Malcolm Small is Senior Adviser on pensions policy at the Institute of Directors.
At the Institute of Directors, we run regular research programmes to find out what our members think about pensions. The results, unfortunately, are not encouraging for the current pension saving system in the UK.
Directors are thoughtful people, almost by definition – they think about business and run the companies many of us depend upon for our employment. So, what they think is important.
In our research, we can detect consistent themes about the pension saving architecture, which come up from year to year. The following are the issues which Directors perceive to be the problems with pensions, which perhaps mirrors how many in the wider population are starting to think.
Pensions are complex – and the rules keep changing
Almost nobody now understands the complete rule-set around the private UK pension saving system.
The following bodies all make rules or undertake policy interventions around pensions: HM Treasury, HMRC, the Department for Work and Pensions, the Pensions Regulator and the Financial Conduct Authority. There may be others.
We have had 8 major Pension Acts in the last 10 years, and yet another Bill is wending its way through Parliament. The rules you planned to two years ago no longer apply, when you need to make long-term decisions. Pension providers need to employ thousands of people just to keep up with the pace. So do employers.
Charges are opaque
It’s a cheap headline to get hung up on pension charges; in fact, most of them have been coming down for years, and are now approaching the lowest in Europe. However, a recent OFT report identified no less than 18 different “points” at which a charge for running your pension could be taken, with some requiring disclosure and some not, owing to different regulatory regimes (see above).
However, the thrust is that the charges for pension saving are opaque in many cases, giving rise to the comments of many of our members that “pensions are a rip-off”.
Pensions are too inflexible
This may be where the rubber really hits the road. Our current pension saving architecture was last consciously looked at when self-employed pensions were introduced in the Finance Act of 1956.
What we have broadly had since is tax-relieved saving, locked up until retirement age, then some tax-free cash and a still, effective, requirement to buy a thing called an “annuity”. (This is where you give all your pension funds to an insurance company, in return for a level or fixed escalating income.)
Our real lives in 2013 are nothing like 1956.
The over-65s are the fastest increasing divorce cohort in the UK. The market for pay-day loans did not exist 6 years ago; people today have no effective access to their pension fund before age 55, when they may have an urgent need for cash now. It’s not much fun losing your home, while having a big, but inaccessible, pension fund. And an annuity, by its very nature, can make almost no contribution to possibly the greatest later life need – residential nursing home care costs.
The way we do pensions needs a truly radical re-think.
It needs to be got right for the 21st Century. Then it needs to be left very strictly alone, for decades.
So, how do we make this better? How do we deliver a pension saving system that people can support and be positive about?
First, we need to understand that retirement saving is simple.
All we are doing, in partnership with our employers, is putting assets aside today, for later life. That’s all. It is not difficult, only the existing system makes it so.
We need to radically simplify, and make more attractive, the existing system.
Second, we need to standardise and simplify existing charge regimes.
We should not rush to “cap” charges, as many under would currently wish. Doing so defeats natural competitive pressures in the market which have already delivered massive charge cuts in the last 12 years – but the industry can do better, if we let it.
Third, we need to look very hard and radically at the existing pension regime and especially the access and income parts of it, lest we drive the very people we are currently seeking to automatically enrol into pension saving, into an architecture which turns out to have been unsuitable for them, or which provides very poor retirement income value.