1988 and all that

Neil Copeland

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1988. Lawrie Sanchez scored the winner as the Wimbledon Crazy Gang beat the then League Champions Liverpool in the FA Cup final, Phil Collins topped the charts with A Groovy Kind of Love and teenage boys everywhere were confused by their adolescent hormones generating an unhealthy interest in a cartoon Rabbit called Jessica. It was indeed the best of times and it was indeed the worst of times.

The Tories were in power, then as now, and believed in individual freedom and individual choice. You could choose to buy your council house, choose to get on your bike and, thanks to a reform introduced that year, choose not to join your employers pension scheme and instead take out a bright new shiny personal pension.

Up until 1988 employers could make it a condition of employment that employees joined the company pension scheme and many employers did just that. The new legislation effectively prohibited this benign compulsion. At a stroke the Government freed people from the collectivist tyranny that was a good company pension scheme.

The problem with choice is that, as we have often observed, if you give people choice they invariably make the wrong one. Where once inertia had worked to ensure that people enjoyed the benefits of a company pension scheme it now worked to ensure they didn’t.

And what of the shiny new personal pensions? Salesmen did what salesmen do when given a new commission generating product. They sold it. And marketing teams produced glossy brochures to explain why if you compounded things up at 20% per annum you got a very big number – a much bigger number than you would ever see from a company pension scheme. The fact that comparing these two numbers was like comparing apples with the least appley thing that you can imagine in the universe, was overlooked.

Obviously I’m simplifying and exaggerating for effect, but the introduction of choice explains in part why we have only 33 per cent of private sector employees who are members of a workplace pension scheme, according to the 2011 Annual Survey of Hours and Earnings. Which is, frankly, a shocking statistic.

Clearly this is a bad thing for society (this assumes that you don’t subscribe to that other view espoused in the 80’s that there is no such thing as society) and something must be done. 

Now, people don’t like pensions, don’t see the value of pensions and don’t trust pension advisers, which may be terribly unfair of them but, given many peoples experience over the past 30 years, we have to concede that it is at least understandable.

But I find most people, if you can engage them in a sensible conversation, agree that saving for retirement is a good idea, if not a priority in the current climate.

The honest approach to this problem would be for politicians to say to people, look, the current level of state pension is rubbish , so we’re going to increase income tax by 4p in the pound and employer National Insurance contributions by 3p in the pound and provide you with a decent level of base income in retirement. Unfortunately honesty and winning elections don’t go hand in hand, so that’s not going to happen.

Instead the pensions tax is being introduced by means of a compulsory pension contribution levied on employees and employers. Except its not. Compulsory, that is. Instead we have created a complex system of qualification, staged implementation and opt-out.

The HR administrative burden on a large employer with a flexible workforce is horrendous. Still, lawyers, consultants and providers will make a decent turn on advising on the inevitable mess caused.  I’m guessing that this policy’s  real objective is part of the stimulus for growth in the wider economy. It certainly can’t be about delivering people a decent income in retirement.

Why is nobody saying what we all know to be true? A total of 8% employee and employer contributions is likely to lead to disappointing outcomes and the 1% employer and 1% employee (including tax relief!) minimum contributions that will apply from 1 October 2012 to 30 September 2016 are just ridiculous and pathetic. And, no, “it’s a start” is not an adequate response to this latter point.

For years we at Spence & Partners have been calling for a proper debate on future national pension provision and I’m afraid the lack of such a proper debate has landed us with the current auto-enrolment proposals. 

Is compulsory pension provision the right way forward? If the answer is yes then lets have proper compulsion for everyone rather than the current misbegotten halfway house. If the answer is no then how do we help people make the transition from agreeing that saving for retirement is a good idea to actually doing something about it?

In one respect 2012 feels a lot like 1988. If a can continue to misquote Dickens, it is the age of wisdom, it is the age of foolishness.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.