Malcolm McLean: Simplify pensions once and for all

Malcolm McLean

For almost the entire 20 years I have worked in pensions people have said the same thing: “Pensions are too complicated. I don’t understand them. They need to be simpler.”

This inevitably leads on to statements like: “I can’t be bothered with paying into a pension. I don’t trust either the pensions industry or the government; they’re out to rip you off. I’ll handle my own money.”

I would like to think that after so many years of us banging on about the problem things would be improving a bit. However, it is probably getting worse.

National Pensions Awareness day came and went back in September, with no apparent impact on people’s understanding of the subject, while the success of auto-enrolment so far seems to depend more on workers’ inertia than any degree of engagement with their pensions.

And it is not just the general pubic. Earlier this year, Bank of England chief economist Andy Haldane said that even he was unable to understand pensions because the system is so complicated. What is more, new pensions minister Richard Harrington pointed out at a recent conference that, prior to taking up his role, he was not sure what he had by way of pension provision and how the various bits all fitted together.

Harrington went on to say that one of his key aims was to make pensions simpler and more easily understandable to the ordinary man and woman in the street.

I wish him well with that but, at the risk of sounding cynical, we have heard it more than once before. And it has not happened. At least not to an extent that would make a material difference.

The problem is we have let the system grow like Topsy, over a long period of time and in a totally uncontrolled way. Take tax as an example. There are hundreds, if not thousands, of pages of tax legislation on pensions that continue to expand at an alarming rate.

And to what end? How many consumers actually fully understand what tax relief is, how it works and how it benefits them in their pension saving? Why is there this apparent obsession on the part of the Treasury with constantly adjusting the allowances with ever more complicated processes for capping and restricting reliefs?

I would like to think that after so many years of us banging on about the problem things would be improving a bit. However, it is probably getting worse.

Coming together

I accept that, to some extent, we are prisoners of our past and simplifying pensions as though we are starting from scratch is not always possible. Bringing in changes often means you have to recognise and give effect to accrued rights that already exist, producing complex transitional arrangements such as those in place for the new “simpler” flat-rate state pension.

But does that mean pensions have to be so convoluted and confusing in all respects? The basic concept of a pensions saving plan is about putting money away during your working life to give yourself an income (or extra income) in your retirement years. It is hardly rocket science. But when you add in the question of tax reliefs and allowances, contribution rates, target date funds, salary sacrifice, default options, lifestyling plans and so on, it probably starts to sound to the consumer a bit like it could be.

Why can’t the industry and the Government work together to find ways of radically simplifying the whole pension system for the benefit of everybody involved? We need simpler legislation, simpler scheme rules and simpler insurance products. But above all we need a desire to think and act in the best interests of the consumer at all times.

Alternatively, this could be given as a discrete task to a new Pension Commission, which could objectively examine the case for more simplification and make practical recommendations as to how it might be achieved.

And while we are at it, let’s have a once-and-for-all purge on the gobbledegook language used. Expressions like “trivial commutation” and “uncrystallised fund pension lump sums” have to be consigned to the dustbin if we are ever going retain any credibility going forward.

Malcolm McLean is senior consultant at Barnett Waddingham