The Copenhagen climate summit ended without any firm deal but there was almost unilateral agreement that the delicate balance between all our climate’s elements is susc-eptible to man-made damage.
So it is with our pension system too. Surveying the side effects of the last two decades of reform demonstrates how easily damaged it is.
For example, the right to opt out of occupational schemes – millions of people who should be saving no longer are. Or what about the inadequate minimum funding require-ment compounded by the rule requiring reduction of defined-benefit surpluses. Look at the parlous state of final-salary schemes today.
The solution? Low-charge stakeholder pensions – charges so low that there was no money to pay for distribution – not a great plan in a country where pensions are sold rather than bought. But there have been some successes. Pension simplification was well thought out and its execution well planned. The gradual erasure of arcane protected rights divisions is also laudable.
Then the tinkering begins. Despite creating something that at last looks like it will encourage people to save and can be understood without the help of a Philadelphia lawyer, hasty alterations are made.
The 2009 Budget and pre-Budget changes appear like something dreamed up in a 15-minute session around the flip chart: “we need to raise some money quick”, “would be good if fat cats bore the brunt”. The result is the ecological equivalent of pumping a mill-ion gallons of crude into a national park lake to stop a few jet skiers doing their thing.
What must the architects of pension simplification think? Those civil servants who thought through what they were doing and considered the consequences of change, so carefully that they even built in safety valves to cope with extraordinary times like these.
But these safety valves – the annual allowance and the lifetime allowance – have been deliberately blocked. Instead of allowing everyone to pay
£245,000 into a pension, this could easily have been cut to £50,000 overnight and without a mountain of new and complex rules.
What is more, it would have achieved the same outcome that those gathered around the flip chart wanted. A cut in tax relief spend and a mean-ingful cap on pension accrual for high-earners. Importantly, a cut in the annual allowance would have kept high earners in their pension schemes. As things stand, they will effectively be thrown out on their ear in 2011.
As a result, the pension system faces irreparable damage but, just like our climate, it is not too late to act. HM Treasury is consulting over these changes until March 3.
I know that advisers have a lot on their plate at the moment but a sizeable vote of no confidence in these proposals might just make them think again.
John Lawson is head of pensions policy at Standard Life