Pensions suffer from being complicated, yet extremely important. BALPA members have told us that pensions remain one of the top industrial priorities for them, and we are doing a lot of work on several fronts to that end.
There are two recent consultations relating to pensions to which BALPA has submitted a response.
Firstly, The Pensions Act 2014 requires the state pension age to be reviewed during each Parliament. The review is to consider changes in life expectancy, wider changes in society and to help ensure that the state pension remains sustainable for generations to come. John Cridland CBE has been appointed as the independent reviewer, and he will report to the Secretary of State for Work and Pensions in time to allow government to consider the recommendations by May 2017.
Secondly, the DB taskforce was established in March 2016 to undertake a review of the challenges currently facing defined benefit (DB) pension schemes, and make recommendations to government. Ultimately, the taskforce will issue a report setting out its view of the DB landscape and giving recommendations which can be used by government, regulators, employers and the industry to help ensure a sustainable DB pensions system.
Ongoing review of state pension age
Under safety-based licensing rules determined by the International Civil Aviation Authority (ICAO), commercial pilots cannot fly past the age of 65.
This means that pilots have an effective retirement age of 65 but the state pension age will reach 67 by 2028 and is undoubtedly set to get progressively higher. Some commentators believe that due to continuing increases in life expectancy, those entering the workforce today may have to wait until their mid-70s before they are able to access the state pension.
Pilots therefore face an ever-increasing gap between their retirement and the date from which they can access the state pension, which is likely to make up a sizeable proportion of their retirement income. There are now no DB pension schemes left open to new joiners in any UK airline with only defined contribution (DC) schemes available to new members which, based on our projections, are likely to deliver much lower retirement incomes. BALPA sees poor pension provision as a major issue pilots have to face and is currently engaged in a campaign to improve, or at least maintain the terms and conditions provided by the current schemes.
The growing gap between effective retirement age and stage pension age also affects other occupational work groups. For example, the normal retirement age for senior police officers is set even lower at the age of 60.
In summary, BALPA feels that further increases to the state pension age will disproportionately disadvantage a number of specialist workgroups – including pilots and senior police officers – in which safety and/or other occupational rules prevent an individual from pursuing their chosen profession up to the state pension age.
There are several issues on which BALPA believes action could be taken which would improve the sustainability of DB pension schemes.
Investment strategies/efficient funding of DB schemes
Any review of investment strategies should take into account the maturity of many private sector DB schemes (a lot of which are now closed to new joiners) and the need to adopt effective investment strategies using liability driven investments and journey plans to ensure that the accrued benefits are fully protected.
There is a growing perception that the pensions regulator is becoming reluctant to exercise their regulatory powers, preferring instead to encourage and advise trustees and sponsoring employers. Moreover, BALPA is aware of cases in which it has taken the Pension Regulator (tPR) an extraordinarily long time to reach a decision following an approach from the trustees and/or sponsoring employer. This time delay places the trustees in an unenviable position when engaged in difficult funding negotiations with the sponsoring employer and can result in unsatisfactory situations in which the trustees feel obliged to finalise an agreement ensuring that funds are not lost to the scheme during a prolonged period of tPR decision-making. Therefore, we believe that the taskforce should consider the powers available to tPR and their resources and willingness to use these powers in support of trustees.
To achieve more sustainable DB pension schemes, we believe it is extremely important that no further steps are taken to change the current system of tax relief (including no further changes to higher rate tax relief). Continual revisions to the rules creates complexity and uncertainty, and also discourages people from saving for their retirement. There is a recurring threat that the Government might try to attack tax relief for high-rate tax payers. We’ve seen that threat off for now, but remain vigilant. We have a number of points to make about the Annual Allowance to the consultation too.
DC pension flexibilities
We are concerned that some DB members are receiving poor financial advice in relation to transferring their DB benefits into a DC pension scheme in order to take advantage of the new pension flexibilities introduced in April 2015. BALPA suggests that the taskforce considers new safeguards to address this serious and growing problem.
PPF compensation cap
To achieve safer and more sustainable DB pensions, we believe the taskforce should press for a review of the PPF compensation cap to determine whether it is achieving its original aim – to guard against ‘moral hazard’ – or whether it is having unintended consequences and penalising scheme members who were unable to affect the operation of their pension fund or influence high-level commercial decisions.
At the same time, we would ask the taskforce to call on the DWP to implement its promise as soon as possible to increase the PPF compensation cap by 3% for every year of service over 20 years.