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Efficient markets thrive on competition – that’s the market theory.

But for financial services in the UK and the personal pension market in particular it has been a case of less (competition) being more (effective).

Throughout the post-war period, the accepted wisdom has been that Government can encourage long term-saving through fiscal measures – primarily the granting of tax relief on selected products.

The withdrawal of Life Assurance Premium relief in 1984 was the pre-cursor to a slow withdrawal fo these tax advantages and we can chart the gradual erosion of the privileged status given to pension through the imposition of the cap on contributions to high earners through Gordon Brown’s infamous  withdrawal of dividend reclaims and the various erosions of higher rate reliefs culminating in the AA/LTA legislation late in 2010.

In an excellent study “Savings Sense” Ben Jupp and Steve Bee argued that tax relief, while important to higher rate tax-payers did little to increase overall savings rates, merely skewing the savings market in one direction or another.

When John Denham introduced the idea of a charging cap in 1995, his motivation was a realisation that most of the Government fiscal incentive to contract-out of SERPS had been passed on to financial advisers rather than benefiting those taking out appropriate personal pensions.

Government has realised that it cannot get to the majority of UK citizens who have inadequate pensions, by offering them fiscal incentives.

The second aspect of Government Policy that has underpinned pensions thinking is that competition between commercial providers will result in better deals for consumers. This credo was at the heart of Thatcherism and had its full expression in the introduction of the personal pension in 1987 as a mass-market solution to the perceived problem of an over-centralised system of pension provision (Old Age,SERPS,Graduated etc.).

What this theory did not take into account was the thorny issue of distribution. Pensions do not sell themselves. While people are prepared to insure against tangible risks such as crashing your car or your house falling off a cliff, they have difficulty with insuring against a desireable – living too long.

To get people to comit to long-term savings into a process they do not fully understand (annuitisation) and into markets they dimly understand (equity/bond), some form of sophisticated persuasion is known. The pensions industry calls this advice, everyone else calls it selling.

The providers of pensions had always recognised that their advisers needed to be rewarded with commissions and as wave upon wave of regulation made the sale of personal pensions more expensive, commissions rose. Agreement to cap maximum commissions came and went and as competition for distribution increased, so did the charges on personal pensions. Far from improving the lot of consumers, the expansion of competition among financial advisers between 1980 and 2000, actually increased charges.

The introduction of a 1%pa charging cap on stakeholder pension in 2001 was the first effective step in reducing unwanted completion and bringing genuine efficiencies into personal pensions. Pension providers divided between those who wished to continue to provide commissions at something close to previous rates and those who decided to distribute on a wholesale basis through large actuarial consultancies.

By and large, those who continued to finance distribution through individual advisers found the model unworkable and have by and large withdrawn from the market. This has created a vast legacy of providers who have been consolidated by the so-called Zombies- companies that consolidated failed or failing life companies with little incentive to improve the lot of policyholders and every incentive to maximise shareholder value by passing on savings to those with their equity.

If stakeholder pensions heralded the start of the demise of individual advice on mass-market pensions, the Retail Distribution Review announces its death knell. From 2012. The abolition of commission from personal pensions spells a massive reduction in the number of distributors of these products and their confinement to a small sector of the market which has the wealth both to need and pay for advice.

The RDR is effectively an admission that the free-market in pensions, most in evidence through the sale of personal pensions, is over. Instead of pensions salesmen we will have a system of auto-enrolment. Instead of high-cost, then low-cost personal pensions we will have a collective occupational scheme -NEST. Instead of a plethora of personal pensions we have but a handful still actively in the market.

Competition didn’t work and we are left with wreckage it wrought. Sorting out the debris of the past twenty five years will be the job of those left behind. It will take many years to reorganise Britain’s private pension provision and many will arrive at the point where they have to draw their pension with massive disappointment before the positive impact of this reorganisation is felt.

It is now the urgent job of those left standing to do something about this legacy and an equal responsibility to ensure that the future continues to look a little brighter.

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