CORPIAS NEWSLETTER
Pensions News Bulletin March 2014
1 UK Pension Funds criticise Brussels for ‘anti-retirement’ tax
The National Association of Pension Funds (NAPF) has warned the European Commission (EC) that its proposed financial transaction tax (FTT) would increase the cost of investing and result in lower pensions. The EC’s intention is to reduce excessive risk-taking and ensure the financial sector pays towards the recovery from the financial crisis. The Commission estimates that the tax could raise 30bn euros but their 2012 impact assessment also showed a 0.5% negative impact on European GDP.
Comment
This tax is sometimes called the Tobin tax after Nobel Laureate economist James Tobin who raised the principal of a tax on short term financial transactions in 1972. The FTT is not aimed at only short-term transactions. An example of the effect of the current European proposals was illustrated by two UK pension schemes which estimated it would cost them together around €40m annually. Previously a report from the City of London Corporation said the tax would also increase the cost of UK gilt issuance by £4bn also hitting pension schemes significantly.
The tax while increasing the cost of investing and the cost of pensions, incentivises lower risk investments and lower volumes of trading. This has some positive effects but the negative consequences may be highly damaging.
The tax implies that more active investment strategies result in lower pensions but this is not the case. Lower pensions often result from higher costs but success in low or high volatility investment strategies has other determinants. Under the tax even passive funds may become more expensive.
A report from the EU Council’s Legal Service found that the FTT would breach EU law in several areas. You would think this was a setback to the project and would force EU policy-makers back to the drawing board, but the proposal is still being taken forward by 11 member states and if passed, will affect all EU members.
2 Auto Enrolment: 590 Employers investigated so far
Responding to a freedom of information request to ‘Professional Pensions’ magazine, the Pensions Regulator (tPR) said it investigated more than 500 suspected breaches of Auto Enrolment (AE) legislation in just six months and 590 in total since October 2012 (when AE rollout started). The regulator took action under its compliance and enforcement policy in 134 cases.
The information showed that three compliance notices have been issued to companies failing to complete registration. One compliance notice was issued to an employer for failing to establish a scheme. An unpaid contributions notice was served in December while a statutory inspection of a company was carried out in October 2013. In addition, tPR delivered 28 instructions to companies at risk of non-compliance and 101 warning letters for suspected minor breaches.
The 590 investigations included cases where employers themselves had contacted the regulator with concerns and smaller employers who requested their staging date be moved forward. Other cases were as a result of reports from whistleblowers.
Comment
These figures show that the AE enforcement and sanctions policy is working and that employers should ensure they have all the support they need for AE.
There are three key parts to a good AE rollout for your company:
- Strategic decision making ahead of the project starting. See my article Auto Enrolment: Key Issues for details.
- The implementation project. I have a useful plan outline in my article Auto Enrolment: The time to act is now!
- Continuous post-staging date compliance.
3 The young would join a workplace pension by salary sacrifice
PR consultancy MRM has published a report called “Generation Austerity” which researched the attitudes and values of the country’s twenty somethings, a generation whose working life has been one of recession and economic gloom. It covers many areas of life and business including banking, immigration and welfare benefits but on pensions it shows support for the idea that employers reduce their workers’ pay in order to enforce saving and return it when they retire. They also felt they would need an annual income in retirement in excess of £42,000! Although 59% would join a company saving plan this was far from the highest priority which naturally was a home.
Comment
The MRM’s Generation Austerity report makes fascinating reading. The findings came from independent polling by ICM of 2,042 people nationwide. It shows a risk averse and careful generation who want the basics to be available (such as more banks open longer and locally) and are not so concerned about innovation (such as communicating with their bank by skype or smart phone video). In most generational comparisons the young are more adventurous and more demanding than their parents. This report paints a contrary picture.
Their estimate of the retirement income they need is a pretty good one but I bet they don’t realise how they should invest to target that or how much they have to save.
MRM director Michael Taggart said: “The current generation of 20-29 year olds have spent much of their working lives in an environment of economic and political turbulence. This has undoubtedly impacted on their attitudes to saving as young people seem to be looking to take a more active approach to saving, both in the short-term and well into the future.
4 No pension changes in Budget 2014 and public sector final salary schemes to end
Chief Secretary to the Treasury Danny Alexander told the National Association of Pension Funds’ (NAPF) Investment Conference, that the budget on 19 March will avoid tampering with pensions and highlighted the changes that have already been made, including to pensions tax relief. He also told delegates that final salary public sector pensions would end by next year amid the switch to career average schemes.
Comment
[20 March addendum – Well it wasn’t true! There were proposals in the budget to change annuity, trivial pension and cash rules. These will have interesting consequences and may be an unannounced move towards the Institute of Policy Studies recommendations I illustrated in the February newsletter]
Ending final salary public sector pension schemes is controversial to those that have them but it is a very expensive benefit, in most cases funded by the tax payer. It is usually the case that pension benefits earned up to the date of reduction are protected by law, so current public sector employees will still receive this very valuable benefit when they retire for their lifetime, and then for their spouse’s lifetime. So don’t expect savings to materialise quickly.
5 Company benefits communication fails to communicate
The Benefits Communication Survey just released by consultancy Aon Hewitt found only 9% of employees claimed to understand their company’s benefits and reward policy. Although employers believe regular communication to employees on pay and benefits is important, only one fifth of employers think their communication has a high impact. Generally employers are not getting a return on their communications investment. You can sign up for Aon Hewitt’s report at the Media Room tab of their website.
Comment
UK-wide the benefits communication effort is huge and if measured by the sheer quantity of material, both traditional and new media, you would think it should work. However what’s wrong is that the communication strategy is planned from the source outward. For source, think employer or benefit provider or other supplier.
Successful communication needs to be planned differently, from the recipient back. This means that the types of communication would be based on what the employees want, produced in a way that they usually find engaging with other subjects, and would be delivered when they want it. Most different is that an expectation and anticipation would be created in advance of a campaign, and a follow up would satisfy all issues and audit the outcome while preparing for the future campaigns. In such a strategy employees also become advocates for spreading the message. When this happens you know you’ve won them over.
This will sound more expensive but it need not be. Spending less on the material or medium and more on the effectiveness of the message could be a straight saving. However, even where the strategy is more expensive this would be mitigated if more effective communication could be done less frequently and in smaller doses. Besides, effective communication campaigns will create the return on investment that the survey says employers want but are not achieving.
At CORPIAS we have discussed this subject with many employers and providers over the years. One of the policy beliefs that usually stop them from achieving what they want is that they believe everyone must get the same communication at the same time. Why? “Because it’s not fair otherwise”. CORPIAS recommends a different approach which we believe is fairer! To find out more, please contact us.
Thank you for reading.
If you would like to discuss any of these issues or to find out how we can help your company, please contact Alan Salamon on 07975 979233 or at asalamon@corpias.co.uk.