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Pensions - the worst and best since 1971
Adrian Waddingham looks back over the worst and best in pensions since 1971.
I first met pensions schemes in 1971, fresh out of university. A busy year, 1971, but the most abiding thought looking back is how every year since then was busier than the preceding year! Pensions life has been anything but quiet over the last three decades.
On deciding the best and worst of pensions since then, I have given careful thought to my criterion. There have been many changes that have been "good": for example member-nominated trustees. Even before they were introduced, I had never known an employer regret involving members in pension scheme trusteeship. However, such changes did make pension plans more complicated, which is a bad thing. I have concluded that the test to apply in deciding whether a change was good or bad, is whether it encouraged a sponsor to provide final salary pension benefits. "Good" plans which cover a decreasing proportion of the private sector will do little for the pensions wealth of the country.
The bad first. After careful thought, my results, in reverse order, are third: The Goode Report. There was public anxiety about pension schemes following the Maxwell fiasco, but the Goode Committee, and the legislators that followed, could not see the wood for the trees. Maxwell stole the assets of a pension fund. Goode did nothing to address this, but instead concerned itself with other issues. We in Britain can be proud that, on a voluntary basis, employers have accumulated £800 billion worth of pensions savings. The envy of Europe! Against that background it was perverse of legislators to introduce a Minimum Funding Requirement. One did not have to be an actuary to foresee that this heavy-handed intervention was only going to damage the growth of good pension schemes. To be fair to Goode, they did put a wise warning in their report:
"The administrative burdens imposed on employers and scheme administrators should wherever possible be reduced, and flexibility increased, through simplification of the law and its administration"
Unfortunately the legislators missed this paragraph.
The second worst move was the introduction of SERPS. Again, a well-intentioned move by Barbara Castle, but it was always inappropriate for the State to provide salary-related benefits: all the more so now as politicians of all parties accept that we cannot afford a decent basic retirement pension. Until we get an adequate basic pension we should not be concerned with SERPS, or indeed S2P in due course.
In first place, as the worst single change affecting pension schemes, has to be the Conservatives' action in 1988 ending the right of employers to make membership of their scheme compulsory for employees. Many of the bad things that happened thereafter, including the pensions mis-selling scandal, were a direct consequence of that misguided change. It is not too late to correct it.
I found it more difficult to consider the best thing that has happened to pension schemes. It is sad that I have been busier recently winding-up pension schemes rather than establishing them. No doubt "preservation" of pensions for leavers was a good thing. But my prize goes to the Inland Revenue. It is encouraging that there is still a helpful tax regime for approved retirement savings. It has creaked and groaned a bit over the years (the July 1997 change abolishing reclaim of tax deducted at source was a terrible mistake; Gordon Brown caused serious harm to pension schemes). PSO regulations are still unnecessarily complicated, and long-term pensions still deserve a better tax regime than ISAs, but at least tax encouragement remains. Without a tax-efficient climate there would be no pension schemes at all. So the best thing that still happens to approved schemes is that the Inland Revenue, through the Pension Schemes Office, continue to give them support. Now let's make it simpler!
Adrian Waddingham, October 2000.