Pensions have become an increasingly hot topic in recent years, but rather than becoming easier to understand the landscape is in fact more complex than a decade ago when simplification was introduced.
Since April 2006, the pace of change in this space has accelerated rather than decelerated so it feels like we are in fact facing pension complification.
Before then we would have some years where we only had a few bits of pension legislation, but the number has vastly increased since: in 2006 alone there were probably a dozen legislative changes and in 2010 there were 25. Although pensions were simplified, they’ve never stood still since.
Pension simplification swept away the old three-way regime. Whilst that was complex, people understood it in an occupational sense, and there was a separate personal pension manual that you read if you wanted to deal with that. So it was relatively controlled and the manuals were a couple of hundred pages long. They were then replaced with thousands of pages in the registered pension scheme manual, which in itself has been replaced with the pension tax manual and endless bits of legislation.
So what we’ve seen in the past 10 years is a proliferation of tinkering. We’ve set up a regime which treats everyone the same, but then found out that one size does not fit all and spent the rest of the time shoehorning in all sorts of different types of legislation: scheme pensions, defined benefit scheme changes, pension protection changes etc, which makes pensions a constantly moving beast.
Pension pace increasing
Although we avoided a huge raft of pension tax relief changes in this budget, we still saw the introduction of a mini pension Isa in the form of the lifetime Isa, and all the small changes to relax the rules around pension access for people who are seriously ill and young people who inherit a pension pot. The coast is not clear for pension tax relief either; we anticipate we’ll see further changes in the autumn statement this year, possibly the unveiling of the pension Isa.
It is not just the sheer volume of changes increasing, but the pace is getting incredibly fast. The legislation for A Day was passed two years in advance, and that in itself was the result of several years of consultation, so as an industry we probably had about four years to get to grips with the change. In the last three years, we’ve had continuous change and the timeline from legislation to introduction has in some cases been weeks.
The legislation for pension freedoms was passed in February but it went into place in April. It’s not that change in itself is bad, but change does lower customer confidence in a product and the change is constant. Fundamentally, the pension freedoms were a complete rewriting and what comes up in the Autumn Statement may be another complete rewriting. We need a boring budget soon.
You can argue the pension simplification changes in 2006, flawed though it might be, was a genuine effort to harmonise pension provision in the UK and set out a vision for the next 30 or 40 years. Whereas what we have now is a lack of any such vision. It feels like the long term structural change in the UK has taken second place to soundbites and short termism.
The government’s vision on pensions is utterly self-defeating. They want everyone to actively engage with auto-enrolment, to save more for their future, to be more self-reliant, and yet they’re taking away the incentive to save for large swathes of the population.
Simplification has failed
The aim of pension simplification has failed. The man on the street has less comprehension now of how his pension works. Even though they perhaps have more engagement with pensions following the freedoms, the reality is they don’t understand and there are illogical decisions within tax treatments that make it impossible for the man on the street to understand their pension.
The principle of pensions simplification to take away the perceived complexity is brilliant but the delivery, the devil in the detail, meant it never lived up to that promise. So straight away the government introduced all the protections. As soon as you did that you had people who had no personal allowance, or lifetime allowance, and some people who did, so immediately you were running a two-tier system and adding back the complexity, especially with all the different types of protection available.
In Australia, they recognised they had a problem and set out a plan for superannuation, which might have not been popular at the time, but which has been supported by successive governments through time. There is nobody here with substantial vision so in the short term I think things are going to be more complex.
I think there are grounds for some optimism that the younger generation understands the need to save, so that in itself suggests there will be a change over time. But I see those as very long-term pressures. There is an element of the growth of simplified pensions, so the more people that come onto a platform-type world, both advised and non-advised, is a positive step. However, until we get a long-term vision for our UK pensions we will never reach our aim intended for 2006.