The opdu Report - Issue 22, May 2007

Bulletin Board
Pensions – The Last Ten years
Malcolm McLean OBE

Looking back over the last ten years (a timeframe which coincides almost exactly with my tenure as Chief Executive of TPAS), it is very apparent that we have lived through a period of considerable change in the landscape of pensions, by no means all of it for the better.

In fact, some would say this has been a decade of decline in a number of respects with occupational pension schemes (particularly final salary ones) in retreat and less and less people seemingly willing to put their trust in pensions and the industry that provides them.

Ten years ago the pre-occupying issue for final salary schemes was surpluses and how to dispose of them. Now it is deficits and whether employers can afford to run these types of schemes at all

The Chancellor’s withdrawal of tax relief on dividends in his first budget in 1997 clearly did not help the subsequent funding position of many schemes but there were other factors as well which added to the problems.

The drive for greater security following the Maxwell scandal didn’t quite work out as the Government might have hoped in all respects. The Minimum Funding Requirement (MFR) in some ways achieved the opposite of what was really intended, did not enhance funding levels and became to be seen as a maximum rather than a minimum standard. OPRA lacked the powers it needed to be an effective regulator and the spectre of thousands of people losing their pensions in the wake of company insolvencies played havoc with the notion the pension schemes were to any degree secure.

This eventually led to the setting up of two new bodies -an industry financed lifeboat fund to compensate future victims (The Pensions Protection Fund (PPF)) and a new Pensions Regulator (TPR) with much greater powers than their predecessor (the now disbanded OPRA) to encourage and enforce better funding of schemes. These came into being in April 2005 and appear to have had a calming effect so far as the future is concerned. The government help that has been offered to past victims in the shape of the Financial Assistance Scheme has, however, by no means been so well received and, despite the injection of substantial extra injections of money remains, the subject of an on-going and vociferous campaign for greater justice.

We have also had a Pensions Commission to contemplate the longer term problems of an ageing society and the fact that as a country it was believed we were not saving enough for our old age. Specifically the Commission was asked to look at the case for introducing greater compulsion into the system. Its recommendations for a National Pensions Savings Scheme (NPSS) and other reforms to state pensions have been largely accepted by the Government who is now busily producing yet more legislation to give effect to the changes.

Looking forward from 2007 it would be a brave person to conclude that everything was now sorted and there would be no need for any further legislation or other corrective measures to a pensions system that we all want to succeed notwithstanding the many and varied problems within our society as a whole.

So what will be the position in 2017?  It is incredibly difficult to say. Assuming the population mix has not been substantially altered by war or pestilence (? bird flu), the numbers of pensioners and their ratio to workers will be noticeably on the rise. This could have a double-edged effect. It may cause the Government of the day to start to look again at its ability to afford
its commitments to, for example, maintaining the link to earnings for the state pension (assuming this ever gets off the ground in the first place). On the other hand politically it will be impossible to set aside the views and wishes of a large and growing segment of the electorate as the impact of “grey power” takes hold.

In terms of private pension provision, it is difficult to imagine that the decline in final salary schemes will have been arrested and it may well be that by 2017 there will be few such schemes remaining in the private sector. The Government of the day will doubtless be contemplating its first quinquenniel review of the Personal Accounts system and wondering whether it needs to recommission Lord Turner to look again at the case for full scale compulsion.

I would expect my own organisation to still be in existence but to be mainly occupied with providing generic financial advice to entrants into Personal Accounts on both the rights and wrongs of staying in/ coming out and as to the fund choices to be made. I suspect (although hope I am wrong) that means testing will still be quite widespread creating difficulties for those on low incomes in deciding whether it will be worth their while to join a pension scheme at all

Finally, if the last ten years has taught us anything it should be that trust and confidence have to be earned – they are not a given. If we can avoid the sorts of mistakes, oversights and scandals that has so bedevilled pensions over the last ten years it may be possible for the public to regain confidence in the system and be more willing to participate in it. Whether that is achievable in the event remains to be seen.

Malcolm McLean OBE
Chief Executive
Pensions Advisory Service
020 7630 2270
Malcolm.Mclean@pensionsadvisoryservice.org.uk
www.opas.org.uk