January 2, 2013 5:32 pm

2013: Employers face tough choices

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Big changes on the way for corporate pension provision

After a year in which those coming up to retirement faced wrenching choices about their finances, 2013 appears to be shaping up as one in which the toughest decisions may be those facing employers.

For private pension savers and those saving through their employer’s scheme, the lowering of the maximum tax-free annual allowance and that of the maximum lifetime pensions savings pots are certainly disappointing. But they are likely to affect no more than 2 per cent of savers.

Tom McPhail, head of pension research at Hargreaves Lansdown argues that the bigger changes in 2013 will affect what is known as the decumulation phase – the point at which those pension savings are converted into income.

The good news is that an industry code of conduct promoting transparency takes effect in April, which should make it easier to compare annuity offers. Trickier are new rules allowing those going into retirement who do not choose annuities to draw down income. While savers whose additional pensions are big enough to allow them to draw down as much as they wish, those with smaller pots face harder choices.

People with alternative pension income of less than £20,000 a year are subject to “capped” drawdown, designed to ensure they do not run out of money before they die. New rules allowing higher drawdown will lead to more generous payouts now, but mean that the risk of running out of cash is also greater. This is particularly so because academic research shows that people tend to underestimate how long they will live.

But employers face even bigger challenges. This year, a further 2.7m workers become eligible for auto-enrolment into a workplace-based scheme. Surveys suggest that some employers – particularly the smaller ones – have yet to grasp the full implications of the task ahead of them.

First, there is the thorny task of picking the “best” provider of pension savings plans, potentially a very ambiguous concept. Is the lowest-cost provider always the best choice? Is one which is low cost for current workers but bad value for former workers a fair choice? How important are the investment choices?

The Department for Work and Pensions also has a busy year ahead. It’s consulting on whether the low-cost National Employment Savings Trust should be allowed to compete for business that currently it is specifically forbidden from seeking. Liberalisation would please many employers’ bodies, but the savings industry is fiercely opposed.

Waiting too long to lift those restrictions could leave employers stuck in less efficient schemes in which higher fees eat into pension savings. By the time the restrictions expire in 2017, employers’ arrangements will be bedded down and too expensive and cumbersome to change.

The second issue revolves around a concept called “pot follows member” in which a worker’s retirement savings will move to a new employer with them. There is a risk that savings could move from low-cost plans into higher cost plans. Also, there is resistance from some in the savings industry who would like to be able to hold on to higher-value pots.

The thorniest of all issues, especially among employers, is the discount rate. It’s a key actuarial issue since it’s used to calculate the size of liabilities; employers say that current low rates make these appear much larger than they really are. But the actuarial profession says changing it creates the risk that plans will be woefully underfunded in the future. A string of corporate collapses, the actuaries say, could leave taxpayers to pick up the tab.

Questions like these make 2013 a year with the potential for far more turbulence for employers than individual pension savers, however tough their choices are.

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