Money: Chaotic effect of a splash in the sea

Stephanie Hawthorne looks at the disadvantages of the Pensions Act

Some 200,000 occupational schemes with 11 million members have more security as a result of the Pensions Act, drafted after the death of media tycoon Robert Maxwell and the disappearance of more than pounds 400m of his employees' pension funds. But do the benefits of the Act outweigh the disadvantages? Many experts claim it provides better protection at the price of fewer benefits.

Paul Haines, investment director at pension specialists Sedgwick Noble Lowndes, says: "The three main outcomes [of the Act] have been the destruction of forests, the boosting of fees paid to lawyers and actuaries and the start of a wholesale move from final-salary to money-purchase schemes."

It is ironic that one of the main effects of the Pensions Act is to expose more people to the risk of fluctuating stock markets as more employers switch to money-purchase. In the past two years Zeneca, Lloyds, Legal & General, Barclays, Philips and Glaxo Wellcome have shifted towards money-purchase, where savings rise or fall in line with the stock market. In final-salary schemes the ultimate pension is based on your years of service and guaranteed by your employer, who bears all the risks.

Sally Bridgeland, of the actuarial firm Bacon & Woodrow, compares pensions to the butterfly effect: "A single flutter escalates to cause a catastrophic weather system somewhere else in the world. Here, a splash in the ocean [Maxwell] has led to a flood of legislation in the pensions system. Today, actuaries are frantically helping pension scheme trustees batten down their hatches and reef their sails, ready for the storm. There are bound to be some shipwrecks."

Many pension scheme members know that the state pension system is also on the rocks so there will be a lot of pressure to put alternative pension arrangements in place for the future. But winding up old pension arrangements involves salvaging costs which usually come from the assets of the scheme.

And employers may want employees to meet the costs of building and running new schemes, which will leave less for their pension benefits earned in the future. So, asks Ms Bridgeland: "Will this chaotic legislation protect the interests of members of occupational pensions?"

Richard Malone of Sedgwick Noble Lowndes forecasts that the new legislation may not be enough. When it fails, he says, "it will lead to more law, more regulations and more supervision and this will further undermine the commitment of some employers to pension provision when politicians are looking to them to pick up more of the burden".

Martin Slack of Lane Clark & Peacock hopes employers will retain their involvement in decently funded schemes: "It is naive to expect employees to make adequate savings on their own, even if their salaries were increased to reflect any reduction in employer provision."

It is difficult to quantify the cost of compliance. Keith Ternent, of Buck Consultants, a firm of actuaries, forecasts it will be 2 to 3 per cent of payroll costs. Inevitably, it will deter some employers from continuing such schemes.

Will the Pensions Act stop another Maxwell? No legislation can stop fraudulent or criminal activity. What the Act should do is to deter such activity and ensure that, should fraud happen, it will be identified much earlier, so that the effect can be mitigated and corrective action started much sooner.

One of the biggest failures of the Act is that it does not include any requirement for external/independent custody of the investments. Had a requirement for independent custody been in place in 1991, Maxwell may not have happened.

What should the next government do? We must have a radical simplification of the complicated rules governing pensions and tax concessions. There must also be a blueprint for long-term pension provision which is guaranteed to survive political change and our adversarial system of law-making.

But all those in work and who can must all take some personal responsibility. What is crucial to a prosperous retirement is the size of contribution and the length of savings term before retirement.

Stephanie Hawthorne is editor of `Pensions World'