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Under the influence

Education and public awareness are vital to dispel disillusion over pensions.

The UK savings and pension market is in a state of conserable confusion at the moment.

The demographics of the UK population have changed beyond recognition over the past 50 years.

Pensions have always been regulated to a greater or lesser extent and the much heralded pension simplification structure from April 6, 2006 does at least have behind it most of the old legacy rules and regulations. This date is a watershed in pension legislation but it has left a number of issues unresolved. The A-Day clock is ticking but how many advisers have completed all their first simplification meetings with their clients?

Talking of regulation, do members of the public know what decision to make on the contracting option? It is unlik- ely. Advisers are struggling with issues about the state second pension, which seemed so clear only a few years ago. We may be hung again on an audit of critical yields and risk assessments. There are also thousands of stakeholder schemes with no money in them, presumably waiting for the day when compulsory employer and employee contributions are introduced.

On balance, I believe the best way of preventing further pension misselling scandals is to educate the public. Financial education in the workplace is fashionable in Government circles at the moment and surely it has to be a priority to get people to understand the need to save and make provision for retirement.

But the fact is that the public is seriously disillusioned with pensions as a result of the Equitable Life debacle and investment losses incurred between 2000 and 2003. Again, I believe it comes down to education and understanding investment risk in its simplest form, as well as acknowledging that cycles of boom and gloom happen in all asset classes.

Pensions will always need regulating and the severity of regulation will largely depend on employer behaviour and experience after April 6, 2006. We now have a Pension Protection Fund which is designed to protect employees who are still members of defined-benefits schemes. If, however, as I suspect, the majority of private sector schemes are defined contribution in the future, the need for such protection may subside as pension fund solvency will not be linked to money-purchase benefits.

As to who the ultimate regulator will be in the future, this is like gazing into a crystal ball but I question the practicality and benefits of a Government-controlled body, given that the pension debate has become more of a political football in recent years, which is not good for the public or the sector.

Party politics were certainly visible in the run-up to the general election with the Treasury publicly praising the stakeholder suite of savings products although stakeholder has fared poorly so far. Just when we have become familiar with the stakeholder rules, we find that the whole system is being radically restructured. The Government is banking on simplicity making a difference but I wonder if the current split between state and private provision – 60 per cent and 40 per cent respectively – will change much after April 6, 2006.

The million dollar question is whether Government influence will be lesser or greater in the future. One only has to observe the plight of private sector final-salary schemes compared with their public sector counterparts to see that there is a huge imbalance. The Government continues to offer attractive early retirement packages to public sector workers who appear to be cushioned against the problems encountered by private sector schemes. Does the pension protection fund go far enough to protect members of private sector defined-benefit schemes and enable their retirement expectations to be met?

The role of Government in retirement provision has alw- ays been a moot point and we have lived with mixed messages on this front for some time. Gordon Brown, in one of his earlier Budgets, removed the ability of pension funds to reclaim advance corporation tax but he provided suppos- edly tax-free gestures in the form of stakeholder pensions. One wonders where it all fits together, if indeed it does.

Whether or not we ever see the establishment of a permanent independent pension regulatory body – likely to be the subject of much discussion in coming months – the current regulator and the sector must be aware of the need for financial education, especially in the workplace.

It is in everyone’s best interests to move towards a position as quickly as possible where financial awareness is the responsibility of the working population as a whole so they take the initiative and seek advice and take action to make provisions for their future financial security.

The advent of the new pension regime should help raise the profile of retirement provision but, without an element of compulsion, one wonders whether private provision will grow in all but the higher-earning group.


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