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Malcolm McLean: Pensions policy needs to be future-proof


All politicians know (and often quote) Harold Macmillan’s response when asked what a prime minister most feared: “Events, dear boy, events.”

It is not absolutely clear when and to whom Macmillan actually said it. Some say it was made to President Kennedy; others to a journalist after dinner. Former chancellor Denis Healey claimed it referred to foreign policy, while Macmillan’s official biographer thought it may have been a response to the Profumo affair.

Whatever the historical context, the point he was making is very true. Any policy or strategy can be seriously damaged and/or knocked off course by unforeseen events often completely outside your control. It is certainly the case that events and the Government’s response (or lack of) to them have most affected pensions policy over the last 20 years.

I mention 20 years because that was how long ago I first started working in pensions. Joining what is now The Pensions Advisory Service, I witnessed first-hand many of the events that led to so many policy changes, U-turns and the like over the succeeding period.

Most of the pensions legislation governments produce in response to events tends to be more backward looking than forward.

In April 1997, we had the arrival of some apparently very significant new laws, designed to improve member protection and block off the possibility of another Maxwell case (the crooked tycoon who had jumped off his boat some six years earlier having stolen millions of pounds from the Mirror Group pension funds).

In doing that, however, a whole new set of difficulties for pension schemes arose for example, from a minimum funding requirement which on a wind-up turned into a maximum funding requirement and eventually had to be scrapped.

“Most of the pensions legislation governments produce in response to events tends to be more backward looking than forward.”

Unintended consequences

Twenty years on there are also unintended consequences still emanating from the “section 75” debt regulations for employers (for example, plumbers) who form part of an industry-wide scheme. And, of course, the wider problem of defined benefit deficits and how best to deal with them remains largely unresolved.

What that particular piece of legislation also failed to anticipate were the events that were shortly to gather pace around companies with underfunded pension schemes becoming insolvent and causing their workers to lose their jobs and their pensions as well. It was not until 2005 – and more legislation – that we got the Pension Protection Fund and the Financial Assistance Scheme.

To a large extent, this trend has carried on right through to the present day. For example, we had a major revamp of the pension tax rules in 2006: so-called pensions simplification, which was neither simple nor long-lasting. I have lost count of the number of further tax changes brought in by subsequent legislation, with the likelihood of yet more to come.

The Government has also been rather slow off the mark in recognising longer life expectancy and the impact this will have on retirement and care costs. State pension ages have risen but in a seemingly incoherent way; something the forthcoming Cridland Review will hopefully better address.

The new state pension offers some hope as to a simpler, more easily understood system (eventually) but it will clearly not be the more generous-to-all solution that had originally been envisaged.

That said, the one really bright spot over the whole of this period has been the arrival of automatic enrolment and the success it has enjoyed to date in terms of the numbers now enrolled. It would be a great pity if external events such as Brexit or a major downturn in the economy were to spoil this in due course.

In looking back over the last 20 years, it has been relatively easy to pick out some of the main flaws and the opportunities that have been missed. But then, as they say, hindsight is a wonderful thing.

Perhaps more important to ask is: what about the future? Is there anything we should fear? The answer to that is a bit more difficult but on the same lines: Events, dear boy, events. What else could possibly go wrong?

Malcolm McLean is senior consultant at Barnett Waddingham



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I still don’t understand how anyone can describe auto-enrolment GPP’s as a success when they’ve been forced onto employers, whether they want them or not, with severe fines if they don’t comply. On that basis, they could hardly fail.

  2. Trevor Harrington 14th February 2017 at 10:14 am

    The provision of state pensions and health services through the national insurance contribution (NICs) system is indeed “future proof”, and fool proof, and it is already a system which is perfectly capable of providing for all our needs in health and state pensions, regardless of the increasing or reducing number of people who are at whatever time of life, commonly known as demographics.

    All that needs to happen is that Governments plan ahead for bulges or reductions in these social and welfare costs, either by short term borrowing against known NIC revenue, or by longer term reserving of any surplus revenues. In extreme cases of changing demographics, NIC rates can be increased or decreased. It is a simple economic model.

    It only goes wrong when Governments choose to spend our NICs on things for which it was not intended – notably, their own un-costed and unaffordable pet projects for which they hope to be re-elected.

    The current “saviour” to our pension system is called “Auto-Enrolment”, and it will fail miserably, simply because Governments cannot resist removing our pension money from these types of systems when they become large enough to be too tempting, and they have some other need for the money. They are still taking NICs from us, which were substantially increased in the 1970s in order to fund state pensions, and yet they have just increased the state retirement age for everyone, whilst reducing the state pension from well over £200 per week for many people to a miserly £155 per week. They also started taxing private pension funds in 1997 (Brown) whilst increasing the benefit liabilities through various E.U. social rulings, such as widower benefits for same sex couples etc, for which there has never been any premium costing, and which has resulted in most company Defined Benefit pension schemes closing, apart from the public sector.

    Until our Governments, learn NOT to spend money which they have not got, and only spend our defined contributions (NICs) on that for which they were intended, or until we the public learn NOT to vote for political parties (Labour/socialist) who spend our money without any consideration or calculation of where it might come from, then I am afraid to say that all our pension systems, past and present, are doomed to failure.

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