Malcolm McLean: Questions remain over Govt’s radical pension policy

 Malcolm McLean

It was as long ago as 1977 that popular American rock singer Meatloaf first recorded and published what, for him, was an unusually contemplative ballad entitled Two Out of Three Ain’t Bad.

The somewhat bizarre message of the song – addressed to his girlfriend at the time – was that he both wanted and needed her but there was no way he was ever going to love her. But she shouldn’t be sad because two out of three ain’t bad.

I am not sure how the lady in question would have viewed that rather mixed message – whether she was reassured by it, whether she felt sad as a result of it, or what. Because in life generally, just because something is not bad does not necessarily mean it is as good as it could or should be. It is a question of degree.

Take, for example, the Government’s three flagship pension policies: the new state pension, auto-enrolment and pension freedoms. How do they stack up and what conclusions can be drawn as to their worth and value overall?

Starting with the state pension, the new single-tier arrangement is simpler (or will be when we get past the rather complicated transitional stages) and easier to understand. How could it be otherwise when we are replacing a multi-layered system with a single, flat-rate pension? This will clearly help younger people to formulate their retirement plans and work out how much private saving they will need to supplement what they can expect to receive from the state.

The new state pension on its own is unlikely be sufficient to guarantee a comfortable retirement but it will provide a baseline or foundation for private saving and therefore an encouragement for low earners in particular to save privately on top.

And what can I say about auto-enrolment? Overall, it has proved to be a great success in relation to the numbers of workers being enrolled and, often for the first time, starting to pay into a pension plan with the help and support of their employer and Government tax relief to encourage them to do so.

Opt-outs have been surprisingly low and hopefully that trend will continue, albeit at a predicted slightly higher level through to the conclusion of the phasing-in programme in 2019. There will be a need to find a way of upping the minimum contribution levels in due course but that in no sense takes away from the very encouraging results achieved to date.

The third element of the flagship policies – pension freedoms – is rather less clear-cut and we are unlikely to know for certain for many years how successful (or damaging) it has turned out to be. The ending of the effective requirement for many retirees to purchase an annuity was certainly well received by the public when it was first announced, and supported by many in the industry.

But there are lingering doubts whether all the extra flexibility the new system provides for in terms of withdrawing capital sums in preference to a fixed income will result in many more people running out of money in later life. There is evidence that some people are unwittingly incurring extra tax charges as a consequence of their actions, which clearly is to the benefit of HM Revenue & Customs, not themselves. Pension fraud and scams also appear to be on the increase, directly or indirectly as a result of the new policy.

The concept is undoubtedly right – it is the members’ own money and they should be free to decide for themselves how to spend it – but there is little doubt we need better consumer protections and advice/guidance arrangements than those that have been developed to date. These could be critical to the ultimate success of the freedoms policy as a whole.

So whereas it is possible to say that the Government has probably got it broadly right in relation to the new state pension and auto-enrolment, there are still a few question marks about the more radical pension freedoms agenda and where it might be leading us.

Two out of three may be ok in most situations but whether we should be sufficiently reassured by it here is an open question. We – or, more likely, future generations – will find out in due course.

Malcolm McLean is senior consultant at Barnett Waddingham