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Simple logic to raise cap

Although the Sandler review of long-term investment and the Pickering review on pensions focus on different areas there is some overlap.

The good news is that not only are there no major contradictions for pensions between the two reviews but they actually show some signs of agreement.

Pickering stresses there are far too many different types of pensions – for example, there are 15 different types of money-purchase pensions available.

No wonder people think pensions are too complicated.

Pickering would like to see pensions reduced to three generic types – defined-benefit, other employer-sponsored arrangements and individual arrangements (whether the individual&#39s sole form of pension or a top-up to an employer arrangement).

According to Sandler, there are eight different tax regimes for pensions. These have helped create product distinctions, leading to complication and customer confusion and creating barriers to saving.

He proposes a suite of simple products based on similar principles to the current stakeholder pension. The suite would be made up of a pension product, a mutual (or unit-linked) life product and a “new” with-profits product.

As Sandler&#39s recommendation for simple products was made in the context of individual products, the idea of one pension ties in neatly with Pickering&#39s call for a generic type of individual product.

But there is an important piece of this jigsaw that is missing. If we are to reduce the number of different types of pension, the Inland Revenue has a crucial role to play. Many of the distinctions between product types are created by Revenue legislation. At the highest level, the difference between contribution-driven (personal pensions, stakeholder) and benefit-driven (occupational-pensions) is a Revenue issue. So we wait with bated breath for the Revenue proposals to find out how much simplification we will see in terms of types of products.

In pensions, the employer is important. Pickering agrees, as he devotes a whole chapter to Pensions and the Employer, which contains many practical proposals to make it easier for employers to offer and operate pension arrangements.

An employer contribution is valuable and there is evidence that where employers contribute, employees are much more likely to join the scheme. Pickering is keen to see employers able to promote schemes to employees. It is counter-productive that legislation has brought us to the point where employers are unwilling to promote the benefits of schemes to employees for fear of stepping over the legislative line.

Sandler takes this one stage further, suggesting employers could sell the simple “stakeholder” suite of products he recommends. I just cannot see this as something in which many employers would be interested. Most employers want to run their own businesses and are looking for less, not more, involvement in other areas.

Another key area is advice. There are limits to what can be achieved by simplification, no matter how radical that turns out to be. Both Sandler and Pickering believe simpler products will remove barriers to saving, which will, to some extent, provide encouragement to save. But, equally, both acknowledge the need for pension advice.

Pickering talks of the need for better customer knowledge of pensions but acknowledges there will always be an asymmetry of knowledge between the customer and the industry. The report says the most important added value the industry can offer is persuasive advice.

For example, consider this quote from chapter five: “It is important to recognise that most people do not go out and buy pensions; it follows therefore that pensions have to be sold to them. Since pensions must be sold, it follows that some form of advice is likely to be crucial for most people.”

If we then look at what Sandler has to say about pensions and advice, we find that he says that there is a greater need for advice on pension products because of their special nature.

The reasons he give include the fact that pensions are long-term investments and that money saved via a pension cannot be accessed until later.

He also points to the differences between personal and occupational pensions and the issues raised by the relationship between state and private sector pension benefits.

The interesting point here is that while some of the reasons Sandler gives for the greater need for pension advice could be tackled by simplification, others could not.

For example, the complicated nature of the relationship between private and state pensions would be considerably simplified by adopting Pickering&#39s recommendations on contracting out.

On the other hand, the fact that pensions are for the long term is part of their nature and so is beyond the scope of any simplification exercise.

Pickering does not touch on charges, which were not part of his remit. Sandler does. As far as pensions are concerned, he makes the point that pensions could justifiably attract a higher charge for advice because of their special nature and greater complexity.

In general terms, he recommends a 1 per cent charge cap, which is disappointing. But it is worth paying attention to the detail. He says 1 per cent is reasonable in the context of a simpler and much less costly sales process. This can be read as an implicit acceptance that 1 per cent is not enough where full advice is required.

Since the publication of the Sandler and Pickering reports, we have seen the second Oliver Wyman report commissioned by the ABI. This illustrated, through various models, the reduction that might be achieved in the savings gap that might be achieved if additional advice were made feasible through raising the charge cap.

The report demonstrates that a higher cap is required even within a much simplified sales regime. Reducing the savings gap in the UK must surely be our priority – it is, in one way or another, what all the various reviews are about.

So if it is necessary to raise the cap to allow for advice and to increase overall savings, then the Government should be prepared to do this.

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