A new dawn for pensions: can politicians restore trust?
Estimated reading time: 6 minutes
Ministers need to demonstrate a lot more urgency in clamping down on rip-offs, fraud and scams to help maintain the integrity of the pension system and consumer confidence in it. There is a significant lack of knowledge and understanding amongst the political classes.
Stephanie Hawthorne, freelance journalist, asks Malcolm McLean, Senior Consultant, his view on how ministers can improve the relationship between politicians and pensions.
In a nutshell, yes. Short termism is frequently apparent in the development of pension policy with ministers seemingly often being more concerned with the popularity of the government and their own political survival than anything else. Looking beyond the next general election and being prepared to think in the longer term rarely happens. One notable exception to this has been the introduction of auto-enrolment in 2012, although even that took a long time to get off the ground and had to be cautiously phased in over a number of years.
How should pension policymaking change to facilitate a more certain outcome for pension savers?
Apart from short termism, there needs to be much more “joined up” government, something that is regularly claimed as happening but in the event does not work anywhere near as effectively as it should. In particular, the Treasury and the DWP must sing from the same hymn sheet and synchronise their approach on vitally important common issues such as tax reliefs, pension freedoms and so on. There is also a somewhat fragmented set-up in having two separate regulators – The Pensions Regulator and The Financial Conduct Authority – who appear to frequently occupy the same space and overlap. They are currently consulting on how to work better together but as things stand it is surely far from clear to most pension savers which regulator is responsible for what and when and how they become involved.
It could be said that a new dawn for pensions has already resulted from the arrivals of auto-enrolment and pension freedoms.
This is partially true and yet both are still either work in progress or haven’t quite lived up to their initial promise.Auto-enrolment has been an undoubted success in terms of the numbers enrolled and the surprisingly low number of opt-outs to date. But even with this year’s and next year’s increase in minimum contribution rates it will not deliver the level of pensions many savers will be expecting and ways will have to be found to increase them even further.
Pension freedoms were launched on an unsuspecting world with little advance notice three years ago and have proved somewhat controversial ever since. Some would say they have effectively changed pension schemes into long term savings vehicles, which may be popular with many members of the public for the greater flexibility and cash options they now offer but do not always provide the sort of financial security in old age that a permanent income can give (See also the answer to question 6 below).
There is clearly much more to do in both these areas and elsewhere before we can really be talking about a new pensions dawn. There is a need to sort out DB pension arrangements following the recent White Paper as well as a more considered and longer term reassessment of pensions tax reliefs and allowances to include the possibility of moving to a single uniform rate of relief for all and an end to tinkering with allowances. (See also question 4). Collective DC schemes may also yet gain traction and we hope to see a new pensions dashboard coming on stream eventually. The pace of change may be slow but the need for it shows no sign of abating.Is an all-party consensus possible? How would it be achieved? Could it be in the form of a shared vision and objectives against which all future pensions policy could be tested, including policies on pensions taxation?
Achieving an all-party consensus in every individual pension policy area is obviously going to be difficult, if not impossible, to achieve as is the formulation of a shared vision and objectives, other than in fairly broad terms. But that is not to say there should not be more early discussion and consultation between the main political parties on at least major policy initiatives as there was with auto-enrolment - but not seemingly with pension freedoms. Tax relief is a particular problem because the Treasury sees it as being very exclusively within their domain with any changes being kept under wraps until a formal announcement can be made, normally on a Budget day. Even here, however, you would have thought that some advance notification and debate between politicians and senior officials, perhaps under Chatham House rules, could only be a good thing and might just help smooth the way forward later on.
Is an independent Pensions Commission the way forward to bring this long-term focus to pensions policy?
There are some downsides in setting up yet another quango and allowing it to be used as an excuse for ministers side-stepping or kicking difficult issues into the long grass. However providing such a Commission concentrated on the long term aspects of pensions policy and acted as a non-partisan sounding board/influencer for ministers, and not a decision maker in its own right, it could have a useful role to play.
While Freedom and Choice opened up a lot of new options, is there a risk that pensioners will run out of money? How can the pensions industry provide solutions that restore confidence and limit the risks for consumers?
I think we are becoming increasingly aware that there is a risk that some pensioners will run out of money in later life. Non-advised drawdown has become increasingly the choice for many and yet research has shown that consumers do not fully understand the complexity of these products, may be taking money out at too high a rate in the early years and are therefore running down their pension pots with consequences for them in later life. The problem is exacerbated by the fact that there is also a tendency for the “younger pensioners” to underestimate their longevity. Various possible solutions suggested include mandatory guidance and/or the setting of default pathways. Clearly the credibility of pension freedoms as well as the individuals involved could suffer if nothing further is done.
Brexit and the continuing uncertainty surrounding it is obviously a distraction which for the moment at least the pensions industry has to contend with as best it can. There are particular questions for both sponsors and trustees about the likely performance of investments during this period of uncertainty and how best to mitigate loss. But aside from that the business of pensions and the contemplation of any necessary reforms has to go on notwithstanding.
These questions, posed to Malcolm Mclean, were the basis of an article which first appeared on the ICAS website.
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