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Access roads

Society of Pension Consultants outgoing president Duncan Howorth says early access to pensions would be instrumental in changing the savings mindset and outlines policies to achieve this goal Gregor Watt reports


The new Government has got off to a promising start with its pension policies, according the outgoing president of the Society of Pension Consultants Duncan Howarth. He finishes his two-year term as president this month and, having spent most of his term dealing with the old Labour government, the change in regime has been reasonably warmly welcomed.

Howorth says the appointment of Liberal Democrat Steve Webb as pensions minister is a welcome move as he talks very sensibly on the subject. Howorth says: “His passion is for simplifying the complexity of our state pension arrangements but he is also, I think, a strong supporter of occupational pensions.”

The fact that the SPC has a favourable view of the new Government is understandable, given the overlap in their policy proposals. In April, the SPC published an updated version of a policy paper that it first released in the summer of 2009.

The paper, Pension Priorites For a New Government, sets out a number of issues it believes the new masters at the Department for Work and Pensions must tackle to address the problems in pension saving.

The SPC’s main aim is simply to have a pension system that works and that can provide a decent level of income in retirement and the most effective way of achieving this is through good workplace pensions.

In order to achieve this, the SPC outlines four supporting priorities – to restore confidence among employers and employees for pension saving, simplify pension regulations, provide more flexibility for pension provision and remove disincentives for both employers and employees to save in pension schemes.

In the detail of these four aims are proposals to, among other things, remove the compulsory annuitisation rules and provide clarity on how auto-enrolment will work.

Howorth says: “The Government has made a reasonably clear statement about withdrawing compulsory annuitisation which is a welcome step. Of course, I don’t think it will make a huge difference. The amounts of annuitants it will affect is less than 10 per cent but nevertheless it is a positive step.

“The other thing I believe they have emphasised is they intend to proceed with the auto-enrolment policy although they are on record as saying they want to review the Nest contract itself. But what industry, advisers and business need early on from this new Government is clarity on many key aspects so they can continue the job of working with employers and helping them plan their strategies for company pension plans over the next few years.

“The SPC put together pension priorities for the new government last summer. In that, we had the end of compulsory annuitisation. We also asked for early clarity on auto-enrolment and Nest, so we are quite pleased with some of the early statements.”

However, these policies are fairly easy to achieve as they have broad agreement not just with LibDem and Tory coalition partners but across the industry as well.

What the industry, advisers and business need early on from this new Government is clarity on many key aspects so they can continue working with employers and help them plan their strategies

As Howorth says, the harder work will be in formulating the rest of the pensions policy. “What we all need to address as a policy perspective is how we can encourage more people to save more over the longer term for their retirement. That is where some of the more challenging aspects of policy will come.”

The coalition pledges to look at ways the Government can help simplify pension regulation and reinvigorate occupational pensions as well as look at the idea of early access to pension saving and a lot more work is needed to put some flesh on the bones of a very basic intention.

Early access is something that the SPC has looked at in detail as part of its pension priorities and Howorth says: “A key obstacle for people saving in the long term is the fact that it is a long-term non-accessible savings regime. Therefore, a key aspect is whether we can put together a framework which allows early access.”

Howorth suggests this can be done in three ways but as important as the design of the system is a willingness to find a way to make it work.
“What we need is mindsets that get away from ’that is too difficult from a technical perspective’ or ’that is not going to achieve anything because people are just going to access their money anyway.’”

He says the fact that pensions lag behind as a choice of long-term savings vehicles is due in a large part to the inaccessibility of any funds committed to a pension. “We have to ask ourselves why pensions have been relatively unsuccessful compared with Isas? Isas have less tax benefits than pensions but most people have one and they are a huge success. I think the answer is because people can access their money.

The obstacle to long-term retirement savings is the fact that you can’t get at it so if you can provide some form of early access, you increase the savings rate and you will probably find that people don’t access it as much as you fear.”

Howorth says the options for allowing early access to pension assets come down to three possible methods. “The first is a loan withdrawal, effectively the ability to take a loan against your accumulated fund at any time. Probably a simple system of paying some interest on that and paying it back. That is pretty much the American 401k system, so there is a precedent for that, with some of the successes and some of the issues that that has created.

“The second is what you might call permanent withdrawal, where you simply take back some of the contribution you have made.”


He concedes that there are concerns around this option because of tax relief contributions but says if withdrawals are limited to the tax-free cash allowance accrued, the issue of tax incentives is neutralised. The other advantage of this option would have is that it is much easier to administer than a loan system.

“The third is feeder funds, so you don’t technically call the contribution a pension investment, it is an instant access account, whether it is an Isa or some other form of saving, which you can then flip into some permanent form of long-term saving once you are satisfied you don’t want to call on it. That is an Isa to pension model if you want to call it that.”

Howorth’s preferred option is the second of the three, with the complications of the first and the lack of emphasis on long-term saving a drawback for the third. This option may be more favoured by the public as well.

“If people are saving in an Isa, they are not saving long term for retirement. If you put people into a pension plan with the ability to effectively call on some of their tax-free cash early, I think you will remove quite a lot of the barriers.”

Of course, early access is not the only incentive that is or can be used to promote pension saving. The recent changes to higher-rate pension tax relief on pension contribution has had a lot of attention but Howorth says the arguments in favour of higher-rate tax relief are not as strong as the other incentives are in place.

Tax-free cash rears its head from time to time. I think it is more important to preserve that than to preserve higher-rate tax relief’

“I think you can trade against whether we actually need higher-rate pension contribution tax relief. There is a line of argument that says higher marginal rate taxpayers do not need that as an incentive to save for retirement, they have got disposable income available, they understand the benefits. So there is the potential to look at the tax relief system here, to provide certainty for people, advisers, companies and individuals as to what the tax system is going to be. There is obviously speculation about whether or not higher-rate tax relief will survive the Budget on June 22 but certainty is what people need.

“It might be that we change certain aspects of the tax relief that the pension system gets and move it somewhere else. For example, tax-free trivial commutation is an important part of the pension system which people would like to know if they end up with relatively trivial sums they can take tax-free.”

Howorth says the tax-free cash allowance is also an important incentive to save and it would be very damaging to remove this attractive allowance.

“Tax-free cash rears its head from time to time. I think it is more important to preserve that than to preserve higher-rate tax relief.”

Naturally, the promise to simplify pension regulation has gone down well with the SPC but Howorth says to revive pension savings, a coordinated approach is needed and not just a scaling back of pension scheme admin rules.

“This is a four-step process. First of all, we have to try and remove the natural barriers as to why people don’t save for the long term and early access could be one of those. I think the second is to improve confidence in the pension saving system so that is making sure that we don’t have any scandals, that schemes are well governed and we deliver sensible outcomes. The third is to try and get people to understand what you need to save in order to get a certain outcome. That is all about general education so that people understand that a 5 per cent contribution rate is only going to give you so much money.

“The final part is the get people, again through education, to understand that putting your money to work in investments and assets in the long term is going to make your money work as hard as possible.

“It is getting people saving, getting people saving at the right level and then putting the savings to work in terms of investment returns.”

Howorth says auto-enrolment and Nest will also help overcome some of the reluctance to save and the changes should be seen as an opportunity and not a threat to advisers of all descriptions.

He says: “All the 2011, 2012 changes represent an opportunity for advisers generally in the pension and retirement space. Higher earners are going to need more than pension advice. These people with disposable incomes are going to need an holistic financial planning service.

“We are going to have to look much more broadly at what tax wrappers we can use and that leads nicely into the financial adviser that can not only use his skills around pensions but his skills around portfolio management and tax generally.

“Again, I see auto-enrolment as a big market opportunity. Companies are going to need advice in what auto-enrolment actually means. How do I meet the legislation? Should I embrace Nest or should I expand my own scheme? Why wouldn’t you expand your own scheme?

“I can see opportunities for advisers, I can see existing occupational schemes expanded because of the auto-enrolment requirements as much as I can see this whole legislation threatening this space.”

Duncan Howorth

2008-2010: president, the Society of Pensions Consultants
2008-present: chief executive, JLT Benefit Solutions
2005-2008: managing director, JLT Benefits Solutions
1988-2005: managing director, Abbey National Benefit Consultants

The SPC’s goals

A pension system that provides a worthwhile income in retirement can be achieved by:

Restoring confidence in pensions among both employer and employee
Simplifying pension regulation
Providing greater flexibility for pensions
Removing disincentives for employers to run pension schemes and employees to join schemes
Allow early access to pension assets to improve the attractiveness of pension saving
Ensure that tax treatment acts as an incentive to pension saving


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