A new dawn for pensions
What can politicians do to help restore trust in UK pensions? Experts share their views in this long-read article as part of our Challenging Conversation on pensions.
UK workplace pensions over the past half century have been marked by the irreversible decline of defined benefit (DB) schemes. In 1967 there were around 8m active DB members. By 2017 this had fallen to 1.7m members with over 87% closed to new members and/or future accruals.
Pensioners’ longer lives, changes in policy, regulation and accounting standards have all played their part in the destruction of the much-loved gold-plated final salary schemes. But the start of auto-enrolment in 2012 could be seen as a new dawn with over 9m members enrolled to date.
Today there are now far more active members of defined contribution (DC) schemes (12.8m in 2017) than in DB schemes. DC schemes are less risky and generally less expensive for employers while employees, who are not equipped for this, take all the risk of underperformance.
Other problems remain.
People are not saving enough – the legal minimum auto-enrolment contribution of 8% from 2019 is not nearly enough to provide an adequate pension and many groups such as the self-employed are excluded.
Scandals from Maxwell to pension liberation and downright fraud have all tarnished the very word ‘pension’ but nobody can think of a replacement term.
The frequent changes to the state pension have also not engendered confidence. Annuity rates still offer poor value. The Freedom and Choice reforms of 2015 have opened up new opportunities but there is a danger that people in drawdown will run out of money before they die.
Pension reform timeline
Click on the infographic below to chart the key pension changes from 1975-2019, including the events that contributed to trust being diminished in pensions.
What must change
Bob Scott, chairman of Association of Consulting Actuaries and senior partner at Lane, Clark & Peacock, highlighted the problems which have led to low levels of trust in pensions:
“Scandals (Maxwell, Equitable Life, pension scams); perceived poor value (eg annuities); negative publicity around pensions (BHS, British Steel, Carillion, USS, public sector pensions); complexity (disclosure requirements have led to people being given large amounts of unintelligible information. Individuals are then faced with the impossibility of: comparing different types of benefits; understanding whether a transfer value is good value for the DB pension being given up; assessing what level of income a DC pension might provide); and frequent changes (in particular to tax laws).
“To address these and to start restoring trust, there are three things that politicians ought to focus on: making pensions simpler, publicising good news about pensions and – stop tinkering. Sadly, I have not seen any signs that politicians are motivated to do any of these things.”
Hugh Nolan, President of the Society of Pension Professionals and Director of Spence and Partners, says: “The main way that politicians could help restore trust in UK pensions would be to stop sensationalising issues for political advantage. Demonising employers who have tried to provide generous pensions to workers but have ultimately failed due to insolvency is unfair and damages the level of trust.
“Equally, calling for knee-jerk and populist reactions to difficult cases has unintended consequences, with potential investors scared off from rescuing companies with DB schemes and members getting the incorrect impression that their employers are all trying to rob their pension schemes. It’s unhelpful for Frank Field [Chairman of the Work and Pensions Commons Select Committee] to constantly complain about pension schemes and then be surprised when British Steel members transfer out of theirs.”
Much that is good
Stewart Hastie, Partner, KPMG and Head of Pension Services for Large Corporates, adds: “Millions of people are now enjoying a comfortable retirement provided by good occupational and trust-based schemes. However, it is all too easy to focus on where the system breaks down or unscrupulous individuals undermine the good done by the majority.”
Penny Cogher, Partner in law firm Irwin Mitchell, agrees: “According to figures published by the FCA on 19 April 2018, decumulation and pensions were the least complained about financial products in the second half of 2017, with approximately one complaint received for every 1,000 policies in force.
“The proportion of complaints upheld fell most significantly for decumulation and pensions compared to other financial product groups, from 68% in the first half of 2017 to 59% in the second half. This is partly as a result of the Government, The Pensions Regulator, the FCA together with the pensions industry, making strenuous attempts to reduce pension scams which were rife before that time.
“However it doesn’t mean that everything in the pension garden is rosy. We’ve seen the British Steel workers making over 150 complaints to The Pensions Ombudsman about being given wrong advice on transfers out from the DB British Steel pension scheme by unscrupulous advisers who make a nice profit on advising on each transfer. Fortunately, this has now been clamped down on.
“SIPPs are another area that are bringing pensions savings into disrepute as investment-only products have historically allowed members to invest in unauthorised high-risk investments which are now non-performing at best and at worst non-existent.”
Politicians have been too short termist and have switched many higher earners off pension saving all together.
- Duncan Buchanan, Hogan Lovells
Duncan Buchanan, Partner in law firm Hogan Lovells, says on tax: “Politicians have been too short termist: over the last 10 years or so there has been short-termist positions taken by politicians mainly by way of reducing tax allowances and complicating the annual allowance system.
"This was done to increase the immediate tax take but is has switched many higher earners off pension saving all together. This lack of engagement of higher earners feeds down the workforce in general.”
The view from Westminster
Former pensions minister Steve Webb, now Director of Policy Royal London, says: “there is a perception that in practice pensions policy has been subject to constant tinkering and there is little or no stability and consensus. This is an incorrect perception, distorted by repeated changes in one part of the system (pension tax relief). In fact there is more agreement over core features of the system than is widely observed.
“If the pension architecture in the UK were to be described in terms of four elements – the state pension, workplace pensions, the at-retirement framework and the tax treatment of pensions – in at least two and probably three of those areas there is a good deal of consensus.
“The new state pension which was introduced in 2016 was achieved without significant political opposition. Government policy was already moving in the direction of the ‘flat-rating’ of state earnings-related pensions, and a destination where there was a basic and second tier state pension both paid on a ‘flat rate’ basis would not have been a long way from the ‘single tier’ pension that was introduced in 2016.
“Workplace pensions are increasingly focused around the model of automatic enrolment into large scale, low-cost master trusts or group personal pensions. Automatic enrolment was the product of a non-party Pensions Commission set up by a Labour government and was implemented under a Conservative – Lib Dem Coalition.
“The programme is widely held to have been a success and although there is debate about issues such as the right contribution level, coverage of excluded groups etc., the basic principle seems widely accepted.”
But policy makers are too short-termist in outlook, says former Shadow Pensions Minister Gregg McClymont, now Head of Retirement Savings at Aberdeen Asset Management and a member of the ICAS Pensions Panel: “Politics are ever more a short-term game of ‘something must be done, this is something’. In Sweden no government can make a major pensions change without the consent of a cross-party parliamentary group. This agreement has held for the last quarter of a century.”
Politicians need to encourage the pensions industry to treat customers better. Customers don’t know what is happening, yet the provider is taking money from low earners and charging them fees.
- Former Pensions Minister Baroness Ros Altmann
Former Pensions Minister Baroness Ros Altmann thinks “politicians must make sure that we do far more to protect pension customers, ban cold-calling, prevent scams and recognise the need for firms to treat customers fairly.
“Politicians need to encourage the pensions industry to treat customers better. For example, providers who use Net Pay administration to auto-enrol low earners are depriving these customers of money they would have if they were in a Relief at Source scheme.
"The customers don’t know what is happening, and nor do their employers in most cases, yet the provider is taking money from low earners and charging them fees, while forcing them to pay far more than they should.
“It is also important that politicians require Regulators to get rid of the excessive use of jargon and reams of impenetrable paperwork. Firms should be required to provide standard information and use standard terminology. Politicians should introduce PensionWise free guidance as the norm – the standard expected option for people who have pension savings. Also, it is important to improve access to financial education in the workplace, alongside auto-enrolment.”
“Short termism is rife in the development of pensions policy with ministers seemingly often being more concerned with the popularity of the government and their own political survival than anything else,” says Malcolm Mclean, Senior Consultant at Barnett Waddingham.
He adds: “Looking beyond the next general election and being prepared to think in the longer term rarely happens. The exception to this – perhaps the only one in the recent past – has been the introduction of auto-enrolment in 2012 and even that took a long time to get off the ground and had to be cautiously phased in over a number of years before it could be fully implemented.”
Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown, is more nuanced: “Steve Webb’s changes to the state pension were commendable for being a long-term improvement to the system, in the face of some significant short-term challenges. Pension freedom was cynical and short-termist but also an effective long-term reform.
“By contrast, the introduction of the Lifetime ISA and the introduction of laughably generous death benefit terms for drawdown investors were nothing but short-term decisions for political advantage.”
State pension concerns
David Robbins, a Director in consulting actuaries, Willis Towers Watson’s Retirement business, has concerns over state pensions: “Governments have appeared to believe – no doubt correctly – that there is a lot of pressure to maintain or improve their value for older groups, whilst it’s quite easy to cut them for younger people.
“That’s partly because pensions are less salient when you’re young, partly because people may not believe that they’ll get what they’re supposed to anyway, and partly because pensioners are seen as having less time to adjust and were historically poor. As a result, the single-tier State Pension is cost-neutral early on but significantly less generous for people retiring in future decades.”
He explains that this is because amounts projected to be paid under the new state single tier pension will be less than the old basic state pension when combined with the state second pension for those with a full career, but the self-employed do better.
We are in a world where the pensions terminology used is so complex no ordinary person or even educated person understands it.
- Dr Yvonne Braun, Association of British Insurers
“Policymakers are acutely aware that once you automatically enrol millions of people into workplace pensions and they collect new pensions whenever they switch jobs, people will end up with multiple pension pots.
"We owe them a duty of care to make sure they know where their money is, so that they can use it in retirement. The current situation where £400 million, or by some estimates, £3 billion of pension money is lost to people, has to end.”
Penny Cogher sums up the feelings of many: “We do seem to be in a world where the pensions terminology used is so complex no ordinary person or even educated person understands it. And as for pension tax, what type of situation is it where pension tax is so complex HMRC cannot devise an online tax relief calculator that provides correct pension calculations.”
Brexit, and the continuing uncertainty surrounding it, is a distraction which for the moment, at least, the pensions industry has to contend with as best it can, but the current pension system can and must be improved.