In an excellent article in Money Marketing, Nic Cicutti offers us the following analysis of how pension policy has progressed in the past thirty years
The defining moment in financial services was the introduction of the 1986 Social Security Act, which gave employees the right to leave or decline to join their employer’s pension scheme. At the same time, it introduced personal pensions to the general public.
Back then, government experts predicted that 500,000 people would opt for a personal pension, but that figure was reached in weeks. In two years, almost four million personal pensions were sold, many of them consisting solely of rebates paid to persuade people to opt out of Serps.
Back then, we totally underestimated the likely impact of what was to follow. When the Financial Times’s former pensions correspondent Norma Cohen broke the story about the SIB pensions review, the talk was of a compensation bill running into hundreds of millions of pounds, something I described at the time as “one of the biggest financial calamities to hit the City”.
The number of personal pensions rose to more than five million by 1993, just before the edifice began to crumble in the wake of an inquiry by the Securities and Investments Board, the first City financial regulator, into suspected misselling.
How little we knew. By the time the final dribs and drabs were paid in the early to mid-Noughties the final cost, including the review itself and fines levied on those who delayed paying redress, topped £11bn.
Far more important than the compensation costs was the change in attitudes it engendered. If they had previously been sceptical about the merits of saving for retirement, many consumers now found there was increasingly little to choose between personal pensions and company schemes, where a corpulent Czech publisher could steal your money before falling off the back of his yacht.
The sense that you could never really trust a financial adviser or be bothered to save probably began in earnest in the mid-1990s. Every other misselling scandal since then, from with-profits endowments to payment protection insurance, has confirmed what we first learned in the aftermath of 1986.
It is because of that experience, massively underestimated at the time, that I predict the next big shake-up will once again involve pensions. Specifically, it will involve the Government’s liberalisation of the pensions regime to allow people to take cash out of their personal pensions.
What we seem to be seeing are two things happening in tandem. The first is that more and more people are making use of these new freedoms to extract money from their schemes.
Last week the FT reported that pension providers have paid out £2.5bn in 166,700 lump sums in the six months since April. In addition, a further £2.2bn was paid out via 606,000 income drawdown payments, according to the Association of British Insurers.
Meanwhile, Tom McPhail, Hargreaves Lansdown’s head of pensions research, has estimated the tax take for the Government so far is about £666m, more than double its original estimates.
Intriguingly, what the figures also indicate is that people taking their money out of pensions are clearly doing so on the basis of a calculation of some sort about what they can afford to free up and how much they should leave in their pension. The FT quoted an estimate by Just Retirement external affairs director Stephen Lowe to the effect that people are accessing about 48 per cent, a little under half, of their pension pots.
Precisely how they are figuring out that leaving the other 52 per cent of their money in a tax efficient pensions environment will provide them with the funds they need to meet their retirement needs 20 years down the line is anyone’s guess.
Which brings me to the second aspect of the tandem effect I referred to earlier: this mass withdrawal of cash is being carried out with little or no evidence of financial advice.
As Money Marketing has repeatedly indicated, take-up of even the incredibly limited form of ‘guidance’ on offer through Pension Wise is way under what many people assumed would happen. In turn, Citizens Advice is trying to retrain pensions advisers in other aspects of its work, although it strenuously denies suggestions it may want to redeploy staff.
What we are starting to see is a slow-motion drift into another chapter of a saga that began in the 1980s but will come to fruition in another 20 years’ time.
I started advising only three years before the 1986 Social Security Act at a time when tax incentivised personal saving was primarily into life insurance policies benefitting from an uber-friendly EEE tax regime. I remember being told that the personal pension was a responsible step in tax policy designed to encourage provision for later life.
On Friday afternoon, First Actuarial’s staff heard two powerful speeches, one from the Pension Advisory Service’s Charlotte Jackson and the other from Kings College’s Debbie Price. The first focussed on the use of the Pension Freedoms (confirming Nic’s numbers), the second took a long-term view of the impact of mass- market financial education.
I was left thinking of my comment on Money Box last week
“We need pot-hole mending and urgently .. but let’s not forget in the long term, we need a new road”