The consultation on the proposals for pensions announced in the Budget, and contained in yesterday’s Queen’s Speech, ends on 11 June. I have set out my response below. I hope that it will sufficiently incense one or two more people into making their views heard, before the chance disappears.
The government welcomes views on its proposed approach to reforming the pensions tax framework.
1 Should a statutory override be put in place to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility?
Yes. Otherwise you are just writing cheques to pensions lawyers.
2 How could the government design the new system such that it enables innovation in the retirement income market?
Reform preservation rules, the TPR code on funding, HMRC rules and the PPF levy framework so as not to penalise different arrangements across the defined ambition spectrum. Remove the annual allowance, controlling the level of tax relief offered through the lifetime allowance only (I got this the wrong way round in my first draft – the annual allowance assumes regular incomes, many people now have incomes which bounce up and down alarmingly from year to year. It is also ridiculously cumbersome to administer).
3 Do you agree that the age at which private pension wealth can be accessed should rise alongside the State Pension age?
No. There is already an issue around healthy life expectancy and the state pension age in some regions of the UK.
4 Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief?
Yes. The arrangements need simplification.
5 Should the minimum pension age be increased further, for example so that it is five years below State Pension age?
No (see answer to 3).
The government welcomes views on its proposed approach to supporting consumers in making retirement choices.
6 Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should pension providers be required to outsource delivery of independent guidance to a trusted third party?
There needs to be more clarity about the charges which can be levied for guidance or if it is to be remunerated in some other way.
7 Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust-based pension schemes?
No. In most cases the scheme members have not chosen to receive lower levels of service.
8 What more can be done to ensure that guidance is available at key decision points during retirement?
I think there needs to be a right (but not requirement) to it for everyone at 50, 60, 70 and 80 as a minimum, at an agreed national nominal charge. I imagine that the £20 million available to develop resources for this will need to be increased significantly to make an impact on the quality of guidance materials provided.
The government would welcome views on the options outlined in point 5.15, including their likely complexity, and the burdens they might place on scheme sponsors and HMRC.
9 Should the government continue to allow private sector defined benefit to defined contribution transfers and if so, in which circumstances?
Yes. In all circumstances.
10 How should the government assess the risks associated with allowing private sector defined benefit schemes to transfer to defined contribution under the proposed tax system?
The reasons the Government have advanced for the changes to DC are equally compelling when applied to DB:
1. There is a lack of choice for people at retirement, which has become more of an urgent concern now that auto enrolment is boosting DC membership. This is even more the case for DB members who are already numerous (although getting less so daily), as their only choices are how much cash to take up to the 25% tax free limit and (up to a point) when to retire.
2. Current regulations deter innovation. This is, of course, why defined ambition as an idea has been so slow to get off the ground.
3. Restrictions on cash commutation imply a lack of trust of members to be able to decide how they spend their savings.
4. The concern that the annuity market has not maximised income for scheme members. This is mirrored by the high cost of de-risking via bulk annuities, which is the ultimate “flight path” for most DB pension schemes, and which many argue has resulted in a big drag on the growth of UK PLC.
All that would be required to extend the proposed freedoms would be to allow DB members to commute as much of their benefits at retirement, whether for cash or income drawdown, as they wanted, with the rest taken as pension as now. This could be applied to private and public sector schemes and would, I believe, at a stroke head off the rush to transfer.
Even if the Government does manage to stop people pouring out of the exits before April next year, this has to be bad policy. To provide more freedom and choice to one group of pensioners and at the same time to remove a longstanding freedom (and one available at the point members joined the schemes) from the other groups is clearly unfair. What is worse, with an election looming, it is likely to be unpopular.
The government would welcome views on any potential impact of the government’s proposals on investment and financial markets.
For private DB schemes, the Government says the decision is “finely balanced”. I think their fears are exaggerated and rather contradict the earlier declaration of trust in pensioners to make appropriate decisions about their retirement – after all appropriate investment in support of regular income in retirement (which would presumably be recommended by the “guaranteed guidance” to be offered to DC members) should not differ markedly from the equivalent investments in DB schemes. Whether DB schemes invest on a longer-term basis than individuals is, as the Kay Review made clear, uncertain.
The level of the Government’s concern about financial markets rather makes it look as if individuals can be trusted to look after themselves, with a slightly bigger safety net and a bit of advice, but financial markets cannot. This cannot be right.