A mass of contradictions

So another year of Parliament will kick off in September, and another Pensions Bill awaits us (as well as another Finance Bill full to bursting with pension amendments). Is anyone else feeling dizzy from this never-ending onslaught of changes to pensions?

We can look forward to the laying down of the rules for the new pensions freedom, as well as the introduction of the defined ambition regime – the third way, for those who don’t want defined contribution and can’t afford defined benefit.

But when laying these two initiatives side by side, it’s becoming increasingly obvious that there is no master plan behind pensions. Instead, it’s a swirling mass of contradictions, and legislation using the piecemeal effect.

Back in 2006, I distinctly remember being promised the introduction of A-day was the end of itty bitty changes and tinkering of legislation. But it’s proved to be anything but.

A few things to draw attention to.

The budget changes bring in autonomy and responsibility. It’s your money; you spend it how you see fit. But the new CDC regime is all about pooling money together (so you have no idea what’s yours and what’s not), and trusting in a higher body to give you the right amount of money at the right time in retirement. So, completely opposing views.

Next year we also get the charge cap for defined contribution schemes. Steve Webb (and others) has lamented the fact that we can only use the charge cap to control fund management charges and not total charges. The industry is in a state of worry (and rightly so) about how much the pesky transaction charges cost someone, and why they aren’t disclosed clearly and transparently.

But how much will CDC costs amount to? Or the guarantees being offered through defined ambition schemes? I strongly suspect we will never know. It seems bizarre to me that we have spent the last ten years travelling towards openness and transparency about how much your pension costs you, and now the new defined ambition regime is driving a cart and horses right through this initiative.

Will the costs fall under a charge cap? I don’t think so, unless the cap’s extended to DA as well as DC. But remember, this new regime is essentially DC. Employers’ costs are controlled – they pay a percentage of earnings (or whatever). Charges will fall to the member. It’s just they won’t have the foggiest what they are.

And the new guidance guarantee will only apply to DC schemes – not to DA or DB schemes. In a way you can understand the logic. Transfers from DB schemes to access the new freedoms won’t be allowed for public sector schemes and might be banned as well for private DB schemes. So these people don’t need guidance.

But what about those in DA schemes (indeed, if any are ever set up)? On the one hand, you could argue they should be treated the same as those in DB schemes. If there is a mass exodus of members at retirement then the pooled scheme will ‘fall over’. But I believe in freedom. People should be allowed to transfer out. It’s just the trustees will hit them hard with a market value adjustment (or whatever it’s called) to cover the scheme’s back. And that’s a tricky decision – stay in the DA scheme for the benefits you are promised (or even guaranteed), or transfer out to DC and spend your money how you want to. People will need help.

Things are happening too fast in pensions. They are not thought through. They are not joined up. There is no master plan.

Instead, politics is driving change. And that means politicians’ needs are at the centre of new developments not customers.


6 thoughts on “A mass of contradictions

  • Great blog Rachel, thanks. Just before I read this, I saw a tweet with the headline ‘Minister repeats call for pensions tax overhaul’ and I thought ‘please, no, just leave us alone’.

  • Rachel,

    I don’t disagree with anything you say – unsurprisingly after working so many years in SIPPs! But, in the interests of debate, it’s only fair to point out that the break-down of pooling and the increasing individualism in pensions raises costs, too. Not just in terms of the cost of running many separate arrangements: in the responsibilities and decisions it pushes on to people, too. With auto-enrolment, they won’t just be the advised, HNW people of my working-world of SIPPs.

    It doesn’t address your (and mine and many people’s) frustration at politicians’ piecemeal approach and constant change but why not let the market decide if there is a demand for a new approach to pooling as an alternative to the great freedom, flexibility and responsibility of the DC / drawdown route?

    • Thanks for your comments Andy.

      I’m not against CDC. Just unconvinced at the moment. And you are right, if there is demand for them, who am I to argue?

      What frustrates me though is, as you say, the piecemeal approach to legislation. But also that after a decade of change we are getting to the situation where people know what they are paying on their DC pot, and understand the charges. And when you think where we have come from and the unintelligible charging structures of 20 years ago, that is something to be celebrated.

      So, I just don’t want to see a return to the dark days of opaque charges. The DA framework is loose at the moment. So I hope these type of concerns can be factored in.

  • I think before we get too hung up on change , which after all is always with us in every aspect of our lives – we should reflect on the miserable job the industry has done to date with the tools it has had at it’s disposal.

    The average UK pension fund is still below £40K so why does the advisory community not just get to work racking this up to workable levels ?

    We have a broad church of clients and find very little reaction to the myriad announcements concerning pensions and our job remains helping people to understand the financial implications of living too long or dying too soon.

    Governments and regulators come and go but the basic job for the industry does not change at all.

    So lets look inwards at how we can improve things and leave the meddling to others more suited to it.

    • You are absolutely right Phil. Your job is to cut through legislative and regulation waffle to the “so what” for customers.

      But having the right legislation and regulation means it’s much easier for you to do your job. And that’s worth arguing over.

  • Hi Rachel,

    I really don’t think that the muddled and opaque history of pensions can be laid at the door of legislation. Much of the nature of the pension products which were available came as a result of providers designing what suited them rather than the clients.

    The world of employment has changed beyond recognition in my lifetime and the change from a corporate outlook on later life to an individual responsibility has meant that much of what we had has become obsolete.

    For the vast majority the technical changes our industry obsesses over are irrelevant when compared with the emotional acceptance of the responsibility for ones own future and the demands that this makes on income.

    There is a huge demand for advice out there but our industry continues to complicate the issue either by trying to show how clever it is or by trying to reference its charges to the historical commissions paid by providers for product distribution.

    If we don’t hurry up and sort ourselves out we will soon be watching Amazon et al.wiping out our jobs by making the whole process simple and economic.


Leave a Reply