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Inside edge

The Government has two separate reviews aimed at simplifying pensions- the Pickering review and the Sandler review.

These are both set to make recommendations later this year but for those of us judging the results of their work it is difficult to know which benchmarks we can look to if we are to comment on simplification.

Pensions seem almost too broad and multi-faceted a subject to allow simple judgements on simplification itself. We need to establish a framework against which any plans for pension simplification can be judged.

I think there are three key principles for simplification – transition, separation and true concurrency.

Transition is perhaps the most important. In all previous pension legislation in the UK, no retrospective changes have ever been made. The resulting “layers of simplification” have simply added to the complexities within the system.

The principle of transition would require new, simpler pension regimes to replace the existing regimes and all individuals and companies operating pension schemes would be required to move to the new basis.

Governments have shied away from this radical approach because of the fear that some would lose valuable rights attached to previous legislation.

It is a sound fear but one that needs turning on its head. A new, simpler pension regime must allow for all the advantageous rights from past legislation to apply not just to the lucky few but to all pension savers.

Any genuine claim for simplification can only be made if transition is a requirement. Anything else would merely be yet another layer of complexity or, worse, a cosmetic exercise tinkering at the edges of the problems inherent in the fragmented pension system.

The second principle, separation, builds on the first and recognises that occupational pensions, state pensions and individual pensions are distinct from one another and should be treated as such by legislation.

I think that occupational pension schemes should not be allowed to interact with the state schemes (contract out), that occupational pension schemes should not be able to include contributions from individuals and that where people do elect to contract out of the state schemes (on an individual basis only), that the state should give up any right to prescribe how such rebate monies are used by individuals to purchase retirement benefits.

Transition would require that separation is applied retrospectively. This would mean all contributions made by individuals towards their own pensions would be covered by a new simpler individual pension regime, irrespective of whether such contributions in the past were made to state pension schemes, occupational pension schemes or individual pension schemes.

It would also mean that occupational pension schemes would be just that, pensions provided for employees by their employers, again covered by the terms of a new simple occupational pension regime incorporating all the best features of existing arrangements and making them available to all.

The state pension schemes, other than where individuals buy themselves out by accepting full National Insurance rebates, would continue to accrue separate and additional benefits to those being produced by corporate or individual arrangements.

That all three regimes, state, corporate and individual would co-exist with no reference to each other and no limitations imposed on any one by any other is the third principle I would recommend – true concurrency. What an individual chooses to do to provide for himself in retirement should not be subject to limitation because of what his various employers choose to provide or what the state may choose to provide for them during their working lives.

Separation means true concurrency will exist. True concurrency means pension products geared to genuine longterm savings habits can prosper. Transition means complexities and conflicts will cease to be a problem to those trying to save and costs of distribution and compliance will be substantially reduced.

Any attempt at simplifying the UK pension system that does not incorporate these three principles cannot be described as being radical.

Steve Bee is head of pensions strategy at Scottish Life

Fair Value Accounting for Insurers is a timely and focused one-and-a-half-day conference. It will look at the latest developments in international accounting standards and the timetable for their implementation, as well as processes for determining best practice in performance reporting and disclosure.

The list of contributors includes FSA conglomerates insurance and operational risk department head of policy Paul Sharma, Watson Wyatt partner Robert Hails and International Accounting Standards Board senior project manager Peter Clark.

The event is followed by a half-day workshop on methods for calculating fair value of life insurance contracts. It takes place on April 10 and 11 at the Euston Plaza Hotel, London. Contact 01323 430816.


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