In her first guest blog Rachel Vahey, Independent Pensions Consultant looks at how pensions have become a political football and injury time is fast approaching
One of the major changes introduced by the current Government is a fixed term parliament lasting five years. As we near the end of the first fixed term, and a general election looms next year, politicians are sensing that time is running out. And many, I suspect, will want to make their mark before time is called on this Government.
Steve Webb, the Pensions Minister, could be one of them. After holding the position of pensions minister for four years now – no mean feat given the swapping around of ministers by previous Governments – Webb seems keen to use whatever precious time he has left to pass final pieces of legislation. But he’s up against the clock.
An ambitious agenda
In his final months as pensions minister, Webb wants to bring in a charge cap for defined contribution schemes; governance committees for defined contribution schemes; a whole new regime for building up pensions called defined ambition which is based on sharing risk differently; a new way of taking pension benefits in retirement which means people can access whatever funds they want whenever they want; and a guarantee to give impartial guidance to help people accessing benefits get information and make the right choices.
This is an ambitious agenda. Even though some of the responsibility for it falls to the Treasury, Webb is still going to have a frantic 11 months.
Different directions of travel?
It feels too rushed for me. I am worried that in our haste we are losing sight of the bigger picture. There doesn’t appear to be a coherent joined-up strategy, and instead some of the planned changes seem to contradict themselves in the direction of travel they are taking.
For example, the defined ambition agenda includes the development of collective defined contribution schemes (or CDCs). These are enormous pooled pension schemes where individuals don’t take on the responsibility of choosing an investment strategy for their pension fund. Instead, the trustees develop an overall strategy for the scheme based on sharing risk amongst members. Members hopefully receive promised benefits, but these could be reduced if the investment reality doesn’t live up to expectations.
CDCs are an interesting idea, and I can see that, given the right circumstances, they may appeal to both employers and members.
They are by a nature a large beast, and the industry needs to develop the massive multi-employer schemes to realise the economies of scale, but also to help the risk sharing amongst members. So, I think they could work, although early signs are employers have little appetite for them.
Under these schemes the members probably won’t fully comprehend the investment strategy adopted by the trustees, and might not even know what the charges are (even though they will be paying for those charges).
But at the same time, Webb and the DWP are pushing on with the development of a charge cap for defined contribution schemes, to come in next April, which means these members will know – to the exact penny – what their charges are and can be reassured they’re not excessive.
I understand the theory that under CDCs schemes economies of scale should mean charges will be low. And therefore – maybe the reasoning goes – CDC members don’t need to worry about them. But surely people should know what they are paying? It seems odd one group of defined contribution customer will, and one group won’t.
New pension freedoms
Taking away the responsibility from members of how pension funds are built up sits at odds with the Government’s new flagship retirement reform. From April next year, people aged 55 and above will have complete responsibility on how they want to spend their retirement fund. But this will mean some tricky decisions, concerning judging investment conditions over, say, a 30 year period, analysing and comparing charges, and making sure their investment can give them a sustainable income until death. Whenever that may be.
So, why do politicians believe people don’t want to and can’t make the investment and financial decisions to build up a pension pot, but can make the – arguably more – complex decisions on how to spend that pot?
Time for an independent commission?
I’m not objecting per se to any of these new developments. It’s more that each new pension policy makes sense when taken in isolation, but when looked at as a whole they contrast with each other. There is no joined-up strategy.
Perhaps it’s time we took the politics out of pensions. Instead of leaving the development of policy to MPs keen to squeeze in as many changes before time runs out, maybe pensions should come under the responsibility of an independent commission, who remains stable, regardless of who is in power. That way we can get more measured long-term decision making.
About the author
|Rachel Vahey is an independent pensions consultant, working with providers and advisers. She has over 20 years’ experience of working in the pensions industry – including technical areas, marketing, and public affairs and policy development – and writes, presents and tweets widely on the subject.Rachel has a keen interest in monitoring, analysing and discussing the ever-changing pensions world. Her motivation is to work with others in the industry, Government and regulators to create the right environment to help people make sure they have enough income to enjoy their retirement, both in building up their retirement pots and spending it in later life.She is a strong supporter of pensions, and believes in fighting so they work in the best possible way for individuals, and for society in general.|