Pensions in the news
This is the second in a series of three articles about Pensions in the news. You can read our first article on Pensions here
No more tax credits on dividend income!
In 1997 the then Chancellor Gordon Brown removed reportedly £5bn a year out of millions of pensioner’s funds by stripping the schemes’ ability to reclaim the tax credits on their dividend income.
The issue with defined benefit schemes
A major issue began to emerge with DB schemes which surprisingly no one had really worried about too much. Medical science and better health was meaning people were living longer and longer after retirement and as DB schemes were required under the trust to pay pensioners for as long as they lived the liabilities in the schemes were rocketing upwards.
Also worrying investments were not performing as well as previously. This got worse over the decade with major financial meltdown.
A combination of ever increasing pension liabilities and falling values of investments due the economic climate and previous changes such as the withdrawal of tax credits on dividend income meant larger and larger deficits for all virtually all DB schemes in the country.
Sponsoring employers and employees were being required to contribute ever larger amounts into the scheme in order to keep up the funding levels which came at a time when everyone was struggling anyway.
FRS 17 – retirement benefits
In 2000 the accounting standard FRS 17 on retirement benefits was introduced.
This meant that for the first time any deficits in a sponsoring employers DB schemes would be reflected on the balance sheet of those companies. This made the balance sheets of the companies’ concerned look weaker and also affected the dividends the company could pay out.
It is true to say that although this accounting standard did not affect the actual pension scheme at all this effect on the sponsoring company’s accounts and fears over the reaction of lenders such as the banks and those setting credit ratings lead to some knee jerk reactions with FDs deciding to close their DB schemes.
In 2001 Stakeholder pensions were brought in by the government in an effort to encourage increased pension provision. These were designed to provide a low cost pension scheme for people on middle to low earnings who frequently had had no access to pension benefits in the past.
Like a DC scheme each employee has an ear-marked investment fund which is portable when the employee changes jobs. However unlike a DC scheme, the employer is not obliged to contribute to the employees’ funds.
The advent of the stakeholder regime did not encourage the level of pension provision that was anticipated.
The Pensions Act
Despite the 1995 Pensions Act having been brought in to protect pensioners there were many notable sponsoring employer collapses over the following years where large deficits in DB schemes and an adequate compensation scheme meant that many pensioners and particularly those approaching retirement suffered financially.
The 2004 Pensions Act was introduced which included a Pensions Protection Fund (PPF) funded by a levy from all occupational schemes which was based on the size of the scheme and also the perceived risk within it.
A new pro-active Regulator, the pensions Regulator (PPF) was introduced to take over from OPRA and it was given far more powers. Its function is to reduce potential claims on the PPF. Very soon after the PPF was introduced there were several notable collapses of sponsoring employers such as MG Rover which resulted in claims on the new PPF.
In our third and final article in this series we will look at the radical overhaul of the pensions tax system came into force on 6th April 2006 which was known as A-Day. We’ll also look at other Government changes with took place in 2011 and the auto-enrolment scheme which will be introduced in October 2012.
You can read our third article on Pensions in the news here.