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A new age for pensions

It is now so generally accepted that there is far too much regulation and legislation surrounding private pensions that the Pickering report had no need to prove the point.

It may then seem strange then that Pickering&#39s solution to an excess of legislation is to propose another Pensions Act, which at first sight might look like compounding rather than alleviating the problem.

But the new Pensions Act proposed by Pickering would be a very different kettle of legislative fish. There are three key differences which would make this new act a much needed departure from the norm in pension legislation.

First, the act would consolidate and repeal. At the moment, trying to track down the answer to a question on any piece of pension legislation very often means a complicated paper chase through different acts and various sets of regulations.

Apart from taking up time and effort, to say nothing of causing bad temper and a splitting headache, this is a very inefficient and opaque way to set out the rules that the Government wants us to follow. No wonder people find pensions complicated.

It also creates an environment where mistakes are likely to be made, simply because the rules are so complicated and obscure.

A new act which consolidated and repealed would mean that everything would be contained in the one place, putting an end to the game of hunt the legislation.

We could get rid of legislation containing outdated requirements that are no longer needed. All this would make it easier to find answers and easier to follow the rules. That has to be good for all concerned.

The next key difference is that the new act would include some elements of retrospective change. As a concept, that is nothing short of revolutionary for pensions.

Traditionally, the approach has been to make changes only for the future.

The problem is that pensions are very much a long-term game and if changes only cover the future they take a very long time to work through the system.

This approach is responsible for the fact that the pension legislative landscape at present bears a marked resemblance to an architectural dig. Using the various layers of legislation you can trace the history of pensions over many years.

If, for once, we could make some retrospective change this would be a huge step forward and make real inroads into the current complexities, rather than simply adding another layer of legislation.

Finally, and probably most importantly, the new act would, to borrow the legal jargon, be purposive rather than prescriptive. That means it would focus on the objectives of the legislation but not dictate in detail how those objectives should be reached – unless absolutely necessary.

As an example, the new act could state the principle that all occupational schemes should have one-third member nominated trustees.

But, unlike the present legislation, it would not prescribe the detail of the ballot process to elect those member nominated trustees. In plain English, legislation should focus on the “what” and only dictate the “how” where absolutely necessary.

However, the Pickering report does not suggest some sort of pensions free-for-all. It proposes that a new kind of regulator should back up this new approach to legislation.

We have had a dedicated pension regulator since the Occupational Pensions Regulatory Authority was set up by the Pensions Act 1995. That act gave Opra the remit to police many of the detailed legislative requirements that currently surround pensions.

As a consequence, much of Opra&#39s time and energy has been devoted to a reactive role, ticking boxes to indicate that the appropriate rules have been obeyed.

As an aside, I note that some commentators have suggested there is no need for a separate pension regulator and that the job of looking after pensions should be absorbed into the FSA.

I understand the logic of this view but, on balance, my personal preference would be for a separate regulator.

The FSA&#39s responsibility is to the commercial savings market. Pensions are different in the important sense that much of what we call the pensions industry reaches the ordinary scheme member via his employer.

It therefore seems to me that the balance of the argument lies in having a separate, dedicated pension regulator.

Wherever the function should be housed, there is no doubt that if we are to change our legislative approach to one focused on principles rather than detail then the regulatory approach must also change.

To state the obvious, in a simpler and less prescriptive pension world, there would be fewer boxes that needed to be ticked, although, of course there will always be an element of detailed policing required of any pension regulator.

But this new kind of regulator would have other, rather different responsibilities.

In the absence of detailed prescriptive regulations, it could maintain a small (and I mean small) number of codes of practice to help the industry and employers.

These would be intended to provide guidance in key areas, not become so many in number or so detailed in content that they became de facto regulations.

If that were to happen, it would defeat the aim and object of the whole exercise. Professional bodies – for example, the actuarial profession – might also issue a few codes of practice.

The new kind of regulator would also offer guidance to industry and employers where needed.

So, for example, instead of having complex and detailed regulations on money-purchase accrual, it could advise a scheme on whether its proposed accrual was reasonable.

For this approach to work, the Government would have to give the new regulator the necessary authority and discretion. It would have to be willing to use that discretion. The industry would need to change the way it works and accept that the detailed answer to every question should no longer be looked for in the legislation.

A change of mindset all round would be needed and we would not underestimate how big a change that would be.

Finally, and perhaps most important, the new kind of regulator as envisaged by the Pickering report would also have a role in advising the Government on the potential impact of policy.

Clearly it is the role of the Government, not the regulator, to formulate pension policy. But, equally clearly, the pension industry has suffered in the past from initiatives, which have not always worked well in practice, despite the best intentions of policy makers. Indeed, I am sure we can all think of some alarming examples of the law of unintended consequences.

Imagine the improvement in the process that would result if a new approach to regulation meant that the practical impact of policy decisions were given serious and informed consideration before changes were made. Might we also hope to see at least some political consensus in pensions? Perhaps I am becoming rather over-optimistic as I grow older.

I may be ageing but I am not quite in my dotage and I am not naive. I fully appreciate that the changes in legal framework proposed by the Pickering report are significant and will take a significant change in mindset right across the board from the Government to regulators to employers to advisers.

But the new approach to legislation is crucial to the Pickering report as a whole and if we are to pull pensions out of the quagmire of detail in which they are currently struggling, this is a change in approach which must be made.


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