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The opdu Report - Issue 23, November 2007 It has always struck me that the less you know about a subject the easier it is to make or suggest changes to it. Pensions are a classic example of that. Someone with no experience of the system might start from the basis that a pension scheme is nothing more or less than a form of savings vehicle in which you put money away during your working years to give yourself an income when you retire. And they would be right to see it like that in conceptual terms, hardly rocket science and something anybody of average intelligence could comprehend. So surely all the twists and turns of our elaborate system could be straightened out and a basic system put into being in its place – couldn’t they? I remember when I first came into pensions some ten years ago that is exactly how I felt and said so whenever the opportunity arose. But a little knowledge can be a dangerous thing. With much more experience it is very apparent to me that pensions are different from most other types of savings vehicles and some degree of complexity is probably inevitable, particularly if you are to protect people’s accrued rights over a timescale of perhaps 40 years. That is not to say I believe our present pensions system cannot be simplified at all – of course it can, particularly in relation to state benefits. Does anybody really understand how S2P is calculated and what exactly is involved in moving it forward from a largely earnings related pension to a flat rate one from the year 2030? But, in a sense it is the case that most changes in the rules that are designed to simplify actually complicate. Whereas previously there was one complex rule you now have two – the old complicated one and the new simplified one. Simplification frequently only works when the change is applied retrospectively and then you come right up against the problem of hitting accrued rights or, if the change works the other way round, cost considerations in backdating rights. “Getting out of complexity is a complex operation” To most people outside of pensions, the recent deregulatory review could have seemed a bit of a damp squid. It was certainly not the sort of radical change that many had been calling for, but as the reviewers found you are entering an area for which there is no silver bullet. Getting out of complexity is a complex operation and there are many other issues to take into account. So are we stuck with what the Turner Commission described as the “most complex pension system in the world”? I sincerely hope not. There is much that can be done and as a starting point we should at least address the complexity of the language of pensions. There is just too much jargon placed before scheme members and others enquiring about pension rules. For example, do we have to call the cashing in of a small pension a “trivial commutation”? It is completely unnecessary if not deliberately designed to confuse. “The Open Market Option is an issue that probably costs individuals thousands of pounds in foregone pension rights”. And what about the vital right to check out the best deal you can get from different pension annuity providers – the so called “Open Market Option”? We in the Pensions Advisory Service have been tasked by the Government to produce a web based tool to help people better understand and use the option to their best advantage. This is an issue that probably costs individuals thousands of pounds in foregone pension rights every year and is therefore a priority for action. But if people do not understand the meaning of the term “Open Market Option” – and in our experience many do not – what hope have they got of getting this right unaided? There are many other things I am sure we can all do to make pensions less impenetrable for the consumer. Simplifying pensions should be our aim at all times, but it is probably a mistake to expect too much at the stage we are now at. There is a lot of history and a lot of regulation standing in the way. Malcolm McLean OBE
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