There are at least three uncomplimentary ways of thinking about “pensions” in the UK . So disparate are these three that it is hard to talk (or blog) about them in the same place.
For a small number of people, pensions remain, what they were supposed to be when the OECD dreamt up their three pillars, a combination of a state floor (keeping everyone from destitution), a second pillar sponsored by employers which offered up to a two thirds replacement as a wage for life and the option of third pillar private savings.
But this simple and sensible way of thinking about pensions has been seriously undermined – principally by the shift of second pillar pensions to second pillar savings schemes. To begin with, the move from guaranteed pensions (DB) to savings schemes (DC) was dressed up as “giving people the money to buy their own pension” , shortened to “money purchase”. But people grew tired of having to buy a pension with their savings and their frustration led to the pension freedoms, where tax barriers were removed and people could spend their savings as they pleased.
Pensions as a tax-wrapper
Even before the arrival of these “pension freedoms” , increasing numbers of the wealthier in society had cottoned on to pensions as “tax-wrappers” and dispensed with an idea that they would have to have their lifestyle circumscribed by such plebeian phrases as a “wage in retirement”.
The tax simplification of pensions in 2006 was the spur for this new way of looking at pensions, It meant that people could put 100% of their earnings into a tax-efficient holding pen – equivalent to an offshore trust. It spawned numerous wealth management companies who offered fund platforms and discretionary fund management services.
Since tax-avoidance, rather than retirement provision, was the principal attraction, this new view of pensions was adopted by IFAs who’s traditional business model was turned over by the Retail Distribution Review in 2012. RDR meant that there was now no money in savings plans since they could no longer pay commission. RDR plus changes in tax legislation has totally changed the nature of pensions advice in the retail sector
The launch of universal retirement saving through auto-enrolment
Compulsion on employers offering PAYE to also offer and fund a pension saving scheme has brought 10m new savers to the party. After years of decline (partly due to the failure of DB pensions to adapt to a low interest rate environment), pension savings is on the increase again – through the second pillar. But it is not a very satisfactory sort of saving as it no longer offers the prospect of a wage for life in later years, merely the complexities of pension freedoms – without the wealth or advice.
While auto-enrolment proves to be a success, the ultimate aim of the second pillar system is not to create a savings culture, but to supplement the first pillar with meaningful occupational pensions. This simply isn’t happening at the moment.
Those reaching retirement today
Most people who get to the point where either they have to or want to wind down, have three very different visions of “pensions” to consider, and as I said at the top of this blog, it’s very hard to get your head around all three.
The Government pension – the state pension pays out at a distant point but without a single state pension age.
Occupational Pensions are increasingly being switched to wealth management (where their is an IFA) or being paid by an insurance company or the PPF. The original idea that you are paid a pension by your employer is becoming less and less common. The vast majority of people in works schemes have been auto-enrolled into workplace savings plans which bear little in common with pension schemes other than that they enjoy similar tax treatment on contributions
Private saving for retirement remains in retreat. Without an entrepreneurial salesforce of financial advisors fuelled by commission, sales to the self-employed have fallen away. While employed people have auto-enrolment, the self-employed are expected to provide for themselves, and they are not doing so.
What of the OECD’s three pillars
The clear vision of the three pillars has been smudged by the realignment of Government incentives and the opportunism of wealth managers, insurance companies and fund managers.
This is not a criticism of the opportunists, they are in the business of making money out of money and they have adapted to each change in Government policy with flair and aptitude.
What is currently missing in our pensions system is not opportunity – but certainty.
Ordinary people are being enrolled into plans they don’t understand without much clue of how to use the freedoms they have been given, Their legacy savings are remote and often lost to them and the vision of a two thirds of pay , final salary scheme – is no longer even a vision.
Everything seems to have changed except one important thing. People still reach their sixties and expect to be able to stop work and rely on their pension. That expectation will not be met – for most people. We know the reasons – too little in – too little out, but it’s more than that.
We are encouraging people to use the third pillar of private savings to pay themselves a wage for the rest of their life and most people haven’t got a clue how to do that.
We must get back to providing strong second pillar pensions. We know we cannot afford the guaranteed system that did for DB pensions and annuities alike. We know that people cannot manage pension freedoms with a lot of help (that generally isn’t there). We must find ways to give people back their pension – and an expectation of retirement with much greater financial security.