Rewriting's on the wall

January Retirement Strategy | By Lee Jones

Robin Ellison is the man who wrote the book on pension law but now he thinks that book needs to be thrown out and rewritten. He will be standing as an independent candidate for Hampstead and Kilburn in the general election next year in an effort to highlight some of the problems with the system.

The head of strategic development for pensions at law firm Pinsent Masons understands the law of pensions better than most. As a fellow at Cambridge, Ellison wrote the first textbook on the subject but he says the current system has become so unwieldy it needs to be completely overhauled.

He says: “Everyone in the pension industry knows that things are not going well. State pensions are very complicated, the admin costs are gigantic and most people find them very hard to understand. The private sector is in secular decline - defined benefit is dying and defined contribution is not going to do the job. Also, we have a dysfunctional tax structure for pensions, getting ever more dysfunctional by the day.”

But Ellison thinks the whole system does not need to be so complicated. His party, the U Party, has created a manifesto that he thinks would change the entire pension system for the better.

He says: “When I began in this industry, you could learn all you needed to know about pensions law in a few days but now there are 50,000 pages of regulations - it is impossible.

“I think the population is confused beyond belief. People have lives to lead, they have families and have to work. The amount of time and effort they have to spare to think about state pensions is relatively small and they expect the Government to do that for them, that is what they have a Government for and the Government has failed in that obligation to its people.”

Ellison floats the idea that the state pension could be scrapped altogether. With the range of benefits available, the need for a specific age-related benefit could be made obsolete.

He says: “We have a very complex social security system in the 21st Century and if you need money, you can get it whatever age you are. But should you get money just because you are old? I am in two minds about that - it might be better to abolish the state pension system completely. But I don’t think we are politically ready for that.”

Instead, the U Party aims to simplify pensions by creating a system whereby every person gets £200 a week at an age that is directly linked to the average life expectancy of the population. It also proposes a scrapping of means testing.

Ellison says the cost of the new, simple system to the Government and taxpayer would be zero as it would remove 10,000 pages of regulation and £11.1bn in admin costs. The U Party says it would also save private industry £3bn.

As well as dealing with state pension problems, the manifesto proposes a dismantling of private pension sector regulation and the creation of new laws that would force all pensions to be taken in an annuity so as to differentiate them from savings.

Ellison says this would stop another Sir Fred Goodwin pension scandal. He says: “The uproar surrounding the fat cat pension issue was understandable but our proposal would mean very rich people will find it very inconvenient to put huge amounts of money into pensions if they can only get it out in an annuity.”

Investment for the super-rich

Ellison says the Government has not successfully promoted pensions because they are too entangled with savings and have become vehicles for investment for the super-rich. By making clear distinctions, pensions would be viewed differently by the public.

He says: “The reason that pensions were invented was because back then there was no social security at all. If you couldn’t work, you couldn’t earn and you couldn’t eat. So it was thought that, in absence of a social security system, it was better to offer a pension at retirement and that would cure a lot of poverty - and it did.

“People need to understand that the pension system is for people to have a comfortable life before they die. It is not a savings system.”

The U Party is also calling for an increase in the pension age. It suggests that the pension age would be decided by assessing life expectancy and then the Government would pledge to support pensioners for a certain number of years, a system akin to the Swedish model.

Regardless of how the age is set, Ellison says the current system is unsustainable if the pension age remains static at 65.

“The age needs to be changed over a number of years. People in manual, stressful or difficult jobs may have to retire earlier but generally we have to be able to offer the general population provisions for the last 10 or 15 years of their life.”

The heart of the U Party manifesto lies in the return of a “fiscally neutral” pension tax system. Ellison says the current system’s central failing is its lack of neutrality as pensions are being double-taxed instead of only taxing the benefits of a pension.

“A pre-funded system only works with tax neutrality, otherwise people may as well leave their money in a building society,” he says. “Right now in the UK pensions are double-taxed every day. We have a non-recovery of tax on investment income in relation to shares, whereas in most of Western Europe, you can recover holding tax. There are also stamp duties, VAT and now there is no tax relief or limited tax relief for high earners. That is not only unfair but very complicated.”

Ellison is confident that once the confusion and overregulation of state and private pensions is cleared, more people will want to save for their retirement. He also thinks it would make the life of the IFA easier.

“IFAs find it very hard to market pension arrangements because they are so complicated. Trying to write a best advice letter is very hard work and most people are put off by the length of advice they get. If it were simpler, more people would take up pensions.”

The fragmented nature of the state-funded pension system is another one of its weaknesses. Ellison says even if most poeple understand the basic state pension, very few people understand how the second state pension, the S2P, works and even less people understand the mechanics of state pension credit, the third system.

The introduction of a potential fourth system, personal accounts, will therefore be a complicated and costly mistake.

“Personal accounts have two major flaws - it is unlikely that they will achieve the policy objectives in helping the lower paid. Also, no one is sure the adding machine will work. There are some success stories in Government computer systems but most of the large Government systems have not worked for 20 years. “It’s a big challenge to put in a machine that will cope with a very complicated system.”

Ellison is so sure that personal accounts will not work that he has a bet with friends that the scheme will never be launched. Since Great-West Retirement Services withdrew from the administration bidding process for personal accounts last month, he says his bet is looking good.

“The problem is a lack of clarity at the top,” he says. “We are struggling with an inability or an unwillingness by the senior civil service to think about what they want to do with pensions over the next thirty years. State pension rules need to be rewritten. Governments find it very hard to go back to square one, you usually build upon what came before.”

Ellison admits that while the U Party is not a single issue party, its main drivers are pension reform: “If one of the other parties takes our policies or something approximating to our policies, I will resign. The idea really is to influence the other parties, not so much to get into Parliament.”

He argues that none of the three main parties have an all-encompassing holistic pension strategy and must consider his party’s proposals. He says: “The other parties only have gimmicks and sound bites - the point of the U Party is to try and get them to think holistically.”

For Ellison, the key to pension reform is through political channels but he warns that they should never be used as political tools for the right or the left.

“It is just a case of allocation of resources,” he says. “The odd thing is most of the three parties, the thinktanks and the trade bodies have the same view for pension reform when asked off the record. The problem is they are not willing to articulate that view publicly - that’s what we are trying to do.”

 

If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing