Spence & Partner's Neil Copeland discusses the ramifications of George Osborne's pensions revolution and says that the most difficult part of the process is yet to come.
"In a revolution, as in a novel, the most difficult part to invent is the end" – Alexis de Tocqueville
We've all been there. Stuck in a meeting, 30 minutes into an agenda item about IT spend, and even the most conscientious amongst us find our minds wandering. Let's have a sneaky look at ft.com then, see what Osborne has done to the price of a pint. Bingo duty halved to 10%! Take that UKIP! Oh, that looks like an interesting link - "Chancellor's Pension Bombshell". He's probably gone and slashed the LTA again. Click. "All tax restrictions on pensioners' access to their pension pots to be removed, ending the requirement to buy an annuity." Er OK. He can't actually have done that. I'll just move on to the BBC to get the real story. Expletive deleted, he has.
My colleague had just finished making a very important point about SBS breakout and exchange services and then I said "All tax restrictions on pensioners' access to their pension pots to be removed, ending the requirement to buy an annuity." Incredulity. Some more expletives deleted. Denial. I've decided that's how you spot a revolution. Even when you have it confirmed from multiple reputable sources you're still not really sure that you believe it.
It's a very simple concept. People save up a pot of money whilst they are working and then draw on that pot of money as and when they need to when they are no longer working. Defined contribution (DC) pensions shouldn't be any more complicated than that. And now it seems they're not.
It's all the knock on stuff and consequences that are complicated.
Take the consequences for defined benefit (DB) pensions.
What Osborne said: "People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. And that's precisely what we will now do. Trust the people."
What Osborne meant: "When I say "people", obviously I don't mean the many millions of "people" in public and private sector DB pension schemes. No, no, no, no, NO! We still know what's best for them and its certainly not being able to flexibly access their pensions."
Quickly on the heels of the genuinely radical and revolutionary announcement on DC pensions, came the news that the Government will legislate to prevent transfers from public sector pension schemes and will look at banning private sector DB to DC transfers as well.
The Government is quite open about the fact that this stance is not driven by a considered view that DB members would not benefit from the proposed DC flexibility, but is all to do with protecting the public purse and wider economic concerns.
It seems inherently inequitable not to afford the new DC flexibility to members of DB schemes, at least as an option on retirement. A simple ban on DB to DC "transfers" as the term is currently understood may not achieve the Governments objectives in this regard. It is not difficult to envisage hybrid schemes where members have as an option of creating a drawdown fund instead of taking a scheme pension. A guaranteed element in the accumulation phase with greater flexibility in the decumulation phase sounds a lot like the trendy risk sharing and the ill-defined defined ambition aspirations of the current pensions minister.
A DB to DC transfer ban would also remove a useful liability management tool for employers, many of whom are struggling to fund annuity like liabilities in their DB schemes. If annuities are a bad idea for individuals, why should they be the only option available to employers to discharge their liability to members? Perhaps we need a(nother) new funding model.
We have always been of the view that well designed, clearly communicated, fair value transfer exercises are a legitimate route for employers to engage with their employees. This change only makes it even more likely that a DB to DC transfer or conversion will be the right answer to a greater number of people's retirement needs.
I find the notion that significant numbers of pensioners who have behaved prudently throughout their working life to build up a reasonable pension fund will cash in their pensions to blow it all on Lamborghinis, Lobster and Louis Vuitton, a bit patronising. No doubt some will. No doubt some should, but most will realise that they are likely to live a long time and will invest their funds to provide an income. They'll just not have to give a big wodge of their hard saved funds to an insurance company for the privilege.
The Chancellor's changes to the pension framework seem to me to give the industry an opportunity to re-design both DB and DC pensions as we know them now to focus on the needs of members. The forthcoming consultation on the Government's proposals provides us with a once in a lifetime say in helping to invent the most difficult part of this revolution, the shape of its end outcome. Let's not squander it.
Written by Neil Copeland, director, Spence & Partners
neil_copeland@spenceandpartners.co.uk
