not least its low-risk, long-term nature, while it should also offer inflation-linked returns. The NAPF and its partners are focusing on assets that aren't linked to gross domestic product - infrastructure such as regulated utilities and roads that don't rely on usage in the same way as, for example, ports do.
The formal launch of the investment platform is some way off yet, but Segars is positive about progress. 'We've been having discussions with pension funds. They have all said 'this is the sort of thing we need'. We're talking to them with a view to encouraging them to become founding investors, so we can put the infrastructure platform together. We hope to launch early next year.'
Infrastructure isn't the only issue where the NAPF is working closely with government. It's not often a trade association is in so much agreement with those running the country as in the NAPF and coalition government's shared view on the planned revision of the European Institutions for Occupational Retirement Provision Directive. Plans to place more stringent capital requirements on pension schemes have led to concerns that the revised directive will create a 'Solvency II for pensions' by mirroring new rules being introduced for the insurance industry.
Together with the CBI and Trades Union Congress (TUC), the NAPF wrote to the president of the European Commission, José Manuel Barroso, in February, warning that taking this approach could add billions to pension deficits and cause DB schemes to close. Then, in July, pensions minister Steve Webb stressed the government's continued opposition to any such move. Segars, who previously held the pensions brief at the TUC for 13 years, says the unity of purpose on this issue is "quite remarkable".
She is cautious about comments from the European Commissioner responsible for the Directive, Michel Barnier, that the revision won't involve a 'straight lift' of the Solvency II rules faced by insurers. "What he's also said, and what's clear from consultations from the European Insurance and Occupational Pensions Authority and others, is that Solvency II is the starting point," she says.
"So while he's saying there will be no 'copy-paste' - as they say in Europe - there's a sort of copy-paste, and it borrows heavily from Solvency II."
Getting the Directive right
Segars stresses the importance of taking time to consider exactly how the Directive should be revised. "This is a measure that will impact on millions of individuals, working people all across Europe, and employers and trustee bodies," she says. "So we must get it right, and we've been concerned that the Commission wanted to rush this. They're now taking a slower timetable, which is good, but are still keen to see proposals next year."
Of particular importance will be the assessment of the macroeconomics of any changes that is set to be carried out as part of the revision process. "Given that the focus in Europe has to be on growth, jobs and economic recovery, it's important to understand what the economic impact of applying Solvency II-like rules to pensions would be," she says. "They'd be damaging in terms of investment - if everybody has to come out of equities into gilts then you're disinvesting from the real economy, so what does that mean for investment opportunities and pension funds? It's not good."
In light of this, she remains hopeful that the NAPF's view will prevail, noting that the unity of opposition isn't just a UK phenomenon. Europe-wide business and trade union bodies are also lining up to attack any moves towards Solvency II-like plans. "That strength of opposition, that solidarity of pension groups, employers and social partners was strong enough to make the commission think again," she says. "But it doesn't mean we can take our eye off the ball - we've got to be vigilant."
Europe isn't the only area where the NAPF can claim to have government on its side. The current government's buzz phrase for the future of workplace pensions is 'defined ambition'. Sitting somewhere between DB, which places the risk on the employer, and DC, which places the risk on the employee, this could be seen as 'the middle way'.
"We've got a polarised environment, with pure DB and pure DC, and that's what the regulatory environment supports," says Segars. "There's not a huge amount of activity in that space between pure DB and pure DC. As soon you start to do anything that gives a form of guarantee, you have the full weight of DB legislation sitting on you - Pension Protection Fund levies and everything."
"We've argued for a long time that there ought to be scope to create an environment to populate some of that middle ground," she says. "It could be DC with guarantees, so you're at least guaranteed to get your contributions back - you can look at it as what some people call 'DB-minus'," she says. "Then you've got 'DC-plus', and it sort of merges in between. The guarantees thing is in that DC-plus space."
The NAPF's support for defined ambition is not unqualified. "We need to be wary about mandating employers to do that, because I think they would be wary if they think 'we're being dragged towards DB' or wary that successive governments could come along and layer things on," she says.
Based on previous experience, it seems there's every chance the government will take these concerns into account when it sets out formal plans for defined ambition later this year. Segars says a lot of the NAPF's success in lobbying for policy change is "about persistence and not giving up". "I think we are influential and have a good and constructive relationship with government," she says.
Taking a constructive rather than confrontational approach has paid dividends for the NAPF to date, and Segars is in no doubt that the organisation will continue to succeed in its aims in the future.
As a former journalist herself, she's aware of the negative news stories surrounding pensions, but she says: "It's a bit dull if we say the end of the world is nigh and just throw in the towel. It makes good headlines, but it doesn't get the job done."
Reeling off a long list of reasons to be positive - auto-enrolment, state pension reform, improving annuities, defined ambition - she adds: "There are lots of reasons to be optimistic and we have to be - the alternative doesn't bear thinking about."
