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Malcolm McLean: Why a pat on the back for pension reform is premature

Pension reform has come as a big shock to many but there is still much that is untried and untested

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Since the coalition Government came to power in 2010 there has been a veritable blizzard of initiatives and changes to the pension system, most of which appear to have commanded widespread public support.

Pensions minister Steve Webb in particular deserves much credit for the drive and determination he has shown in bringing this about.

But we must not kid ourselves that everything is now sorted and we can all rest on our laurels. There is still much that is as yet untried and untested and may have to be further adjusted over the course of the next few years.

Budget 2014 came as a big shock to many in the industry and heralded a major change not only in the pension decumulation process but in the whole saving for retirement culture itself.

In pure policy terms, precisely what it was intended to achieve is still not completely clear. It may have obtained the public vote and may ultimately prove a resounding success but whether the changes were motivated more by politics than sensible public policy development remains an open question. 

Similarly, the new single-tier state pension may not be quite as good as some of its advocates would have us believe.

What has been described as a more generous state pension is not more generous to everyone. There are losers as well as winners, notably young medium to high- earning individuals who would have benefited more from a combination of the present basic and state second pensions as well as those employers struggling to run defined benefit occupational schemes who will lose their National Insurance rebates in 2016 consequent on the ending of contracting-out.

Fallacy

It is also something of a fallacy to describe it as a simple, flat-rate pension. It is neither of these, certainly not over the medium term.

Because of the need to take into account established rights to Serps/S2P accrued up to April 2016 and make deductions for contracting-out rebates given in the same period, the pensions payable for many years will be at variable rates. The Department for Work and Pensions has now acknowledged that when the new state pension starts in 2016/17, 61 per cent of the new pensioners will get less than the standard rate; 27 per cent will get more and only the remaining 13 per cent will receive the flat rate.

The fact the DWP is not yet in a position to respond to requests for individual forecasts makes forward planning of available pension income nigh on impossible for most of the people affected.

Flagship policy

And finally to the Government’s flagship policy of automatically enrolling eligible workers into a workplace pension arrangement. 

The first stages of the programme have undoubtedly gone well, with opt-outs running at less than 10 per cent, substantially lower than anyone had expected.

But we all know that the minimum contribution levels specified are totally inadequate and need to be increased sooner rather than later. 

There are also signs that the political consensus that has existed so far between the main parties is starting to unravel which could be bad news for the eventual success of the policy. 

Starting from the Queen’s speech and in the run-up to the general election, we can expect a lot more political discussion and debate about pension policy.

Let’s hope any further initiatives and changes are correctly directed and not unduly influenced by short- term political gain.

The pension consumer and the country deserve better.

Malcolm McLean is a consultant at Barnett Waddingham

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