By SLF Council member and pensions expert Janice Turner
Millions of private sector members of final salary and career average pension schemes have a better chance of a decent retirement after the government implemented more SLF pensions policy in this week’s budget.
Chancellor George Osborne’s budget statement announced that the Pensions Regulator would be given a new objective to support scheme funding arrangements ‘that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation” . The Pensions Regulator has been ordered to revise its Code of Practice “as soon as possible” in 2013. The government is also consulting on a new growth duty for non-economic regulators and “is attracted” to applying such a new duty to the Pensions Regulator.
While this may seem like a dusty technical issue to people who are not closely involved in pensions, it is a hugely important step forward in safeguarding defined benefit pensions. These are the best quality pensions in the private sector and for those who are members of them for long enough they lead to a comfortable retirement.
Rules introduced by the Labour government changed the way DB schemes carry out valuations, making the valuation of each scheme fluctuate wildly as they reflected the state of the markets on the valuation date. The global recession, followed by quantitative easing, has led to a widespread acknowledgement that the current valuation methods were grossly undervaluing pension schemes. They were creating deficits which could double in a year. But the Pensions Regulator had reacted to this by insisting that trustees could not make any allowances for the unprecedented low gilt yields, for example, which made a bad situation worse.
This week’s announcement is an acknowledgement that the status quo is no longer an option. It will allow DB pension funds far more freedom when carrying out their valuations, which will inevitably mean that defined benefit pension schemes will be better able to ride out these unprecedented economic circumstances. In short it means more DB schemes are likely to remain open, more people will have a chance of a better retirement, and more people still at school will have a chance of membership of a decent pension scheme.
The other advantage of this change is that employers will have more money available to invest in their companies and that, in turn, should lead to greater revenue to the exchequer. There are huge numbers involved here: defined benefit pension schemes account for around £1.1-trillion of pension assets. The Pension Corporation has estimated that the current regulations have cost the government £37-billion in lost tax revenues to date, and that without change it could be as much as £10-billion a year in future.
This announcement in the budget directly implements more of the SLF’s policy on private sector pensions which became party policy a year ago at the Lib Dem spring conference. That policy motion criticised the current scheme funding arrangements for needlessly damaging employers’ finances and destroying DB pension schemes, and also crticised over-regulation. It called on the government to ‘act with urgency’ to protect private sector DB schemes including immediate reform of valuation rules and lifting overly interventionist regulatory practices. This has now been achieved.
We should pay tribute to Lib Dem Pensions Minister Steve Webb, a founding members of the Social Liberal Forum, for responding so positively to the SLF’s views and supporting their policy initiative last year and taking it forward. Webb’s commitment to improving private sector pension schemes has not been without criticism within the pensions industry and it is a testament to his principled resolve that so much of this policy has been achieved in so little time. Millions of ordinary working people are going to be better off as a result.