It is a reform that will affect the retirement of every worker in the UK and it arrives in less than five months, yet communication of the single-tier state pension has been shockingly poor. John Lappin untangles a complex picture
Even the Government’s own pensions minister, Ros Altmann, thinks communication of the new, single-tier pension proposition has been wide of the mark. Last month saw her agreeing with a Woman’s Hour presenter that the policy had been “missold” to the public.
Meanwhile, the work and pensions select committee is so concerned at the low level of public understanding of these momentous changes – which will affect many people a great deal more than auto-enrolment – that it has initiated a probe into the matter.
TOO MANY LOSERS
A key dilemma for the Government is that there will be too many losers from the new pension. Clear communication would show millions of people how much they stand to lose, with some women, many contracted-in workers and those with short periods of contracted-out benefits who do not gain from pensions uprated in line with inf-lation all set to be disadvantaged.
Public-sector workers, the self-employed and other groups of women will all fare better.
Naturally, there is anger among those who have realised they will be disadvantaged. So maybe it is no surprise that the Government has ducked communicating the policy so far.
Barnett Waddingham senior consultant Malcolm McLean thinks some very senior politicians are guilty of raising expectations too far.
He says: “The proposition was oversold and overhyped, not so much from former pensions minister Steve Webb but from work and pensions secretary Iain Duncan Smith and the prime minister, who said: We are going to have a flat-rate, more generous state pension.’ It is neither of those things.
“In pensions, you have to have regard to the past and the present before discussing the future. We now see many people expressing great surprise about what they are going to get.
“The increase in national qualifying years from 30 to 35 means many women are affected. It suggests women will do a lot worse out of the single tier in the early years than men, by not satisfying that test. You can pay £722 in National Insurance contributions to make up each year’s gap but you have to have the money and generally you can only go back six tax years.”
McLean adds that the need to make the reform revenue-neutral also caused problems.
“The underlying problem was the Treasury diktat that said it had to be brought in at a nil overall extra cost. So there had to be winners and losers. The winners are those who never earned enough to pay into Serps, and the self-employed. They get a big increase.
“The losers in the longer term are young middle-class professionals who would have done better previously because the new system is capped at £155.
“In the long term it makes the policy rather distributive, giving to poorer people and taking away from the slightly more aff-luent, which is interesting from a Conservative-led government. This makes me think Steve Webb was more influential in it.”
Lane Clark & Peacock partner Andrew Cheseldine says: “Until recently, most people thought they would get a higher state pension. More people are now aware that some categories will lose out or won’t gain as much as others. Yet the Government has spun this change to be an unalloyed good for people – whereas, for most, it will be a reduction in benefits.”
But if the Government has raised expectations, should the pensions industry lower them again? Some advisers are sceptical.
Syndaxi financial planning director Robert Reid says: “The big challenge for employers is understanding what is going on. It is a mess at the moment.
“All employers want to do is be compliant; they don’t really care about the engagement piece. That is the problem: you need employers to be engaged but there is no incentive. Telling an employer he is not getting tax relief on more than 10 grand of contributions doesn’t help. American employers spend money on engagement because they get relief on their own contributions if they do.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “While employers have participated in the contracting-out process, it is private pension providers having to dance to the Government’s tune, not the other way around. The Government has been setting the agenda right the way through. When it comes to changes, this is all on the DWP. If employers are happy to contribute to getting the message out, I am sure the DWP will be grateful.
“Yet I think the DWP has dropped the ball on this. My instinct is that, with all the noise being made by the Women Against State Pension Inequality campaign, the surprises about the impact of contracting-out on state pension entitlement and the fact that everyone else is going to be talking about this change, it will provoke many more people to ask questions.
“It is complicated but the DWP has done almost nothing to build tools to help people explore the impact. Potentially, it will be severely embarrassed next year.”
McPhail also asks why, in the age of the smartphone, one can-not log on to a website, enter details of one’s state pension record, NI history and retirement intentions and find out what one’s state pension may be.
The Government plans to enable everyone aged over 55 to obtain a projection of how the transition will affect them. Yet many advisers think employers should be more proactive.
Cheseldine says: “It is in emp-loyers’ interests to do more than is being done on average – which is to just send a two-pager to every-one who is 55. You can dissuade people from making poor decisions and point them in the right direction. You might start arranging seminars for older employees, explaining the pros and cons.
“You are allowed to ask them questions. You can’t say ‘You have to retire’ but you can ask ‘What are your intentions?’ for business succession planning reasons. You can say ‘We can’t hold you to it but it helps us to know.’”
Pensions communications specialist AHC’s head of client services, Karen Partridge, says: “From a DWP perspective they think it is like Kevin Costner in Field of Dreams, that ‘If we build it, they will come.’ But the truth is you have to drive people to look at the information.”
She thinks employers should do more around communications because this has implications for long-term planning. “If we don’t get into the habit of enabling employees to plan to retire, they won’t be able to retire,” she says.
Independent retirement expert and founder of Pensionschamp.com Alan Higham says: “Employers can’t default staff into retirement age easily. They could say ‘Sixty-five is the age’ and the courts have upheld 65 in certain circumstances, but it is risky. People may misjudge it and be forced to retire.
“Employers will have to think about how to help their workforce understand what they will get from retirement. If people can’t easily see what they are going to get, they can’t plan how they are going to retire.
“What employers should insist on is that the pension companies they employ, and pay huge sums of money to, produce comprehensible documents. I see stuff that people get sent and it is almost impossible for the average person to understand.”
“The insurers that write to their own customers are better than most occupational pension scheme providers. I would want to ensure the service providers I was using provided employees with simple, clear information. I would hold their toes to the fire and say ‘My personnel department can’t be inundated because of the garbage you have written.’”
Higham adds: “In pecking order, however, the Government is making the pensions industry look saintly and competent.”
The ending of contracting-out remains a more immediate concern for many employers. Partridge says: “Employers have quite a burden but, from an employee perspective, where there is an increase in cost in terms of paying more NI, you want them to think this is a change in governmental policy, not your choice. Even from a defensive position it is a good thing to explain the change, what the consequences are and what they can do about it.”
Corporate advisers on DB schemes say such communication about the contracting-out changes is fraught with challenges.
Spence & Partners director Alan Collins says: “The biggest difficulty for us is how individually specific these things are.
“It is so dependent on contracting-out history. Somebody could have been contracted-out for many years before he joined your employment. All that complexity means a lot of our clients are caught between a rock and a hard place. They want to explain these things in detail yet it is very difficult to show the impact.
“It is hard to argue that the DWP staff are sure themselves, never mind passing on the information second or third hand. It is difficult to communicate precise numbers so we are trying to explain it qualitatively rather than quantitatively.”
Collins says that, in previous exercises for not-for-profit workforces moving from contracting-out to contracting-in, his firm helped to provide illustrations of before and after the change and often attempted to estimate the additional state pension available from those contributions.
“That worked well in the board sense,” he says, “but now it is all one pension.
“Yet there is a cohort where there is a lot of variability and it is hard for people to appreciate why. It may be hard to work out if there is something wrong with their own records or perhaps with the DWP’s. Just how much an employer is going to be leant on by their staff to get an answer hasn’t been fully understood. Ultimately, people are going to ask ‘Just how much am I going to get?’”
LV= head of pensions and investments Ray Chinn says: “The state pension changes are on the way and no one can avoid them. As a DB trustee, and through the conversations we are having at LV=, it is clear that you can’t talk about the freedoms without talking about the state pension because it is part of the deal.
“The state pension is part of your personal balance sheet. We are doing a lot of work to make that conversation easier but it is a fine line between information, guidance and advice. Simplified advice needs to get sorted out and we are trying to help employers with a generic set of tools for the conversation.”
The state pension reform and the ending of contracting-out will affect the pension income of every UK worker. This looks like being a long and complicated conversation.
The end of contracting-out: more pain for DB
The end of the contracting-out regime will see the closure of many DB schemes to accrual, predicts Aon Hewitt partner and head of the firm’s national pension benefit design team, James Patten.
Aon Hewitt has been carrying out ongoing research with employers on the issue and expects the change to lead to an increase in the number of DB schemes closed to accruals, from the current 50 per cent to 60 per cent.
Patten says the change is the final straw for some employers amid other arguably bigger pressures such as the fall in bond yields and recent equity market turmoil.
He says: “We are seeing more clients deciding that, rather than make modest changes to offset the cost of contracting-out, which is around 2.5 per cent of active DB payroll, they will undertake a wholescale review.
“We are finding that roughly 35 per cent of employers that have reached a view on the matter are looking to make more significant cuts above the cost of contracting-out and, in most cases, that means DB closure.”
Around 12 per cent of employers will seek to mitigate the cost of contracting-out by increasing employee contributions or reducing accrual very modestly, leaving about 49 per cent looking to absorb the cost,
“Often they have just made a change to their benefits and don’t feel a need to go back with a further change.”
He says that leaves just 4 per cent of employers looking at broader alternatives, such as salary sacrifice or pension increase exchange exercises, where employees at retirement take a bigger pension but give up some escalation during their retirement.
“The terms are not cost-neutral and the members are made very aware of that. For some members, having more money now can be a good thing. It can offset the NI impact,” he adds.
In terms of communicating the changes, Patten says it depends on the strategy. He says: “Those that are
absorbing costs may be thinking there is no need to communicate. However, we think it is worthwhile employers communicating that they have done so, especially as the employee will see take-home pay reduced slightly. We suggest employers communicate the news and also communicate about the state pension.
“For those making more significant cuts, recent legal cases have shown the importance of undergoing a thorough and readily understandable communication programme. In that circumstance, it will be important that communications cover all the appropriate information.
“There is not much time to act before April 2016 if they are going to move forward with what can be a very sensitive communications programme.”