Christopher Massey: More questions than answers in pensions proposals

Although the scope for tax-efficient pensions savings has been significantly reduced, pension schemes still remain one of the most effective savings vehicles an individual can have.

We recently estimated that UK employers spend 30 billion each year on workplace retirement savings, excluding amounts being spent to address pension deficits. Despite looming tax and auto-enrolment changes, many employers have delayed decisions on amending retirement provision due to further uncertainty around regulatory changes.

Earlier this year, for example, the government announced that consumer price inflation (CPI) rather than retail price inflation (RPI) will become the yardstick for the minimum rates at which pensions have to increase in private-sector pension schemes.

Last week, the long-awaited next step was revealed; a three-month long consultation process on the CPI switch that ends on 8 March. However, as the government will undoubtedly want to review the findings, we are unlikely to have any clarity on the road ahead until next summer.

While the changes announced in last week's consultation document are indeed welcome, I can't help but feel that there has been a missed opportunity in that under the proposals the majority of private-sector pension schemes will not be able to use CPI as the basis for increasing pensions after retirement. Trustees and employers are already struggling with funding deficits and complexity. There was an opportunity to alleviate more of this pressure by allowing wider application of CPI, in a similar way to state and public-sector pensions, but the government played a cautious hand and the proposals have not gone that far.

Unfortunately, this means that the burden for interpretation and action has been firmly shifted back on to schemes and their sponsors, and will severely limit the action many companies can take. Sponsors with pension schemes that have rules which specify the use of RPI or involve other constraints, such as requiring agreement from trustees to make changes, may find they cannot make full use of the CPI switch. Crucially, as a result of this, the government's estimated saving for private-sector pension liabilities of over 75bn may not be fully achieved in practice.

On a more positive note, those pension schemes that already have the flexibility to move to CPI increases will be able to do so from 1 January. I was also pleased to note that no schemes will be left in a position where they have to pay the better of CPI and RPI. Whilst CPI is not expected to exceed RPI regularly over the long-term, it can happen in some years, such as 2009. So this concession is important, even if it has limited effect overall.

Hot on the heels of this, the government also unveiled draft legislation covering the new tax regime for pensions and removed the requirement to buy an annuity no later than age 75.

However, once again, I would have liked to see them go further.There needs to be greater flexibility so that employer and individual savings can be integrated, not only to provide income in retirement but also to help people react to key issues they may face such as debt management or to avoid the repossession of their home.

A recent survey by PwC showed that one in five Scots would welcome this level of flexibility. What was also interesting was that at present 90 per cent of employees in Scotland either have "no idea" or dramatically under-estimate how much it costs to save for a pension while 49 per cent say they don't understand their employer's pension scheme and how it will benefit them.

With announcements now coming through, and a flurry of activity set to get under way, perhaps a quiet moment of reflection should be taken.

As well as asking themselves what dividend their organisation is getting in exchange for the considerable sums they are spending on retirement provision, trustees and employers should also question whether it is clearly understood or appreciated by the workforce.

Is this money well spent and could they do more to help employees better understand the pension landscape and just how much needs to be saved to provide a decent retirement income?

• Christopher Massey is head of pensions at PricewaterhouseCoopers in Scotland.