Pensions: get flexible

The government must recognise that employment and retirement patterns are changing and encourage ‘gradual’ retirement as a retention tool for older workers, according to recommendations put forward by the Employers Forum on Age.

At the same time, the government should create a centralised body to provide workers with a comprehensive annual benefit statement and stop its assault on private pensions by increasing pensions tax relief and abolish contribution limits to make pensions a more attractive savings vehicle.

In the run up to the launch of the Government's Inland Revenue review and Green Paper on extending working life, the Employers Forum on Age (EFA) was asked to put forward its views to the Inland Revenue.

In response, leading members of the EFA, including some of the UK's biggest employers, such as BT, BUPA, Sainsbury's, HSBC and Tesco, are calling for the relaxation of current Inland Revenue rules that obstruct employers seeking to offer pensions flexibility to employees. They have suggested radical measures calling for the government to recognise the importance of changing lifestyles that, combined with demographic change, make the traditional model of working and retirement out of date.

Ms Sam Mercer, campaign director of the EFA, says: “Pensions should be regarded as a vital recruitment and retention vehicle and as such, need to accommodate flexible working. To support this, employers believe many of the existing IR rules governing occupational pensions should be scrapped, or at least amended.

”The key themes of any occupational pensions review have to be about delivering transparency, simplicity and choice. And in the future, we need to clearly understand pensions as deferred pay, as this will encourage employers to provide better schemes to meet competition for skilled employees.“

Sainsbury's pensions manager, Geof Pearson, agrees. “Occupational pension provision in the future needs to incorporate and embrace the concepts of flexible, partial, gradual and semi-retirement; it should allow for starting another job, and for those who either don't want to retire or cannot afford to do so.”

Karen Beech, head of group HR services at BUPA, also criticised the inflexibility of current pension regulations. “Current IR rules governing occupational pensions prevent BUPA staff from working flexibly and make it difficult for us to retain skilled and valued older employees. We need a pensions environment that accommodates changing patterns of work and the aspirations of employees in the 21st century.”

The EFA is calling on the government to introduce greater flexibility and tax advantages, which would encourage people to join pension schemes and contribute more. It should also set up one centralised body to deliver employees an annual benefit statement, which would improve the financial literacy of the population and individual awareness of likely retirement income, including state benefits.

What should be kept?

Inland Revenue rules that the EFA would like to see retained:

• Minimum Standards - rules and legislation that protect scheme members including levels of security and minimum entitlements (elements of IR 12).
• Higher rate tax relief - saving through a pension should be attractive.
• Tax relief on lump sum - this is the main advantage of pension schemes over other investment vehicles and helps people to manage the move from working into retirement.
• Maximum and minimum age between which employees must take their pension - with some employer discretion.
• Earnings cap - while many employers do not believe a cap is necessary they acknowledge it is unlikely to be removed in reality. Employers therefore suggest any cap should be set at a higher level and should be linked to increases in salary rather than increases in Retail Price Index (RPI). Employers suggest current levels are out of step with 'real world' earnings.
• Vesting period - to reduce the administrative burden and requirement on an employer to administer small pensions. Vesting should not be greater than two years.

What should be scrapped?

Inland Revenue rules the EFA would like to see scrapped:

• Most of IR 12 (except elements that protect members).
• Contribution limits - individuals should be able to pay in what they want since the resulting pension is taxed and very few employees contribute more than current limits allow anyway.
• Contracting out.
• Benefit limits - relating to occupational pensions.
• The requirement to leave 'service' - preventing employees accessing benefits and salary at the same time from the same employer when moving gradually from work into retirement.
• AVC transfer penalties - removing the requirement to transfer AVC and main scheme benefits at the same time (to reduce the Equitable Life problem).
• 1989 rules which reduce flexibility on occupational pensions.
• Retained benefit offset - this is both too complex and too difficult for employees to understand.

A recent EFA report, Generation Flex: Current attitudes to the retirement debate [here] found that 93 per cent of employees would extend their working lives if offered flexible retirement options. Employers are also strongly aware that the workforce is ageing. 79 per cent know their employees will have to stay in work longer than they might have wished to accumulate an adequate pension.