We have known some time that the minimum age at which most people can access their pension savings will be moving from 55 to 57 and will probably be pushed back again as life expectancy continues its remorseless progress.

The Government has now announced that the first increase will be in April 2028 and is calling for help from the pensions industry. It sets out the rationale for the increase early in its consultation

While the government believes in the principle that individuals should have freedom and choice in how they use their money, it is also necessary to balance this with ensuring that people use their retirement savings for their intended purpose: income and security in later life. This is why the
government has set rules around the reliefs to incentivise accumulation and decumulation. This is why in 2006 the government introduced a normal minimum pension age.

You can see the idea in this chart; the NMPA is supposed to track and lag the state pension by approximately ten years. That is agreed policy- it’s the law and it’s what advises and providers have been anticipating.

Unfortunately, it appears that a number of pension providers have interpreted the phrase “normal minimum pension age” as being set in stone at 55 and have written that date into their scheme rules.

I have no idea what Quilter’s pension documents say but they are calling for the Treasury to scrap the increase in the NMPA. Canada Life ,Andrew Tully, has similarly called for those with a documented expectation of access to 55 to keep it.

I know of at least one major provider that finds itself caught on the horns of its own documents

Changing scheme documents when you have millions of people signed up to them is not a simple matter and I suspect that some providers are more worried about the operational cost of rectifying mistakes than the supposed detriment to their policyholders;

The Treasury’s solution

Rather than explain to providers that they had best write to their policyholders and members and explain to them that their Ts and Cs are changing (we get these letters all the time), the Treasury are thinking of granting those organizations that have written 55 into their documentation “protected pension age”.

The government proposes to offer a protection regime for the increase to the NMPA in 2028 for all types of registered pension scheme. This would mean that an individual member of any registered pension scheme (occupational or non-occupational) who has a right under the scheme rules. at the date of this consultation to take pension benefits at an age below 57 will be protected from the increase in 2028.

Back in 2010, limited protections were in place for those who were either already accessing their pension, or were in specific professions where they needed to access their pension early. This is called the protected pension age.

Protected pension age is a rare and specific benefit that applies to a limited number of professions where early retirement is common, such as professional sports, military work or modelling.

A two tier system with a third tier to come?

Pensions are complex enough without having to worry about this kind of protectionism. Steve Webb told the FT

“There will be a need for clear communication with members to make sure they understand the different rules that may apply to their different pensions. As we move towards an era of pension consolidation, members will have to be careful not to accidentally throw away protected rights to access a pension at age 55.”

That is Steve Webb code flagging to the FCA that any DC to DC transfer activity is going to have to investigate whether the pension pot being transferred has MPRA privileges. I very much hope this isn’t going to be the case but side with Sir Steve in betting that it will.

And this has the potential to complicate all the small pot consolidation plans being considered by Andy Cheseldine’s small pots working group. Block transfers of pots (small or otherwise) will lead to protected status being granted to some transfers , meaning that master trusts and other large schemes will have another two classes of members – those with MNPAs of 55 and those with 57. With further increases to the MNPA in the pipeline, scheme administration is going to get even more complex, expensive and prone to mistakes.

Still time to set this nutty Treasury policy right

Are we really saying that the ability to protect an NMPA of 55 depends upon how a pension lawyer drafted a set of rules five, 10 or 15 years ago?

AJ Bell’s Rachael Vahey, writing in Money Marketing points out that protected pensions could stymie a number of Government initiatives aimed at improving member outcomes.  Apart from the spanner it throws in the small pot consolidation initiative, it is also creates another complexity for the pension dashboard’s choice architecture and leaves those without a financial adviser with another barrier to consolidating pots. It makes the “value for money” calculation that goes on in people’s heads even more complex and could reinforce the strong prejudice people have against pensions.

Far from protecting people, this additional complexity has the capacity to drive people towards cashing out their pensions. This may be helpful from the viewpoint of those who guard the public purse but it’s precisely not what the point of a minimum normal pension  age is.

While Quilter argues for the increase in MNPA be scrapped, Jon Greer- its head of retirement policy has a  more pragmatic plan B, telling the FT it would “arguably be better” to move everyone to 57 and do away with any proposed transitional protections, should the government be intent on upping the age.

The Government has the capacity to introduce a statutory override on badly drafted scheme rules. Writing in 55 rather than “minimum normal pension age” is bad drafting.

If this causes pain for providers it is up to them to pass on that pain to their lawyers. The alternative is to pass the pain on to those who deserve it least – the savers and those who want to spend their savings wisely.

I will be writing to the Treasury on this today as the consultation ends tomorrow (22nd April).

Acknowledgment

Thanks to Clare Reilly of Pension Bee for help preparing this blog. Her piece on this in New Model Adviser can be read here