From prescriptive regulations on final salary pensions to auto-enrolment procedures via the Pensions Protection Fund (PPF) levy, the theme coming out of the CBI’s head of employment and pensions is one of exasperation at a regulatory environment that is testing employers’ paternalism to breaking point. In today’s global village, that regulatory framework can in some cases be the straw that sends companies packing their bags.
For Carberry, the doubling of the PPF levy scaling factor in 2008 is a perfect example of how pensions are now at the top of the agenda of UK board rooms for all the wrong reasons.
“Many of our members are foreign-owned, and we find that UK chief executives find it extremely embarrassing to have to go back to head office and say: ‘We told you it was going to be this figure last year, but now I am telling you it is going to be something else.’ This is one of the issues that makes pensions one of the real threats to companies’ decisions whether to operate in this country.”
The PPF levy remains one of the biggest bugbears of employers when it comes to UK pensions, says Carberry. “Even though the amount they have to pay is not as great as their funding contribution into the scheme, it upsets them because it seems counter-intuitive that, at a time when they are trying to reduce their own deficit, they are having to make this extra payment as well.”
So if a big employer went down leaving a big deficit on the PPF, requiring a substantial increase in the levy, what would be the response from employers? Would the CBI accept that protection levels have to be reduced? Otherwise, the cost to the taxpayer, already burdened by the public sector pension obligations, could rise considerably.
“We would have to have a discussion about at what stage the powers very deliberately inserted in the Pensions Act would have to be used. The protection that the PPF delivers is very generous – that has to come with a level of flexibility.”
Carberry also points out that the levy should not run at a level that actively pushes employers away from offering final salary schemes. “Otherwise you get the cart before the horse,” he says.
And if the recession proves to be one that forces significantly higher demands on the PPF, the government should stand behind the scheme, argues Carberry.
“We have always said that it should – what pensions minister is going to say that PPF pension benefits are not guaranteed after all the words that have been said to the contrary? And if they did actually stand behind it, it would help the government to focus their mind on the way it should work.”
Carberry says it is the speed with which the system can change that is as much of a problem as the rules themselves, as was demonstrated with the PPF levy and also in the changes to the taxation of high earners’ pensions in the last Budget, including the revolutionary step of benefit-in-kind charges for final salary schemes. “Employers were apoplectic about the effect of the pension changes in this year’s Budget,” he says.
So concerned about the effect of pensions on the UK’s business is the CBI that in May it issued an eight-point action plan, calling on the government to take urgent steps to help employers with final salary schemes through the recession. Carberry says it is the labyrinthine nature of our pension system that is at the heart of the problem, fueling the switch to DC, ultimately on a contract-based basis.
“The principal problem is understanding the complexity of the way everything works. It is a real job to explain to senior executive what all these liabilities and obligations actually amount to, and the management time required to do so is hard to justify. It is so complicated that they can get to the situation where non-exec directors are saying to chief executives: ‘We really do not think that you should be spending two-thirds of every board meeting talking about pension issues’. The temptation then is to close the scheme and look to buy out the liabilities,” says Carberry.
So with a new government potentially just around the corner, will calls for the removal of indexation and spouse benefits be reignited? Of all the changes to the regulation of final salary schemes that could be introduced, this would be amongst the solutions that would most quickly reduce liabilities significantly.
Carberry is clear that he sees no chance of removing indexation for existing employees, even for future accrual, but would like to see the ability for new joiners, who have had the pros and cons of such schemes clearly explained to them at the outset, to be able to join a scheme without indexation as currently offered.
“When we put together our eight-point plan we had a conversation about indexation, and came to the conclusion that pushing for its removal for existing members was not going to be successful. But that is not to say that newly set up schemes should not be allowed more flexibility,” he says.
“The current system is like saying: ‘If you want to run a hotel, it has got to be as good as the Hilton, otherwise you can’t do it’. Remember that there were schemes without indexation in the UK before indexation became mandatory. We would like to see greater flexibility in what employers are allowed to offer,” he adds.
One other area that he has been in discussion with the Tories is the S75 debt rules. “In the area of mergers and acquisitions, the S75 debt rules are a big issue. We already have a perfectly good way of dealing with liabilities within groups of companies under the Companies Act, so why do we need all these different rules for pensions?”
Other issues that will be back on the agenda if there is a change of government between now and next May include the state retirement age. “It was very nice to see Lord Turner admit last month that the submission we made years ago about a retirement age of 70 was right,” says Carberry.
Carberry argues that the CBI and its members are committed to the idea of pensions and do see them as positive, despite the fact they are sometimes perceived as wanting to leave employees under-pensioned.
He believes that despite all the bad news about the switch to DC from DB, the trend within DC going forward will be one of employers and employees increasing contributions into pensions, although he concedes that the last couple of years’ financial difficulties will have done the opposite.
“The trend for DC is up, but the threat to that trend is personal accounts and levelling down. Businesses do not want to level down, but if the Government gets the regulations wrong, it could happen,” he says. “The regulations appear to give the impression of a good design for a country that doesn’t have a pension system. The fear is we end up in the stakeholder situation all over again.”
Carberry sees two principal situations where employers have traditionally avoided pensions – where employees want the cash instead, and where companies are small and cannot afford the payments.
Where there is currently no scheme he expects them to go for personal accounts, but expects the majority of employers to stick with something above personal accounts provided it is not made too complicated to do so. Despite the recession, he does not appear overly concerned that employers will not be able to deal with the extra payroll burden.
The trade-off for many employers will be a reduction in salary, and Carberry says the CBI will be negotiating with the Low Pay Commission to make sure that any future increases in minimum wage reflect the extra contribution that is being made in terms of extra pension payments.
On trust versus contract, the CBI has no house view, not surprising given that its members offer both. “But what is important is that employers understand that neither is a ‘file and forget’ solution. Chief executives understand that whatever type of pension solution is in place, you need to have engagement and communicate the understanding that individual employees need to take responsibility for their finances,” he says. “Senior executives understand that raising employees’ understanding of benefits is good practice.”
With this in mind it will be publishing another guide for employers on contract-based DC pensions and their risks and responsibilities. This guide, which will be published in the winter, will take on the work it did with Mercer in a similar guide earlier this year.
Perhaps the issue the CBI has campaigned on most vociferously is funding of public sector pensions, last winter publishing a paper pointing to a near £1trillion deficit in pensions. So why is the CBI so concerned about public sector pensions?
Carberry warms to his theme, pointing out that “these pensions are going to have to be paid by taxpayers. The CBI is, as a group of businesses, the most organised group of taxpayers in the country, which is why we are expressing our views about it.
“Secondly, in plenty of areas in the country, the state is the biggest employer. It used to be that there were two models for rewarding staff – the public sector, where you get less pay, but you get your reward in heaven, in terms of a decent pension, and the private sector, where they pay you more now, but your pension is worse. But now pay is higher in the public sector as well,” he says.
“Furthermore, private sector employers often compete against the public sector. They have a significant advantage if they do not have to factor in the full cost of their pension contributions.”
Public sector pension funding is as big as pension issues come. “We do not want to come at this problem with a baseball bat. But we need the true costs to be understood,” says Carberry. Winning that battle would be a major triumph.
The CBI Pensions Action Plan
1. The regulatory framework must be adapted to place the long-term above the short-term. On a temporary basis, the Pensions Regulator should investigate recovery plans longer than 15 years, rather than the current ten year trigger.
2. The marked-to-market approach of valuing pensions liabilities has proved ineffective over the past year. Accounting valuations must be adapted to allow like-for-like comparison of scheme positions.
3. Government should press ahead with changes that make it more possible for schemes to adapt to changing circumstances – for instance by making it easier to change the retirement age as people live longer.
4. As budgetary circumstances permit, the government must move to re-establish some of the advantages to offering defined benefit pension provision that it has eroded.
5. The Treasury should reconsider its proposal to tax employers’ pension contributions as part of its reform of tax relief for pensions.
6. The government must reform Section 75 rules for restructuring in group schemes.
7. The PPF already costs well over double the level anticipated in 2004 and business cannot afford to pay more during the recession. The PPF board should stick to the three-year indexed cap and extend it.
8. The PPF was not designed to deal with catastrophe risk. Government should offer an in extremis guarantee to the PPF.