Pensions: changes and challenges

About the Conference

Roger Jeary

February 2014

By Roger Jeary

Roger Jeary reports on the lessons learned from the IER’s two latest pensions conferences organised by the Institute of Employment Rights.

The impact of pensions and pension legislation – an issue near the top of the agenda for trade unions seeking to protect workers’ rights – was the subject of two interesting and well attended IER conferences in February. Lewis Emery from Labour Research Department chaired the London conference, while in Liverpool, the IER’s Director Carolyn Jones chaired.

Bryn Davies, Pensions overview: where are we now?

Bryn, an actuary running the Union Pensions Services for many years, started his presentation with an overview of the current pensions picture and made the point that significant changes are occurring – and frequently. Whatever changes are introduced they should primarily address the declining benefits people face in the future, both in the public and private pension provision. The debate however currently centres on the efficiency of private pension provision and the administration costs and the value derived from annuities.

He explained the triple lock protection, which political parties are signed up to, pointing out that it applies to the basic state pension but does not address the decline in the secondary state pension. Government proposals to place a cap on pension costs have been deferred for a year following lobbying from the industry. The message is that there is a lot going on and everyone is in on the act.

The DWP are the main focus of all that is happening. Introducing single tier pensions for people retiring after 2016, the abolition of contracting out in 2016, (the impact of which can be substantial in the private sector,) the increase in state pension age heading towards 67, the implementation of auto enrolment and the action aimed to improve DC provision. He referred to the “defined ambition” idea designed to provide middle ground between DB and DC schemes.

The TUC response to this had highlighted that if contributions were not high enough then any scheme would not provide what was needed; the priority was to get DC provision right, promote risk sharing within DC schemes whilst recognising that this can only work in large scale, well run, trust based schemes. Employers with DB schemes already have plenty of ways in which they can negotiate reduced costs such as closing for new employees, closing accrual rights and caps on the application of pay increases.

In addition the pensions regulator is providing guidance on funding of DB schemes, the running of DC, schemes and auto enrolment.

Bryn then turned to the impact of the economy on pension provision. If promises have been made based on the yield from treasury stock bonds in the past then the decline in this yield which arose from the finance crash results in much more money needed now to pay for promised benefits. He then turned to longevity and the fact that people are living longer. He explained that the issues arising from this vary across different socio-economic circumstances with serious implications for working life and retirement. He reminded us of the massive social implications of the increase in retirement age for different groups with those less well off likely to suffer most.

Bryn finished by drawing attention to the fact that employer contributions were much lower in DC schemes than DB schemes. He also made clear that auto enrolment, whilst bringing more people into workplace pensions, will fall far short of what is needed on current levels of contribution.

Dr Craig Berry, Third Time Lucky: building a progressive pension consensus

Next to address the conference was Dr Craig Berry from the University of Sheffield who addressed the issue of how to build a consensus for progressive pensions. He referred to previous consensus based originally on social insurance and social wage in the post war era which provided a contributory and redistributive state pension system. Alongside this employers provided defined benefit pension schemes and government then expanded the state scheme through SERPS and contracting out. He explained that this unravelled as it became suggested that this smacked of ‘state overload” as we moved into the 80’s.

The second consensus individualised pensions and saw the erosion of both state pension value and fewer employers offering defined benefit or any private pension. Labour when they came into power increased the value of the safety net and sought to widen access to DC pensions. This consensus unravelled as it was never fully accepted by all parties. Individual behaviour varied and the mis-selling of pensions also played its part.

The Third Consensus was based on the Turner Commission in mid 2000’s. It advocated a move to a flat rate state pension taking everyone above the poverty threshold. It also sought to introduce a platform for people to save for themselves. The Commission also recommended the introduction of the auto enrolment private pension for employers to provide minimum contributions. Craig pointed to the good news arising from the third consensus in that single tier state pension should take people above poverty level but warned that it had got off to a poor start with a too low level.

He also told the conference that the single tier does not achieve simplification as there is greater reliance on complex private pensions, there remains a messy contracting out legacy and it fails to incentivise private saving.

More bad news highlighted the increase in state pension age and the inconvenient fact of the existence of life expectancy inequalities.

On private pensions the good news is the duty placed on employers to contribute and the low cost NEST scheme. However the bad news is the dominance of DC schemes. These will be mainly contract based DC schemes reflecting inappropriate faith in the financial services industry. There is the possibility of high charges and the endemic problem of hidden transaction costs and the failure to challenge City practices. Many low earners are automatically excluded from even the auto enrolment scheme. The reliance upon annuities for retirement income is madness, given their complexity and rip-off fees.

The need to radicalise the third consensus highlights the need for a higher single tier starting rate but Craig felt that no party is likely to do this so the alternative will be to phase in a higher rate through additional indexation. The level of contributions has to be addressed and this should be based on every pound earned. Craig also argued that pension tax relief was heavily skewed towards higher earners and advocated a single lower rate of 30%. The TUC argues that the governance model should be trust based rather than contract based and should include member representatives and be genuinely independent of providers. The state should provide annuities. The alternative is for a collective DC scheme which introduces risk sharing elements of DB.

Finally Craig argued that the state pension age changes should be taken away from government and an independent Commission established to determine changes in the future.

During the Q&A session following these two speakers, questions from the floor addressed the inequalities of life expectancy and the impact on ‘blue collar’ workers and low earners and the impact of possible collective defined contribution schemes. In response to a question about contracting out the speakers explained that this would lead to employers and employees in DB schemes paying more NI contributions from 2016. In the public sector this will also lead to higher contributions but it is unclear what will happen to this increased income for the Treasury.

Ijeoma Omambala, Age Discrimination: A legal Update

At the London Conference delegates next heard rom Ijeoma Omambala, from Old Square Chambers, who presented a legal update on the issue of age discrimination. Unfortunately, Ijeoma could not attend the Liverpool event. In London she began by referring to two recent European Court of Justice age discrimination cases, Toftgaard and Kristenson (Experian). Both cases arose primarily through redundancy and the claiming of pensions. This dealt with Danish Law which allows workers under 65 to claim ‘availability pay’ but not workers over 65. The court determined that the difference in treatment could not be justified as it discriminated on the basis of age and it thought there could be alternative ways to provide the protection sought for workers under 65. In the second case of Kristensen the issue was whether the exceptions applied to a pension scheme that provided increases in contributions based on age. This was considered to be discriminatory as the complainant was receiving less pay because of her age through having to pay higher pension contributions. The employer sought to justify the difference by saying that it enabled later starts to build up an reasonable pension over a shorter period and encouraging younger workers to enter the scheme at a lower cost. The court agreed that it was for the national court to establish whether the factors amounted to justification. Ijeoma suggested the outcomes demonstrated that employers would need to work really hard to bring the cases into the exemption for the directive provisions.

Turning to UK cases Ijeoma firstly referred to the Lockwood case in which the Court of Appeal addressed the different compensation received by someone aged less than another employee on redundancy and whether this amounted to direct age discrimination. The court gave useful guidance on the issue of material differences in circumstances and overturned the tribunal decision that the difference in age between two employees provided a material difference in the circumstances of the case.

She then referred to the Heron v Sefton MBC case in which she showed how rigorous the courts will be in determining whether age discrimination can be justified. In this case the EAT told the employers that in order to justify different treatment they would have to produce evidence and statistics to back up their arguments.

Finally Ijeoma referred to the Police A19 Regulation which forces officers to retire providing they receive a pension of two thirds of their pensionable pay. Due to cuts, some authorities had issues mass redundancies using the Regulation.The Tribunal found that the argument was flawed and the employers failed to produce appropriate justification. The decision is likely to be appealed.

Neil Duncan-Jordan, The single tier state pension

The final speaker for the morning session was Neil Duncan-Jordan, from the National Pensioners Convention and he spoke passionately on the single tier state pension. He started by saying that single tier state pension was no financial cushion. He argued that the notion of a single tier pension at this time was a nonsense. He reminded us that around one in five pensioners live below the poverty line the majority of whom are women. The current basic of £110 per week is inadequate. About 4 million are entitled to pension credit but nearly 1.8 million do not claim this for a variety of reasons. All of this, he suggested, goes to show that the state pension system is not working.

Neil pointed to government actions such as the change to CPI from RPI which will reduce pension growth for years to come and governments’ rose tinted view of longevity which takes no account of class or social standing. The single state pension as currently proposed will provide a pension of around £146 – 150 per week from 2016. This figure will be a combination of basic plus second state pension so will not necessarily mean an increase for all. Also employees will end up paying more on National Insurance from 2016. Employers in the private sector are to be given 5 years grace to make changes to private pension schemes to compensate for increases in their NI contributions by changing schemes without agreement of Trustees.

In reference to the increase in state pension age, Neil referred to government looking at further increases every 5 years. On the auto enrolment scheme he questioned how low paid workers could be persuaded to put money in when if you added that to the state pension they could be entitled to means tested support. To overcome this, government has set the single tier state pension just above the level which generates a claim for means tested support.

The concern of the National Pensioners Convention is that the state pension changes have been designed to encourage the case for the auto enrolment provision. The justification for the single state pension is its simplicity. However until about 2080 there will be two pension schemes running in tandem, one for those on the existing pension scheme and one for those on the new one. Existing pensioners will be excluded from the new scheme. This is not bad for all pensioners as they are in receipt of more than the proposed level of the single tier scheme.

Neil highlighted the problems with pension legislation which is brought into place overlapping with existing legislation. He finished by restating the inadequacy of the single state pension, arguing that the future generation of workers will be worse off under the new scheme.

Further questions followed about the impact about increased retirement ages on workers who have physical jobs, the application of the triple lock on the single tier state pension and the level of redundancy for those aged over 65. The work of trade unions through collective bargaining on retirement ages for those in physical jobs was considered the best response to this issue. On the triple lock, Neil felt that the government of the day would apply the triple lock to the single tier regardless of the legislation currently going through parliament.

Michael Ford QC, The Beckman Judgement: protecting income benefits after redundancy

at the London event, Michael Ford QC gave conference a detailed explanation of the Beckmann Judgement and the ability to protect income benefits following redundancy. Apologising for the technical nature of this case, Michael stated that the case was about TUPE and which pension rights transfer with workers. The case revolved around an NHS employee transferred to a private sector employer. He pointed out that some private sector employees will also be affected. This case reversed the practice for basic redundancy to be paid on the basis that pension rights don’t transfer under Article 3(4) of the Acquired Rights Directive. TUPE Regulation 10(1) addresses this point in the UK legislation. Provisions which do not relate to “old age, invalidity or survivors” are not covered by this exclusion.

The Beckmann case reversed an earlier decision in Franklin v BPS. The NHS Whitley Council provided for an enhanced early pension and Mrs Beckmann was made redundant after being transferred to a private sector employer. The definition of “old age” was restricted by the ECJ to benefits which apply at the end of normal working life and therefore Mrs Beckmann was entitled to the rights of the enhanced early retirement pension she would have got under the NHS scheme.

Michael pointed to the subsequent case of Martin v South Bank University which further confirmed the Beckmann decision and added to it. He made clear that the benefits of this decision could be enormous in terms of the value of pension rights on early retirement and thus stressed the importance of this decision. He went on to highlight the outcome of the Proctor & Gamble v Svenska which the court determined that whatever the source of the right – Tust or statute – as pensions are a form of deferred remuneration then they would transfer. The court also said that benefits up to normal retirement age apply, not benefits post normal retirement. However he warned that employers were looking for ways to avoid the rights emanating from this decision including using dismissal and re-engagement, where the House of Lords has decided that the only remedy is unfair dismissal with the cap limitation applied by government.

Nick Kirby, Teachers Pensions: a perspective from the NUT.

At the Liverpool event, Nick Kirby, Principal Officer for Pensions at the NUT, updated delegates on past and future NUT negotiations and strike action over pensions. He reminding delegates that on 26th March 2014, teachers will be out on strike again due to Michael Gove’s refusal to address ongoing concerns over pay, pensions and conditions of service.

Nick outlined the nature of the negotiations across the education sector, the likely impact of the government’s proposed ‘reforms’ and the fact that teachers faced the prospect of paying more, working longer and getting less.

Christine Haswell, Developments in public sector pensions: new “fair deal” arranements

Christine Haswell from PCS talked about the developments in public sector pensions and the new ‘Fair Deal’ arrangements. She began by explaining the “Fair Deal” which was introduced in 1999, with further guidance in 2004, as a set of statutory guidance for staff in the public sector compulsorily transferred to the private sector and the treatment of pensions. Central government , NHS staff and others were put in to ‘broadly comparable schemes’ and local government staff were allowed to remain in their current schemes under “Admitted Status”.

New guidance in 2013 provides for changes to be made for public sector employees rights. It provides for civil service and other public sector employees to remain in their existing schemes. Christine argued that in general this was a positive move notwithstanding the changes to public sector schemes which have occurred. She suggested that this could be viewed as “a light in a dark place”. She pointed to the positive facts that they remained defined benefit schemes and the right in the civil service to go at age 60. She went on to speak about those who had previously transferred to the private sector before the fair deal. They have no protections under the deal but workers are expected to come back into the civil service at some point and will be moved back into the public sector scheme. This will not suit everyone and the issues could become quite complex on re-entering the public sector. She pointed to the further discussions which the trade unions will be undertaking when these changes occur.

Glyn Jenkins, If public service provision schemes survive, can they halt the decline in pensions for everyone else?

The final speaker of the day was Glyn Jenkins of Unison who presented a picture of how if the public sector pensions survived the attacks, this might help address the decline for everyone else.
He started by reviewing the members’ views which with some reservations had been favourable to the outcome of recent negotiations. The major detriment was the change in retirement age and that in future members aged less than 55 now will be getting parts of their pension from different scheme sources.

On the plus side final salary service on pre 2014/15 was protected; survivor benefits are still there, albeit reducing in value relative to the members pension; indexation of pension now based on CPI which may be flawed but at least it is there. Overall good packages were achieved but are already seen as unaffordable for many workers, likely to be inadequate if members have to retire before their normal pension age – and it is under potential political threat in the future.

Glyn referred to 2016 when the valuations occur in the LGPS in England and Wales and costs are likely to go up because of over prudent actuarial assumptions on future growth of the value of schemes and the increasing proportion of the lower paid in the workforce. The impact of the single state pension scheme and the potential for public sector employees being asked to increase their NI contributions were also referred to.

In turning to the private sector Glyn argued that the reason that schemes were closing was that the trade unions were too successful in getting members into them. He pointed to the savings to employer from the switch to DC costs and the increased risks to the employee. His response to his own question on the impact of the survival of public sector pension schemes on the decline in private sector schemes was a resounding YES. This was based though on the clear proviso that the public sector schemes do indeed survive and in doing so provide a standard for others to aspire to.

The conference finished with a final Q&A session which focused on the public sector.

Conference papers

Bryn Davies, Director, Union Pension Services
Pensions overview: where are we now?

Presentation

Craig Berry, University of Sheffield
Third Time Lucky: building a progressive pensions consensus

Presentation

Ijeoma Omambala, Old Square Chambers
Age Discrimination; A legal update

Presentation

Neil Duncan-Jordan, National Pensioners Convention
The single-tier state pension

Presentation

Michael Ford QC, Old Square Chambers
The Beckmann Judgement: protecting income benefits after redundancy

Presentation

Christine Haswell, PCS
Developments in public sector pensions: new ‘Fair Deal’ arrangements

Presentation

Glyn Jenkins, UNISON
If public service pensions survive, can they halt the decline for everyone else?

Presentation

Nick Kirby, NUT Principla Officer, Pensions.

Presentation