SAVINGFOR RETIREMENT

Introduction

1. UNIFIis a TUC affiliated union representing some 160,000 workers across the financesector. The union represents staff in all grades and occupations, not only inthe major English and Scottish banks, but also in investment banks, the Bank ofEngland, insurance companies, building societies, finance houses and businessservices companies.

UNIFIs Comments

2. UNIFIwelcomes the opportunity to comment on the Green Paper. UNIFI also welcomes thepublication of the Green Paper, and hopes that it will lead to the introductionof legislation to tackle the growing crisis that has arisen in pensionprovision in the UK. It must also deliver a new settlement for pensions that isboth sustainable and can command widespread support.

3. UNIFIbelieves that a decent state retirement pension should be the cornerstone ofpension provision in the UK and is the key to tackling pension poverty.Currently, the state system provides inadequate pension rights and is riddledwith savings disincentives because of the extent of means testing. Sadly, theGreen Paper says nothing that will help address this issue: the governmentseems obsessed with reducing the level of state retirement to a minimum.Pension payments and benefits to pensioners cost about 5 per cent of GDP,(lower than any other country in the EU) a level the Government seemsdetermined to maintain.

4. TheGovernment appears to be buying pension sustainability at the cost of enduringpensioner poverty. The pensioner population is set to rise by 40 per cent overthe next half-century, yet spending as a proportion of GDP is predicted toremain flat. This can only mean that the value of state support is bound tofall. Currently, the Governmentspolicy to reduce pensioner poverty depends on means-tested benefits - a policywith which UNIFI fundamentally disagrees. However, means-tested benefits fail toreach the most vulnerable, lowest income pensioners; each year 1.9 billion inbenefits to 750,000 people go unclaimed. If the Government is determined topursue means-tested benefits then it must set and achieve targets for pensionertake-up.

5. UNIFIbelieves that the main solution for the UKs pension shortfall is for theNational Insurance Fund to be used for its proper purpose: to pay a good levelof State pension. The cost of paying for decent levels of State pensions shouldbe met by employers and employees, through the necessary level of NationalInsurance contributions, split on an equitable basis between employer andemployee.

6. UNIFIwelcomes the proposal to set up an independent body to assess pension provisionin the UK and to monitor the desired growth in private pension coverage.However we do not believe that pension coverage can be achieved by policieswhich are based on incentives and by simplifying pension schemes, even thoughthese are necessary.

7. UNIFIdisagrees with the Green Paper ruling out compulsion on the part of eitheremployers or employees to make contributions to pensions. We believe that,since half of all employees do not receive contributions to their pension fromtheir employer and most employees have debts rather than savings, there must begreater compulsion on both employers and employees. For the lower paid helpcould be provided through tax credits.

8. UNIFIsupports the idea of enabling employers to make membership of an occupationalscheme compulsory, as they could do up to 1988. We believe that this could beachieved by the introduction of automatic membership of a scheme. The changesto the tax rules allowing full concurrency between different types of pensionschemes mean that there should not be an either/or choice between continuing tocontribute to a stakeholder scheme and joining an occupational scheme whichwould have the benefit of employer contributions. However, a member of apersonal pension scheme with penalties for ceasing contributions who could notafford to contribute to both the personal pension and an occupational schememight prefer to opt out of his/her employers scheme. It has to be acceptedthat many people, particularly the young, do not appreciate the importance orbenefit of belonging to a good occupational scheme.

9. UNIFIstrongly supports the proposal to improve financial education and awareness.The impact of a successful financial awareness campaign on pensions cannot beunderestimated. Hopefully it will provide individuals with the information theyneed to make informed choices and prompt them into action. Information andeducation are required so that individuals appreciate the value of saving forretirement, have realistic expectations of future retirement incomes, andappreciate the uncertainties inherent in long-term saving. However, informationalone is not sufficient, nor can it be a substitute for advice in all cases.

10. We also recognise, asdoes the Green Paper, that information specific to the individual will be evenmore important. We welcome and fully support the proposal to broaden thecoverage of combined pension forecasts covering occupational, personal andstate pensions and believe that this should be introduced as soon aspracticable, in consultation with the pensions industry.

11. One aspect that needsaddressing relates to people who have changed their employers and pensionarrangements over their working life. They can end up with numerous differentpension entitlements that are difficult to follow and understand. The combinedbenefit forecast could, in such cases, complicate or confuse peoples ideasabout their pensions, rather than simplify. This is due to the absence of plansto include deferred pensions or to link concurrent pension arrangements. Thiscould mean that many people would be sent two or more combined forecast eachshowing an entitlement to a State pension, a recipe for confusion. UNIFIbelieves that the combined benefit forecast must be produced in a user-friendlyform, whereby individuals can obtain figures for their entire pension entitlements- whether State, current scheme and deferred rights - which can be easilyunderstood.

12. UNIFI agrees that, giventhe current problems that exist with scheme solvency, urgent action needs to betaken in respect of the Minimum Funding Requirement (MFR). However, given thetime that has been spent consulting on this subject, the proposals do notappear to progress the matter as much as might have been expected. Notwithstanding its good intentions, the MFR has encouraged a misapprehension onthe part of employers, trustees, members and some professionals that astandard, which is statutory, is therefore an adequate standard. The MFR is notan adequate standard to meet a pension promise. What is needed is separatemechanisms giving members the long term security that their pension scheme willmeet its commitments and the short term security that they will not be leftwithout pension assets if their employer fails. The key issue is to ensureproper funding standards such that whatever replaces the MFR does not dilutethe protection given to members.

13. It is clear that theadvice given by many actuaries on the funding of pension schemes is flawed.There would also appear to be a rift within the actuarial profession overpension scheme valuation methods, with the working party set up to write ablueprint for calculating schemes assets and liabilities unable to reach aconsensus. The March 2001 consultation paper proposed that the actuary shouldhave a duty of care towards scheme members, including an explicit duty toconsider the implications of funding plans for scheme members andbeneficiaries. UNIFI believes that this proposal needs to be revived and shouldnot be replaced, as suggested by the Green Paper, by a Guidance Note whose usewill be enforced solely by the professional bodies.

14. UNIFI strongly opposeany relaxation to Section 67 of the 1995 Pensions Act, which protects schememembers against changes that retrospectively affect pensions rights alreadyaccrued. We do not believe that an employer should have the right tounilaterally alter an accrued pension. Trustees are already able to address theissues by seeking member consent, which has the added benefit of forcing themto consult on the issue. We would be prepared to accept a rewriting of thesection to clarify its meaning and also to strengthen it to ensure that lifeassurance cannot be removed overnight by the employer.

15. In relation to theproposals on reducing the level of prescription on selection processes formember-nominated trustees, UNIFI believes that the proposal that one third ofthe trustees are member-nominated trustees does not go far enough. A keyrequirement is to increase from one third to one half the requirement for aschemes trustees to be member-nominated. We believe that such a move willassist in increasing the protection afforded to members of pension schemes. Wealso support the proposal in the Technical Paper that the pensions regulatorissue guidance on good practice for nomination and selection procedures,believing that it is not unreasonable to expect fairness and democracy in thenomination process for those looking after members retirement income.

16. UNIFI supports theproposal that disputes resolution should be simplified and the timescaleshortened for the process to be completed. We believe that the proposed sixmonths overall time limit is too long. It should be reduced to three months andscheme administrators should not be able to block disputes by picking on narrowdetails. Schemes should be required to address the issues raised and provideadequate responses to a complaint within the agreed timescale.

17. UNIFI welcomes thecommitment, included in the Green Paper, to increase protection for schememembers and the proposal to create a new kind of regulator. However, we believethat the proposals do not go far enough. We need strong regulation aimed atimproving standards. Unified regulation of pensions is essential, covering allaspect of pensions law for occupational pensions, including trust law as itrelates to pension scheme trustees. It is essential that a cross section ofinterested parties, including consumers and scheme members, be adequatelyrepresented on the Board. Consideration should be given to replacing thecurrent levy on schemes for funding the regulator, with money from generaltaxation.

18. UNIFI agrees with theview expressed in the Green Paper that members should have confidence that theywill receive the pension they were promised. We believe that changing the orderof priority on winding-up must have as its key objective the requirement toensure that the available assets are shared more fairly between those withlarger and smaller pensions. There is definitely a case for re-examining thebalance of protection between the better off and the less well off. UNIFIbelieves that benefit capping should be examined for all members and that itshould be set such that it ensures a minimum level of benefits for allbeneficiaries.

19. UNIFI supports theintroduction of measures that discourage practices whereby directors, havingtaken large pension payments shortly before a company becomes insolvent, canstrip significant assets from the pension fund, leaving those - who have notretired - with little or no pension. It would be worth considering placingdirectors pensions lower down the order of priority or, alternatively,recouping part of any pension awarded to them.

20. UNIFI strongly supportsthe idea of moving pension scheme debt higher up the order of priority forpayment. Whilst we acknowledge the needto strike a careful balance between the potential impact on business and theneed to provide adequate protection for members it is essential that some formof protection is provided for members pensions benefits.

21. UNIFI strongly supportsthe creation of a Central Discontinuance Fund to provide pensioners andnon-pensioners with greater protection against the possible pensionimplications of insolvency. The TUC has proposed a Pensions Protection Fund(PPF) and we endorse the proposals which they have outlined for its operation.This could be coupled with insolvency insurance to cover any shortfall inemployer contributions at the time of winding-up.

22. UNIFI agrees with theremoval of the current restrictions on the amount of compensation that can bepaid in cases of dishonesty so that in future all liabilities for all membersare covered. We support the proposals for improved compensation such thatschemes with an insolvent employer can be compensated for the full amount lostas a result of acts of dishonesty.

23. We also support theproposals on wind-up for the full buy-out costs to become a debt on thesolvent employer. The government is right to feel dismayed that some employerschoose to wind-up their schemes when the company is continuing yet do notsecure the pension rights in full. In our view this has the effect ofundermining confidence in occupational schemes generally. However UNIFIbelieves that, whilst the Government wants greater protection for members, butdoes not want to increase the overall burden on employers, it is hard to seehow it can square that circle. We believe the Government should accept that thecost of providing this protection estimated at 1.25bn p.a. is a priceworth paying to achieve members security.

24. Currently occupationalpensions are excluded from TUPE. UNIFIsupports the removal of the exclusion of occupational pension schemesfrom business transfers. We concur with the view expressed in the Green Paperthat simply as a result of a transfer, an employees future pension rights canbe significantly reduced. UNIFI notes the administrative and financialcomplications of adopting such an approach, but would suggest that these arefactors that have to be taken into consideration when a transfer is mooted.These are not complications created by the employee, and employees should notsuffer as a result of it. Indeed, as transfers are commercial activities thesefactors need to be taken into consideration when proposals are drawn up, notside-stepped altogether. Employees in private and public sector companiesshould have as much protection as possible of their pension rights and accessto pension schemes.

25. UNIFI is disappointedthat the Government has failed to act to amend the TUPE regulations to includerights to pensions in their transfer regulations for private sector employees.Transferees in public sector contracting out exercises are already requiredto provide broadly comparable provision. There is also a need to consider theissues raised by the recent Beckmann judgement in the European Court. UNIFIbelieves that the options proposed in this section of the Green Paper forprivate business transfers are unsatisfactory. They should be withdrawn and newproposals drawn up.

26. We welcome the proposalsto consult employees about pension changes. There would need to be clearguidelines as to the extent of consultation. UNIFI would prefer there to benegotiating rights on pensions rather than just consultation as we believepensions are increasingly defined as a recognised element of pay and open tonegotiation in the same way as other elements of the remuneration package.

27. We welcome the proposal that rights should bevested from the point at which an employee joins the scheme. We also agree withthe suggestion that immediate vesting may have benefits for employers abilityto retain staff.

28. We note the reference tothe international experience of other countries and the approaches they areadopting in order to increase the numbers of employees who are saving in anoccupational scheme. We can and we should learn from each other. However UNIFIwould point out that every countrys pension system has developed differentlyfor historical and cultural reasons. We, in the UK, must find solutions thatfit with our traditions and objectives. There is no off-the-shelf model forreform, which can be imported from one country to another.

29. UNIFI believes that thecurrent rules relating to pension sharing on divorce should be given the chanceto settle. Currently, we do not see any arguments for further change, apartfrom the possible consolidation of the law.

30. We support the proposalto ensure that pension fund trustees have appropriate investment expertise.UNIFI believes that ongoing training for trustees is essential and it would bebeneficial for trustees to be clear as to the expertise required. We believethat training standards for trustees need to be defined and established withtrustees being actively encouraged to reach the required standard ofcompetence. We also believe that trustees should be entitled to statutory paidtime off prior to a meeting of trustees to enable them to have the opportunityto familiarise themselves with the proliferation of documentation suppliedprior to meetings. It would also be worth considering allowing trustees to havefacilities at their workplace, if possible, in order that they may prepare formeetings accordingly.

31. Whilst we welcome theproposal to assist people over the age of 50 to get back to work the Governmentshould accept that there is a major problem for older men coming out of manualjobs in their 50s, many in poor health and in high unemployment areas.Employment rates for both men and women tend to decline rapidly after age 55.Of the around 2.8m people aged between 50 and state pension age who are notworking, 1.25m are long term sick or disabled and 290,000 are looking for ajob.

32. We also stronglydisagree with the proposal that the minimum age at which early retirement maybe taken should be increased from 50 to 55 by 2010. Currently there are 500,000people aged between 50 and state pension age who are retired. UNIFI believesthat where people retire before state pension age, because they can afford towithout creating a burden on the state, it seems reasonable for them to be ableto. There should not be a statutory minimum retirement age, as it is notcompulsory to work at any age. Policy should aim to enable people to continueto work at older ages, rather than compelling them to do so.

33. We do not believe thatthe plans to provide large increases for deferred State pensions will have mucheffect, unless it is possible for those who defer, and die before they start todraw the benefit, to bequeath an equivalent lump sum to others.

34. We wholeheartedlysupport the proposal to maintain state pension age at 65, for exactly the samereasons as outlined in the Green Paper.

35. We welcome the proposalto implement legislation to introduce anti-age discrimination in line with theEU Employment Directive. However the government needs to ensure that itprovides advice and support to employers in this area.

36. Whilst we support the proposal to allowpeople to continue working for the sponsoring employer whilst drawing theiroccupational pension we have concerns that it will be abused by senior staff.There is clear evidence that many senior managers currently take earlyretirement and are re-engaged by their former employers as consultants. TheGovernment will need to set up some form of monitoring procedure to ensure thatsuch abuses are not perpetuated.

37. UNIFI welcomes theproposal to consult on best practice to ensure that occupational pension rulesdo not discourage flexible retirement, thus allowing an employee to continueworking part-time while drawing benefits from the employers occupational pensionscheme.

38. UNIFI, whilst welcomingthe inclusion of a section of the Green Paper on women, is surprised at thelack of specific proposals. The request for views solely on how best to ensurethat women are aware of their pension position and the choices they face isdisappointing. UNIFI notes that the position of women in future will bedictated more by wider social and economic policies than by the ageingpopulation effects. However, the change in female state pension age will meanthat the number of women at working ages will increase by approximately 14% bythe year 2020. In contrast, for men the figure is 2%. However, the number ofwomen over (the higher) state pension age will fall by about 5% by the year2020 compared to an increase of 40% for men.

39. UNIFI believes that theGovernment will need to address the issue of women pensioners with some urgencysince most pensioners who live in poverty are women. This is because thepoorest group of pensioners is the most elderly, who have endured many yearsduring which their incomes at best kept pace with price inflation and at worstwere eroded by inflation. Womens participation in individual private pensionprovision is still lower than men

40. UNIFI believes that solong as women are discriminated against in employment and by the caringresponsibilities expected of them, by necessity occupational schemes willappear to also discriminate. This will be so even though there is nothingintrinsically discriminatory in their current design. The Employment Tribunaldecision on part-time pensions has assisted in addressing one aspect of thedisadvantage faced by women. UNIFI believes that the Government shouldconcentrate on addressing the discrimination that results in women beingexpected to take the larger part of caring responsibilities and the lesser rolein the market for paid employment. The proposal to have immediate vesting ofoccupational pension rights is welcome as it means all pensions savings will beused for that purpose.

41. Conclusion

UNIFI welcomesthe contribution that the Green Paper makes to the ongoing debate on pensions. We believe that theGovernment must now progress matters. To date, on key issues, such as replacingMFR, or compulsory membership of pension plans little has been done. TheGovernment must act quickly to restore confidence in the system of pensionprovision in the UK.

42. UNIFI would be happy todiscuss any of the points raised in this paper.

Please contact:

GarethHowells (Research Officer)

UNIFI

1^stFloor Transport House

1Cathedral Road

CardiffCF1 9SD

Telephone:02920-224483

e-mail: gareth.howells@unifi.org.uk

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