Pension Funds Insider

Pension Funds Insider brings the latest pensions news and industry insights; from investment and governance updates to new mandate appointments and pensions regulatory information.

On Trust

Image for On Trust  pension funds

If you go to the doctor and get given a prescription, it’s likely you’ll take the medicine. If a qualified solicitor gave you legal advice, you’d probably follow it. But would you trust a financial adviser?

Maybe not. Why, since financial advisers belong, like doctors and solicitor, to a regulated profession? But that’s not enough for most people. For a start, we’re all too aware of the historical baggage for which the label ‘mis-selling’ was coined.
If our health is not so good, on the whole we tend to attribute it to misfortune, rather than feeling unfairly treated. By contrast, we’re prone to compare our wealth (or lack of it) with that of others, and all too easily we find cause for complaint. “That’s not fair” is a criticism to which everyone is sensitive.

For example, many women in their late fifties have been shocked to discover they would not be getting a state pension at age 60 as they had always expected; hence the WASPI and Backto60 campaigns. Over a million adults earning between £10,000 and £12,500 per year are not getting the tax relief they were led to expect on their pension contributions, because they’ve been enrolled into a scheme operating net pay. That doesn’t seem fair either.

Then there is the gross disparity between members of Defined Benefit (DB) and Defined Contribution (DC) pension schemes when it comes to the Lifetime Allowance (LTA). The former can accrue an annual pension of £50,000, index-linked to boot, without becoming liable to an LTA tax charge. A DC pot of £1.055m (the current LTA) could barely buy a pension of half as much.
This discrimination has arisen as annuity rates have fallen over the fifteen years since the governing legislation was passed. It could easily be corrected: all Parliament needs to do is to make a tiny amendment, changing the number ‘20’ to say ‘10’. That’s not going to happen, though, because of the effect on public sector pension scheme members such as civil servants and MPs.

The pensions tax legislation is always in the limelight. Currently, the focus is on the effect of the LTA and more particularly of the ‘unworkable’ tapered annual allowance upon senior NHS consultants, causing some to take less work or retire to avoid tax charges.
The Chancellor of the Exchequer has told Parliament that he wants to address this problem “in a way that is fair and appropriate”. He is thought to be leaning towards a bespoke solution for NHS Pension Scheme members. This would be a ‘sticking plaster solution’ however; it wouldn’t be long before another group of individuals complained of similarly ‘unfair’ tax charges.
As we know, outside the public sector, DB pension schemes are no longer available to join; everyone is being auto-enrolled into a DC (or ‘money purchase’) arrangement instead. Apart from the discriminatory effects of the pensions tax legislation, DC scheme members suffer all the risks, including the longevity risk, borne by the sponsoring employer of a DB scheme.

There is a more profound source of unfairness between generations here though, which has been highlighted recently in a report by the House of Lords Select Committee on Intergenerational Fairness and Provision. Younger people are far less likely to have the security of a DB pension. A long-term policy approach is needed if intergenerational bonds are not to disintegrate.

Likewise, the Financial Conduct Authority has just published a Discussion Paper on intergenerational finance. “Younger people”, the FCA notes, “face a series of difficulties in building wealth due to the combined impact of rising house prices, unsecure employment and student debt.”

Thus it is not just a matter of re-establishing trust in the system, but trust between generations: a bigger challenge which demands a solid long-term consensus about what is fair and just.
Fair treatment is the key precursor to trust, and trust in turn is what is required if the British people are to demonstrate confidence in long-term saving.
Ian Neale
Director, Aries Insight