Travelling across south London on a bus, early on a Sunday morning, I can talk to and listen to people who I don’t come across at work. I ask a West Indian nurse what she thinks of her pension, at first she tells me she doesn’t have one, but then she tells me she is in a private scheme she doesn’t understand and she thinks she will get something from the Government. She is in her fifties, she has a small bible in her hand, it is Sunday.
People are vulnerable, they trust. This lady trusts in the Lord Jesus Christ , she told me so very directly, he is her long term saviour, not stocks or shares or bonds or buy-to-let. But she trusts the Government that things will be alright.
This trust in the Lord and Government did not extend to her private pension which she spoke of with disdain. She had had a friend whose pension was stolen, she thought the same would happen to her.
If you ask decent God-fearing people how they feel about private pensions and they answer this way, you know that there is something seriously wrong. There is. This lady should not be in a private pension scheme, she should be in the NHS scheme, I imagine that at some point she accrued rights in the NHS pension scheme and that the private scheme she is in now kicked in when the TUPE kicked out.
She had no idea what she was likely to get when she retired; she wasn’t sure when she was going to retire. She just knew she had to work (at St Thomas’) and save as much as she could, which she was doing, in a savings account.
“Pensions steal my pay”
A long time ago I stopped believing that personal pensions worked for ordinary people. They work for people educated to understand how markets work and how to manage drawdown. But they do not work for a West Indian nurse in her fifties who has a hundred other things to think of than how to manage her pension.
She has done her bit, worked a lifetime in nursing and she trusts the Lord and the Government (and her family) will see her through. She has no trust or interest in her private pension – “it just steals some of my pay every month”!
Regenerating defined benefit schemes
This view would not matter if this lady was still in the NHS superannuation scheme, but she told me she was not.
Like millions of other ordinary people she will get a much reduced private pension because of the massively reduced communal accrual into collective defined benefit arrangements.
While it is good that more people are saving into private pensions (through auto-enrolment) , I suspect that many if not most would agree that there’s an element of “legitimised theft” at work from private pension providers.
This isn’t actually the case. All private pensions aren’t being used for theft (even if a few are). In 1995 some people believed all defined benefit pensions were a license for legitimised theft (because of Maxwell). For all their problems today, defined benefit pension schemes have recovered, there has not been another Maxwell and the security of people’s pensions is greatly improved.
But this is the point. Many ordinary people know of private pensions through the second hand experience of a mate, or a mate’s mate. If that experience was of a pension scammed then the damage is as cancerous as the damage done by Captain Bob.
This is why it is so important that we organise pensions so that ordinary people can feel protected from rip-offs.
A proper system of licensing
I am amazed that as part of their pension freedoms, ordinary people can be allowed to waste not just their money, but their employer’s money and the tax-payers money on spurious investment schemes. I am not just talking of scams, but of the high cost, low value drawdown products marketed as SIPPs but operating as Discretionary Fund Management agreements.
It is time we took a long hard look at the destination of the money that is being transferred out of high quality defined benefit pensions and considered rules akin to those that Govern workplace pensions. That means capped charging structures on defaulted investments, capital adequacy requirements on the pension provider and some kind of sustainability testing akin to what the workplace master trusts must now provide.
So that people feel confident that if they exercise their freedoms, they are doing so with a degree of confidence. I would like to see all products used to receive transferred pensions subject to strict licensing from Government from the earliest opportunity. I am not shying away from this, this will need primary legislation and will mean major changes in the way wealth management currently works.
Pride in advice
The RDR has done some of the job, but it has not done all the job, there is still an opportunity for advisers to profit from the proceeds of transfer without charging for advice. Advice is still being used as a lever to open the pension pot and the pot is still being raided by advisers in lieu of fees being directly levied.
It is time we cleaned up not just the products, but the advisory process. We need to ban contingent pricing to restore pride in advice.
Getting rid of the rotten apples from the barrel
The lady on the omnibus (not far from Clapham as it happened) believed that private pensions would lead to her money being stolen. I could not tell her she was wrong but Itold her that she did not need to be right.
She looked at me and laughed – I knew I could not win her trust just then.
For us to win back the trust of the public, we are going to have to protect them, as we are doing with our new and improved defined benefit regime.
The onus is on us – the experts. We cannot stand by and allow things to carry on as they are. They are not good enough for the lady on the Clapham Omnibus.
So we must improve the products, take pride in the advice and rid the barrel of its rotten apples.
And we must do our own laundry!