Tuesday Aug 12, 2003

David -
I hope you will find below the notes I wrote last week on Thursday while the material that I had prepared for the last WN was still fresh in my mind. I regret that copying and pasting Word documents to webmail means that some of the formatting gets lost, but I hope you can see how it was intended to look with suitable indents, etc. I even had some items in bold that have also got lost.
It may be unconventional but I thought you might want to circulate these notes in advance so that we can then have a discussion on issues rather than a detailed spiel from me on the two government documents. Otherwise the notes can be used after the meeting like last February.
See you Wednesday. Regards Peter

UK Pensions Update

Peter Ratzer

When I was here in February I reported on the UK government’s consultation paper that was published in December (see summary posted on Wednesday-night.com after the meeting on 26 February 2003)

In June the government published its Action Plan.

There are three major thrusts to the Plan:

1. Improving the protection offered to members of pension schemes, particularly members of defined benefit schemes that are wound up. This is in response to some tragic cases where employees about to retire have lost all their expected pension benefits.
Solvent employers will be obliged to meet their pension promise in full if they wind up their pension scheme. The government legislated for this immediately the Plan was published to stop any employers winding up schemes before the legislation required for the rest of the Plan was introduced to Parliament.
The priority order, which applies on wind-up, will be revised to ensure a fairer sharing of assets. Currently pensions in payment rank ahead of deferred pensions or the future claims of existing members of schemes. The degree of protection will depend on the length of time a member has been contributing to a scheme.
A Pensions Protection Fund will be introduced to guarantee members a specified minimum level of pension when the employer becomes insolvent. To reduce moral hazard, premiums charged will be a function of the level of underfunding of a scheme.
The government will introduce a new approach to vesting. Rights to pensions are currently only protected after two years employment. In future employees will get some benefit after three months employment.
A new Pensions Regulator will be charged with rooting out fraud and bad practice to help improve confidence in the system.

Making pension provision easier for employers.
The so-called Minimum Funding Requirement will be replaced by scheme-specific funding arrangements.
The cap of 5% for the mandatory indexation of pensions for inflation will be reduced to 2 ½%.
There will be increased flexibility for employers to rationalize the structure of fund benefits.
Legislation in some key areas such as taxation will be simplified.

3. Giving individuals greater choice over how they save and when they retire.
Age discrimination will be outlawed and people encouraged to work for longer.
Changes in the tax rules will permit people to work at the same time as drawing a pension.
To give a lead, the government plans to raise the normal pension age for public service pension schemes from 60 to 65.

There were a number of possible changes that were not made:

No change in the state pension age of 65
No compulsory saving for retirement or compulsory membership of an occupational scheme as a condition of employment
No change in survivors’ benefits

Instead a Pensions Commission has been set up to keep the system of private pensions and long-term savings under review and in particular to advise on whether the current voluntarist approach is sufficient.

7 August 2003

The UK Private Finance Initiative – Update

Peter Ratzer

The Private Finance Initiative (PFI) is one form of Public-Private Partnership that has been used in the UK to involve the private sector in providing public services under long-term concessions from the government to finance, construct, maintain and operate the necessary facilities such as prisons and roads. The private sector assumes the risks it is best able to manage and accepts penalties if it fails to deliver the specified level of service.

PFI has been subject to continuing criticism, particularly from trade unions whose members may have to transfer from the public to the private sector.

Despite this criticism the government still believes that PFI has an important role to play in delivering investment to provide world-class public services. It sees PFI as one of its most important policy successes in its wider modernization agenda. So far 563 deals have been closed with a total capital value of over GBP35 billion.

Ahead of the trade union conference season the government has just launched a revamp of PFI in an attempt to deflect some of the criticism.

The 130-page report from HM Treasury is entitled PFI: meeting the investment challenge. This is the clearest explanation and most cogent defense of PFI yet published in the UK. (The report can be accessed on www.hm-treasury.gov.uk).

The report places stress on using PFI where it is appropriate and where it expects to deliver value for money (VFM) that is not at the cost of the terms and conditions of employees.

It also places stress on ensuring that the evaluation process has no inherent bias in favour of one procurement option over another, i.e. PFI should not be considered the only game in town for new public sector investments. Conventional public sector procurement should be a realistic option.

PFI is now considered most appropriate for major and complex capital projects with significant ongoing maintenance requirements, i.e. where private sector project management skills and risk management expertise can bring substantial benefit.

It is now recognized that PFI does not deliver VFM where transaction costs are disproportionately high and where fast paced technological change makes it difficult to specify long-term requirements. The government will therefore no longer use PFI for IT projects or for smaller projects unless they can be bundled into larger packages.

The government is proposing to reform and toughen up the procurement process to make it more efficient and also to confirm that VFM does not come at the expense of employees’ terms and conditions. Government departments will also be given the option not to transfer soft services staff to the private sector where their transfer is not believed to be essential.

Because of concerns that private sector finance is more expensive than public sector borrowing, the government intends to explore and pilot a form of credit guarantee finance. Senior debt funding would be provided by the government, but would be fully guaranteed by private sector risk takers such as banks and insurance companies. The government’s risk would be the creditworthiness of the credit provider or insurer, not the PFI project itself.

The government also proposes to explore new applications of PFI in areas such as social housing, urban regeneration and waste.

PS For those interested in public-private partnerships in Canada see www.strategis.ic.gc.ca and search for P3 Office. In addition the Canadian Council for Public-Private Partnerships has a site – www.pppcouncil.ca.

7 August 2003

Links:

on Pensions see Peter Ratzer | Aug 2004 | Aug 2003 | Peter Ratzer 2002 story | Wed1118| Wed1119 | Home on Pensions
The Foundation for International Studies on Social Security
FAIR Fairness and Accuracy in Reporting Social Security

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