HARROGATE, England - It's deja vu all over again.
As U.S. pension executives railed against the burdens of government regulation on retirement plans in the 1970s and 1980s, warning that it could spell the death of defined benefit plans, now it's the United Kingdom's turn.
"Occupational schemes have been 'strengthened' almost to death as a result of the 1995 Pensions Act," Ann Robinson, director general of the National Association of Pension Funds, told the trade group's annual meeting. "What we need now is a government which will support occupational pensions rather than subject them to slow strangulation."
British pension executives had been racing to meet an April 6 compliance date for updating their plans to meet requirements spelled out in the law and 40 sets of regulations numbering nearly 1,000 pages, with more to come. Many plans have not finished the task.
Among the burdens they faced include:
New requirements that plan participants have at least one-third of seats on trustee boards, though in many cases participants have agreed to alternative arrangements under a loophole in the law;
Preparation of statements of investment principles, spelling out each fund's investment objectives and relating them to their liabilities;
New rules affecting plans that contract out of the State Earnings Related Pension Scheme; and
New reporting and disclosure requirements.
In addition, controversial new minimum funding rules haven't yet kicked in but remain a source of worry.
"The weight of regulations grows inexorably every year and certainly grew massively in 1997. And the cost of meeting these regulations is forever growing," said Peter Murray, the NAPF's incoming chairman and chief executive of the Railways Pension Trustee Co. Ltd., London.
Employers face more burdens
As if that weren't enough, U.K. pension managers must meet gender-equalization requirements folded into the act to comply with an earlier European Court of Justice ruling. Unfortunately, the government has provided little guidance on how to equalize previously accrued benefits.
What's more, new rules setting minimum standards for transfer values - how much a participant can take out of a fund when switching employment - in many cases have resulted in lower benefits for participants. One consultant said all his clients have opted for lower transfer values for participants.
Adding insult to injury, many British pension schemes must contend with former plan participants who want to rejoin their old plans. At the government's encouragement, many participants opted out of their employer-sponsored schemes in the late 1980s. Instead, they took out personal pensions with high upfront charges - only to find themselves worse off.
Speaking at the NAPF conference, a Securities and Investment Board official was besieged by complaints from irate benefits managers who now have to contend with the mess, with little help from insurance companies that "mis-sold" those personal pensions.
Meanwhile, employers' ability to recoup surplus pension assets has come under attack. A series of recent rulings by the U.K.'s Pension Ombudsman Julian Farrand has affected hundreds of millions of pounds in recaptured surplus assets. Those assets, most of which had been recouped by privatized companies, must be refunded to schemes, he ordered. A key test will occur later this year when the High Court reviews an Ombudsman's ruling that the National Grid incorrectly took (British pounds) 44 million from the Electricty Supply Pension Scheme.
Tom Ross, the NAPF's outgoing chairman, told delegates the association believes refund of surplus assets to employers should be allowed. "The Pensions Act 1995 permits a refund of surpluses to employers where (the) Inland Revenue approves of the payment and the refund is in the interest of the members of the scheme," he said.
Participants are better off if an employer can recapture surplus assets than if the employer makes minimal contributions, he added. Lower funding levels could create the possibility of a shortfall "in the event of a sudden, unexpected drastic fall in the value of scheme assets," Mr. Ross said.
Potential tax threats loom
As if U.K. pension executives didn't have enough to worry about, they now fear the newly elected Labor Government will lower tax relief granted to tax-exempt funds on Advance Corporation Tax. Because retirees pay taxes on their pension benefits, pension funds receive a 20% tax credit on dividends - reduced in 1993 from 25%.
The industry is abuzz with rumors that Chancellor of the Exchequer Gordon Brown will abolish or reduce the tax relief, effectively reducing dividends. Not only would this shrink investment income, but domestic equities held by U.K. funds are valued on the basis of future dividend streams, thus causing overall valuations to decline.
The upshot, some warn, is that companies would have to boost contributions, thus diminishing pre-tax income and reducing government receipts. A back-of-the-envelope calcuation by Mr. Ross suggested (British pounds) 50 billion in additional assets would be needed if ACT relief were abolished.
Resulting tax-revenue losses could equal or even exceed the amount gained by the Treasury from ACT changes for the first five and possibly 10 years of the tax, Mr. Murray said.
Norman Braithwaite, the incoming president of the Pensions Management Institute, a professional U.K.-based training organization, added reduction of ACT would have a direct effect on members of defined contribution schemes, which are just starting to take off in Britain.
Another concern is that the government, in its upcoming budget expected June 10, will lower tax relief on pension contributions to the basic rate of 23% from 40%.
The net result of all these rules and tax threats is that employers are losing more and more control over the pension plans they sponsor, experts said. In the case of traditional defined benefit plans, where they bear the risk of investments of turning out poorly, the push toward defined contribution plans is growing.
"I think the employer has been the forgotten man in the pensions developments that we have had over the last 20 years," Mr. Murray said.
Tax simplification urged
Responding to these various threats, industry figures are trying to cut a path forward. Paul Trickett, chief executive of CMT Pension Trustee Services Ltd., which provides services for Britain's two major coal schemes, said trustees should not believe the Pensions Act finished the job.
"What might appear onerous today will in a few years' time seem very routine, and today's best practice will look very flimsy," he told the conference.
Rather, the industry should develop codes of best practice to those areas not covered by the new law, such as benefits administration, service standards, trustee training and custody arrangements. Lack of guidance on custody was perhaps the "single biggest gap" in the Act, he said.
Meanwhile, in a move that echoes U.S. experience, a NAPF task force is developing a proposals to simplify taxation affecting pension plans, examining issues such as limits on tax-deductible contributions and benefits, and minimum funding rules.
Robin Ellison, head of pensions at London-based Eversheds, Europe's largest law firm and who chairs the task force, questioned whether detailed 1970s and 1980s-type fiscal controls are desirable in today's lower-tax environment.
The NAPF also has carved out its own agenda, including phasing out of SERPS and replacing it with a compulsory second-tier pensions for all, Ms. Robinson explained. The asssociation also wants to restore employers' ability to make plan participation a condition of employment, and that there be credits to funded pensions for those unable to contribute.
NAPF officials also will focus on educating policymakers and the public on how retirement plans work and the need for savings.
"There is huge ignorance in government, among politicians, opinion formers, the media and the general public about even the basic elements of how a pension scheme works and that ignorance is dangerous for us, very dangerous," Mr. Murray said.
"Why is public ignorance so dangerous? Why is ignorance not bliss? One of the main reasons why is that there is so much inappropriate legislation and regulation affecting out industry is that opinion makers and law makers don't understand how our industry works," he added.