UK flounders in world pension provision
The government has announced a new pension tax regime effective from April 2011. This replaces the complex rules proposed by the previous government designed to reduce the cost of pension tax relief.
A reduced annual allowance for pension contributions of £50,000 and an increase in the valuation factor applying to defined benefit pension schemes are the most significant elements of the announcement. These combined with other important changes to the system of pension tax relief requires the attention of employees to ensure they are made aware of the risks and opportunities that will exist under the new regime.
This requires immediate action with less than six months to act. Paul Bloomfield, Director of Technical Consulting at WEALTH at work comments, “The pension tax changes will create uncertainty but the fundamental issue still exists, being that a savings alternative is required.
Workplace ISA provides an additional £10,200 of tax efficient saving to help compensate those affected by the pension changes whilst for others it is a flexible way to save in the shorter term”. Jonathan Watts-Lay, Director of WEALTH at work also adds, “The pension tax changes are likely to create more demand for the Workplace Flexible Savings Platform. It will allow employees to combine pension, ISA’s and all employee share schemes, maximising value for both the employer and employee. However, financial education is needed to ensure employees understand their savings choices”.
Global Pensions Index – UK’s position drops following concern over sustainability and integrity Netherlands continues to be ranked in first position, UK ranked 6 NEST positive for UK’s pensions system but financial crisis exposes weaknesses. The Netherlands has been ranked as having the world’s best retirement income system for the second year running, according to a global pension index which compares pension systems from around the world and ranks them based on adequacy, sustainability and integrity. The UK (ranked 6) scored lower in 2010 due to concerns over sustainability and integrity. The inclusion of Switzerland (2) in the rankings – which was assessed in 2010 for the first time – also pushed the UK down the ranking.
The Melbourne Mercer Global Pension Index (GPI) is produced by Mercer for the Australian Centre for Financial Studies. In the 2010 edition, it was expanded to cover 14 countries with the new inclusion of Brazil, France and Switzerland. Netherlands obtained top ranking in the GPI with a score of 78.3 out of a maximum of 100. It was followed by newcomer Switzerland (75.3) in second place; Sweden (74.5), which maintained third position; and Australia (72.9) which fell from second to fourth position, due to the inclusion of new countries and a decline in its score. The remaining country to obtain a B-grade classification was Canada, ranking fifth with a score of 69.9. Canada also fell in the rankings due to a decline in its asset values as a result of the global financial crisis.
The UK’s retirement system is defined as a C grade and the country’s index value fell slightly from 63.9 in 2009 to 63.7 in 2010. While the UK’s ‘adequacy score’ improved substantially, primarily in response to the progress of NEST, its sustainability and integrity scores suffered. Dr David Knox, a Senior Partner in Mercer’s Retirement, Risk and Finance business, who oversaw the study, said the changes in this year’s index were characterised by global trends and events such as the impact of the financial crisis and increasing life expectancy.
“The crisis has threatened the sustainability of public and private pension systems in several countries through the decline in asset values and an increase in government debt. This was reflected most acutely in the scores for Canada, the United Kingdom and the United States. Increased life expectancy is common to all of the countries in the index. As the gap between pension age and life expectancy widens, pressure on public pension systems will increase. This highlights the need for governments to continue to review their state pension or retirement age and focus on increasing the adequacy of the private system.”
According to Deborah Cooper, partner at Mercer, “The UK’s position could be improved by raising the minimum pension for low income pensioners; by increasing the coverage of employees in occupational pension schemes and by raising the level of household savings. The index favours pension arrangements that are funded and broadly inclusive, so the introduction of auto-enrolment should contribute to an improved score from 2012.” Professor Deborah Ralston, Director of the Australian Centre for Financial Studies said the Index had already demonstrated its value to government, industry and academia.
“The Melbourne Mercer Global Pension Index has already made a meaningful contribution to the debate on how to best provide for the ageing population and the need to achieve a balance between adequacy and the cost of retirement income systems. With this second edition, the 2010 Index will offer even greater insight into this complex discussion, with the inclusion of new countries and broader terms of reference.”
The Melbourne Mercer Global Pension Index is based on more than 40 indicators which reflect features that are perceived as desirable in all retirement income systems. These indicators are grouped into three sub-indices: adequacy, sustainability and integrity. In this year’s study four new variables were included in the calculation of the Index to assess: the costs of each country’s system; the level of home ownership; asset allocation; and the effect of divorce on the provision of retirement benefits.
26 October 2010
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