As part of a series celebrating PP’s silver anniversary, Hope William-Smith asks industry veterans about policy over the past 25 years and what needs to change for the future.
What do you think has been the single most important thing that has happened in pensions over the past 25 years?
Ros Altmann: Establishing the Pension Protection Fund (PPF) and new regulatory regime which has protected pensions, but also encouraged more emphasis on risk management, entailing a signiﬁcant move away from equities and increasing emphasis on ﬁxed income investing.
Susan Andrews: The Pensions Act 1995, which followed the Maxwell fraud. I believe it was the start of a greater focus on pensions and the professionalisation of the industry as a whole, leading to better governance and oversight. It eﬀectively moved pensions up the agenda for sponsors as well as regulators and brought greater protection for members (through section 67, which protected those rights already accrued).
Anthony Arter: Auto-enrolment (AE) - ensuring individuals (and their employers) take steps to plan for retirement and encouraging the public to learn about pensions and save more in a structured way.
Lesley Carline: The Pensions Act 1995 has to be a major milestone for our industry. There are still a few in our industry who remember Maxwell and the ensuing Goode Report's recommendation which led to the act. It is so important because it set the foundations for the governance framework for pensions as it is today. I still have nightmares remembering the ten trustee duties in case they came up in my Pensions Management Institute exams. The act saw the separation of the scheme's assets from those of the company and it set the standards for trustees to adhere to, without which we wouldn't be in such a good place and it would still be a bit wild west! For our NextGen counterparts, if they looked at pensions pre-1995, they would be shocked at how lax the regulations were and how we relied upon good people with integrity doing their best without much guidance.
Jenny Condron: The PPF - as a lifeboat it has provided pensions to those who might otherwise have lost a career's worth of pension saving. AE follows close on its heels!
Michelle Cracknell: The shift of responsibility from the state and the employer to the individual. It was not done with the transparency or support mechanisms.
Emma Douglas: AE
Ray Martin: The Pensions Act 1995, which among other things made what were discretionary pension increases a guarantee and introduced the ﬁrst requirement to fund schemes to a certain level.
Malcolm McLean: The setting up of the PPF to protect members of ﬁnal salary type schemes where the employer had become insolvent and the pension scheme could not aﬀord to pay members' beneﬁts on wind-up. The PPF not only provides protection and reassurance to members, it helps restore credibility to a valuable type of pension provision which had previously been described as the gold standard of pension schemes, but was fast becoming known as a very risky investment where you could lose most or even all of your hard-earned pension saving should the employer go out of business.
Hugh Nolan: AE
Ian Pittaway: The steady shift from a collective assumption of risk to the individual bearing all of the pensions and investment risk. We had a good, eﬀective system but politicians interfering, and ever-improving mortality, hastened the transition - although ﬁnal salary schemes are not going entirely quietly and perhaps collective deﬁned contribution (CDC) may in time take us back to the collective.
Anna Rogers: In deﬁned beneﬁt (DB) pensions, the PPF, but taking a wider view it would have to be AE.
Margaret Snowdon: It is diﬃcult to come up with only one thing as there have been many changes. The biggest has been the popularisation of bulk de-risking of DB schemes, where schemes have been able to buyout sections of a scheme to insure the risk.
Henry Tapper: The Young Report, which heralded the PPF. The PPF is the unsung success story of the past 25 years and is now a model for pension lifeboats around the world. Without it, British pensions would be in a poor state indeed.
Kevin Wesbroom: AE. In a world where state provision will continue to decline, private provision will be essential.
What has been the single most damaging thing that has happened in pensions over the past 25 years?
Ros Altmann: Quantitative easing which, combined with section 75 of the Pensions Act 1995, has artiﬁcially inﬂated pension liabilities and prevented any adjustments to ongoing costs as pensions have become ever more expensive to provide and have become increasingly impossible to match with any investments, while bond maturities do not match pension timescales and therefore entail rollover risks. Quantitative easing has made annuity costs for section 75 buyout punitive for many employers and redirected corporate resources away from the business.
Susan Andrews: The decline of DB schemes, shifting the risk for creating adequate retirement income to employees. The slide away from DB schemes was fuelled by successive governments tinkering with regulation. Penalising surpluses in schemes during the good years; removing tax relief on pension fund investment earnings; and the volume and complexity of pensions regulation have all served as a disincentive to oﬀer DB pensions.
Anthony Arter: The shift away from DB schemes which reduces certainty for members and passes the risk to the individual.
Lesley Carline: Gordon Brown's raid of pension funds. I don't think we will ever know the true cost to pensions of his actions in withdrawing tax relief on investments. It is a potential warning to government of decisions made in times of surplus having enormous impact particularly when times are lean. There was a lot to admire about the man, but this action wasn't one of them.
Jenny Condron: Pension taxation - layer upon layer of complexity that is impossible to understand, far less to administer, and which acts as a potential barrier to making provision for your retirement.
Michelle Cracknell: The lack of preparedness of individuals in ensuring that they have adequate income in retirement.
Emma Douglas: Tax changes
Ray Martin: The Pensions Act 1995 as per my comments above. The Social Security Act 1985 was equally damaging which brought the introduction of compulsory revaluation of early leavers beneﬁts (when with hindsight all that was needed to protect early leavers was a non-discrimination law to stop discretionary increases from being given to pensioners and not deferred pensioners) and the abolition of compulsory pension scheme membership.
Malcolm McLean: I think the introduction of pension freedoms was probably a mistake - certainly in the way they were conceived and brought in with seemingly undue haste. The issue at the time was primarily about the eﬀective requirement to use at least three-quarters of your deﬁned contribution (DC) pension pot to buy an often very poor value annuity. That was what most consumers were complaining about and what many lobbyists wanted to change.
Hugh Nolan: Over-regulation of DB beneﬁts.
Ian Pittaway: Capping senior executives' pension beneﬁts so they ceased to have an interest in the well-being of the whole pensions system. Enlightened self-interest was a powerful tool for wider good.
Anna Rogers: So many to choose from! Paradoxically, the debt on the employer - when solvent employers could walk away, they didn't, and being tougher on them has had a terrible generational impact. DB pensions are what most people want and need.
Margaret Snowdon: There has been a lot of damage by complicating pensions, but I think the single biggest thing was introducing pension freedoms without support for members and without low-risk alternatives. It heralded a new phase of pension scamming.
Henry Tapper: The Pensions Act 1995 marked the beginning of the end for DB occupational pension schemes. The Goode Report that prompted it heralded the minimum funding requirement (MFR) which required sponsoring ﬁrms to focus on meeting the narrow requirements of the MFR, rather than on ensuring that the scheme was appropriately funded.
Kevin Wesbroom: The introduction of pension freedoms, breaking the link between pension saving and retirement, without suﬃcient provision for quality advice and protection against scams.
If you could change just one thing about pensions to make it ﬁt for the next 25 years, what would it be?
Ros Altmann: I would ensure people understand how pensions work and help them use this money to plan for later life income in their 80s and 90s, not just in their 50s and 60s. This would mean including consideration of increased costs of social care in later life, so that pensions are not just about a steady stream of income for ever, but have ﬂexibility to cater for the ‘U' shaped or ‘J' shaped income needs curve that many people will face. Pensions are fantastic products and unquestionably the tax regime makes them the best way to save for later life for almost everyone - the tax rules now mean people should not be frightened of keeping money in their pension fund into their later years, because it passes on tax free, unlike their houses or ISAs.
Susan Andrews: Education about pensions and ﬁnancial matters more generally. Many consumers do not understand pensions and the importance of saving over a working life. We all encounter ﬁnancial challenges from loans (including mortgages) to savings and interest. The problem for pensions is the true value of mindful long-term pensions savings is often realised too late to be able to do anything meaningful about it.
Anthony Arter: Replace the DB and career average schemes still operating with a simple basic DB/career average scheme based on a percentage of a members' salary but capped at a sensible level and without the expensive and complicated extras involving ill health, widows beneﬁts etc. This would give members a clear indication of their entitlement and be more aﬀordable to administer, meaning fewer individuals would be at risk of having insuﬃcient income on retirement and, perhaps enable the existing schemes to continue rather than be replaced with DC arrangements where the members take on all of the investment risk.
Lesley Carline: The current tax regime, and I'm not talking about tinkering around the edges like the current consultation is looking to do. It needs to be a back to basics review across all types of pension arrangements. We live in a mixed economy where the state uses ﬁscal policy to encourage economic growth while looking to distribute the wealth more evenly. The pensions tax regime doesn't reﬂect that philosophy and favours the wealthy at the expense of the lower paid. I still believe in tax relief but it just needs to be reshaped, which will help with a fairer tax regime.
Jenny Condron: Simpliﬁcation! Members don't understand their pensions and it costs sponsors a huge amount to run their schemes - we must seize the GMP equalisation opportunity to convert and simplify pensions for the beneﬁt of all stakeholders.
Michelle Cracknell: Stopping the pensions industry talking about engagement. As an industry, we need to be more engaging and that will help people understand the importance of planning for their retirement.
Emma Douglas: ESG investing and meeting decarbonisation targets become the norm.
Ray Martin: Increase compulsory contributions to around 15% of earnings (10% from employer, 5% from employee or 7.5% each), and apply to all employees for earnings above the lower earnings limit.
Malcolm McLean: I would want to move to a much simpler system which the ordinary man and woman on the street can relate to, with rules that obviate the need for government tinkering and can be expressed and understood for the most part in simple everyday language. If that sounds so much pie in the sky let me say things don't have to be the way they are.
Hugh Nolan: I would plug the gaps in AE, including making it compulsory.
Ian Pittaway: Give me a magic wand and I would create a pensions system free of regulation and red tape which every member would understand and buy into.
Anna Rogers: Find a way to make CDC work.
Margaret Snowdon: Simplify, simplify, simplify. I know that is three words, but it is so important that we standardise scheme beneﬁts at fair value so that they can be easier to understand and manage.
Henry Tapper: I would require DC pensions to default into CDC arrangements when a saver starts spending the pot. This would leave the investment pathways as selfselect options and mean DC saving could be called pension saving again.
Kevin Wesbroom: Encourage (through the intelligent, focused, use of the tax system) a return to workplace schemes that give some element of DB-like beneﬁts.