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Industry Sectors: Pensions

Helen Monks
Scottish Life head of communications Alasdair Buchanan makes perhaps the biggest understatement in the history of Money Marketing when he says: “It has been an interesting 20 years.” In this time, layer upon layer of complexity has been added to the pension regime, with the result that providers and IF As are now preparing furiously for many of those strata to be stripped away through pension simplification next April.

One of the key planks of legislation contributing to the confusion facing pension savers was the Social Securities Act 1986, which opened the door on contracting-out. Towry Law director of strategy Charles Levett-Scrivener says: “Contracting-out was a particularly stupid concept, demanding professional advice on complex issues for no money.”

While Buchanan recalls that the move gave rise to a huge administrative problem, it was not all bad news. Scottish Equitable pensions development director Stewart Ritchie says:

“Contracting-out created a very sizeable increase in funded private pensions on a money-purchase basis. At the time, contracting-out rebates were particularly generous. The advice aspect of this was almost trivial- it was clearly best advice to contract out.”

Personal pensions have also been something of a mixed blessing. Buchanan says they generated huge volumes of pensions sales, followed by a huge misselling bill. “Looking back at the TV adverts for personal pensions where people were encouraged to break free of the chains of company pensions, you can imagine how IF As felt when they got whacked for misselling after the campaign,” he says.

Ritchie says: “The pension industry paid and continues to pay a high price for personal pension misselling, with the compensation bill topping £13bn and rising. The cost is also measured in the legacy in people’s mind and in those of politicians, who felt the pension industry could not be trusted and therefore needed legislation.” Ritchie says it is possible to trace the origins of stakeholder to misselling, as the scandal led Governments to believe they could design better products than the industry.

Stakeholder was intended to sell high volumes of low-cost pensions, often without advice. But the original 1 per cent price cap has been lifted, increasing the opportunity for advised sales. Winterthur Life pension strategy manager Mike Morrison says: “Stakeholder shows you can try and go for cost-cutting but the regulator learned that it is not about costs but value.”

Ritchie says: “Stakeholder is a perfectly reasonable idea but the 1 per cent price cap made it unrealistic to advise on stakeholder and RU64 meant you could not ignore stakeholder in the advice process, demanding that advisers justify why a non-stakeholder was appropriate when you could have sold a stakeholder.”

The driving force behind stakeholder from April 2001 was Chancellor Gordon Brown and experts are largely coolon his overall track record in pensions from 1997. Ritchie says: ”The introduction of a £56bn stealth tax, the extension of meanstested benefits and reduction in contracting-{)ut rebates can be laid directly at his door.” Informed Choice managing director Nick Bamford says: “Brown has robbed more money out of pensions than Robert Maxwell ever did.”

Ritchie says one of the biggest mistakes of the last 20 years has been the failure of Governments to reinstate joining employers’ schemes as a condition of employment. “It is hugely unfortunate this was ever taken away. It would have meant personal pensions misellingwould have never happened,” he says.

Yet Morrison suggests the industry can be proud of the far greater flexibility in product design over the last 20. “It has been 15 years since Sipps started and 10 years since income drawdown started, both of which changed the shape of pension planning. We have moved towards an open architecture for pensions, which today includes multi-fund managers, meaning investors no longer have to settle for generalists, but have a wide choice of specialists to choose from,” he says.

Buchanan says the last 20 years have been characterised by successive Governments tinkering with pensions and avoiding radical and wholesale change. Yet he also makes the point that the UK still has one of the most extensive systems of private pensions in Europe.

Bamford says: “Simplification will happen but do not worry – there will be a new pension overhaul soon enough.”

Steve Bee – Head of pension strategy, Scottish Life
We are going through a period of great change to our pension environment in the UK. The mid-1980s were the last time of great change and may serve as a warning to those now seeking to introduce reforms.

The period immediately preceding the 1980s saw unprecedented growth in the numbers covered by pension schemes, resulting in around half the working population belonging to occupational schemes. Ninety-five per cent of schemes provided final-salary benefits. The trick was to spread pensions among the half of the working population not making retirement savings.

The introduction of personal pensions in 1988 came without the ability for people to run different arrangements concurrently. The problems were made worse as some pensions ended up being regulated by Opra and others by what became the FSA

Practices which had been, and remain, common in the occupational sector, such as transferring deferred benefits between schemes, became the focus of much attention.

Many important changes were made to the level of benefits provided by final-salary schemes. Employers were required to increase the value of deferred benefits, not only during the period of deferment but also during the payment of the pension. These increases have been one of the factors which has resulted in the black holes we hear about in company schemes today.

The hike in costs due to the increases to deferred pensions and introduction of limited price indexation through the late 1980s and early 1990s also acted against the spread of more final-salary schemes. The switch from final-salary to money-purchase provision among existing schemes now looks unstoppable.

By the mid-1990s, the reputation of occupational schemes had taken a serious blow with the Maxwell case while personal pensions had reputational problems because of the so-called misselling scandal. Neither of these fundamental issues of trust has been overcome in the decade since. Indeed, the recent spate of scheme failures that has led to the rushed implementation ofthe Pension Protection Fund and the cobbled together Financial Assistance Scheme seem to indicate the problems faced by employers running occupational schemes are getting worse.

Stewart Richie – Director (pensions development), Scottish Equitable
The story of pensions over the last 20 years has been one of increased complexity and cost but with no obvious payoff in terms of more provision or greater security.

It is difficult to know how things would have turned out if legislation had been frozen between 1985 and now but it is hard to believe the problems would be worse than they are today. Some of the changes were fairly obviously wrong at the time they were made. For example, the imposition of the earnings cap, the 1 per cent stakeholder charge cap, the removal of the employer’s ability to make joining the scheme a condition of employment and the £5bn-a-year stealth tax on pension investments all attracted wide criticism when first proposed.

Yet many changes, examined in isolation, are hard to criticise. Who could argue against better pension protection following Robert Maxwell’s big splash, Maersk’s attempt to walk away from the deficiency in its Sea Land subsidiary or the tragedy of ASW’s workers who were just short of retirement age when ASW went bust?

The road to hell may be paved with good intentions but perhaps the road we have been on for the past 20 years is merely to pension purgatory, from which there is hope of release?

Yet the reason why politicians have interfered so much in private provision is precisely because it is so important. Although currently in decline, private provision in the UK forms a bigger proportion of total pensions than in most developed countries. No politician or pension professional should lose sight of the role which private provision has played in the lives of millions of people who have retired in the past 20 years. There is no reason why that should not be true for future pensioners.

Maybe we deserved a period of purgatory because we started to believe that pensions was an easy business and forgot that the objective must be to help people be financially secure in old age. I do not believe anybody today thinks pensions is an easy business. But if we can demonstrate that we are committed to doing our best for tomorrow’s pensioners, perhaps politicians wi111et us get on with that job. If there is one lesson the last 20 years, it is that trust is hard earned and easily lost.

Ian Naismith – Head of pensions market development, Scottish Widows
With hindsight, 1985 seems an age of innocence. Personal pension misselling, the Maxwell affair, falling annuity rates and the stockmarket slump were all in the future. Pension provision was mostly through generally well-funded final-salary schemes or section 226 retirement annuity plans.

Pensions were relatively simple but a revolution was imminent. It all started with the Social Security Act 1986, which dramatically changed UK pensions.

First, it overhauled the state earnings-related pension scheme, starting a series of reductions to the level of state pensions and also giving individuals the option to contract out of Serps through personal pensions. Previously, contracting-out was only available through final-salary schemes.

Second, it gave individuals the right to opt out of occupational schemes. When personal pensions were introduced in 1988, everyone could choose to have their own pension arrangements rather than relying on their employer.

Industry expectations of personal pensions were relatively low and contracts were generally simple, with cheap and cheerful administration systems.

But a high-profile advertising campaign and a perceived Government giveaway prompted unprecedented interest as millions of people contracted out. Providers’ administrative systems fell apart and even issuing a policy document became a major exercise. We took several years to recover fully from the administrative traumas of 1988.

Many advisers also saw this as a great sales opportunity and a huge market developed in transfers and opt-outs. Many were

well-advised but others suffered greatly through the incompetence or greed of their advisers. An abiding image is of miners finishing their shifts and being accosted by advisers urging them to leave their final-salary scheme.

The fallout from pension misselling, including the naming and shaming of leading companies by the redoubtable Helen Liddell, would tar our industry for over a decade.

Then there was the plundering of the Mirror Group pension fund by Robert Maxwell. The horror that an employer could so blatantly rob his staff of their retirement provision led to the overkill of the Pensions Act 1995, which became another millstone for occupational schemes.

Then 1997 saw a New Labour Government with a big pension idea – £5bn a year income by scrapping dividend tax credits. More positively, it introduced a minimum income guarantee for pensioners (later replaced by the pension credit), overhauled Serps to introduce the state second pension and introduced low-cost stakeholder pensions.

No doubt, we all have views on the effectiveness or otherwise of these measures. What of the future? We have the simplification measures emerging from the Finance Act 2004 from next April, as well as whatever emerges from the Pensions Commission report. We would all welcome a bit of a breather from new legislation but, with Adair Turner likely to recommend major changes to state and private pensions and possibly compulsion, the next four years will bring further changes. Then we will have another general election. I can say with confidence that pensions will feature as strongly in the second 20 years of Money Marketing as they have in the first.

Nick Bramford – Managing director, Informed Choice
Twenty years ago, pension provision in the UK was about to go through an enormous amount of change. Legislation introduced by the then Conservative

Government paved the way for substantial private and public sector change. In July 1988, we saw the introduction of personal pensions designed to give people greater choice and ownership.

But with greater choice and ownership come greater responsibility and perhaps the UK financial services sector was not yet ready to take on such responsibility.

Years later and the root cause of so-called pension misselling can be traced back to the freedoms created by personal pensions.

That said, I imagine there are now members of defined-benefit occupational pension schemes who, with the benefit of hindsight, would have been quite pleased if they had been “missold” out of the schemes now facing massive financial deficits.

Perhaps the most ineffective piece of legislation ever created was the Pensions Act 1995, the proverbial sledgehammer to crack a walnut. Thank you, Robert Maxwell, what could we have done without you?

Successive Governments have created the mess we are faced with today. A Conservative Government reduced the value of the state earnings-related pension scheme and the second state pension has never recovered from it.

In 1997, Chancellor Gordon Brown, seeking a new career as an impressionist, chose Maxwell as his first example and started robbing personal and occupational pension schemes to the tune of £5bn a year and continues to do so even today. But few seemed fazed by either event. Perhaps we will never learn that we must not leave important decisions like pension policy to stupid politicians.

Contracting-out became the craze from 1987 onwards, giving today’s sad critics the opportunity to claim yet more misselling as consumers, in the wake of the bear market of the early 2000s, discovered that their pension plans, just like their endowment policies, were linked to the value of shares.

Pension plans ceased to be a popular way of saving for retirement about the time when stockmarkets crashed, annuity rates tumbled and salesmen and advisers ceased to be paid any thing like the previous high levels of commission with the introduction of stakeholder plans in 2001.

So, as we approach the end of the 20-year period, massive change is on the radar. Eight tax regimes, we are told, will be simplified into one and investment freedom for pensions is attracting high levels of interest.

But will 20 years of inept political interference, slack regulatory controls, lower interest rates and the creation of a highly litigious society result in improved pension provision for the future? Not a chance.

Whoever writes this piece for Money Marketing in 2025, as it celebrates its next 20 years, is probably going to write much the same again.

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