UK Pension Reform – Learn More About the Ch-ch-ch-ch-changes
When I first started in the savings industry on leaving university with a penchant for numbers and some added skills in snooker (I was quite good at spotting angles) the investment and pensions industry was dominated by big 'with profits' insurance companies . Remember them? 1969 it was and life was simple.
Three years later I'd switched to another employer ...another so called mutual insurance society ....boy who thinks up these titles? Yet another that dominated St Andrew Square in Edinburgh. Seen the Square recently? Sad. But back then as I said, life was simple. Savers would take out policies for 40 years or more. Can you imagine that? With profit bonuses were added every year, then "guaranteed " typically every 3 years and if you kept policies going by paying premiums all along the way, these bonuses would be paid out plus (sometimes) an extra bonus they called 'terminal'.
Oh, and by the way, if you stopped payments or cashed up after a few years, you broke the contract so got little back.
My first look at final salary pension schemes
I was given the task of studying a department called pensions documentation to see if we could come up with improvements to their training of new staff. The head of department, a Miss Rose, unfortunately spoke Algebra and bamboozled me inside five minutes with a bewildering explanation of how difficult it all was. "Nonsense" said my boss as I recovered from my utter confusion, "there have hardly been any changes for years". He went on to show me with the simple analogy of a water tank, an inflow pipe and a tap at the bottom, how final salary Schemes worked. I retorted "that can't possibly work!" "Shh..." he replied ..."dinnae tell anybody". It was 1972, and before masses of law changes that helped kill off these schemes.
Where did it all go wrong?
Mutual insurance societies such as Equitable Life, once the darling of the savings media and accountants/lawyers because they were allegedly cheap, are no more. With profits proved to be a busted flush...more like no profits over the last 15 years. And the pensions industry is knackered. All sorts of people are dragged out to blame; salesmen, crap products, overcharging, commissions, big bad Insurance companies and so on. Few people point the finger at the real culprits - our UK Governments over the last 40 years. Let's look at what's happened.
Between 1961 and early 1987 there were 10 changes made to Pensions Law , and only six of them took place between '61 and '83 ... 22 years . One major change took place in my first year as an independent adviser in 1973 ... allowing Director/Owners of Ltd companies to enjoy the pension rights of employee schemes.
Then between 1987 and 1999 inclusive a total of 74 changes were made by Parliament. They were designed to restrict benefits as you'd imagine. A promise was made in March 1987 that anyone in a plan prior to that would be secure in the knowledge no future changes would remove their rights. Aye Right!
Pension reform in the noughties
Between 2000 and April 2006 inclusive, there were...wait for it... a total of 315 changes made! The most outrageous change was what the government called "New Simplified Tax Regime" in April 2006, when in fact retrospective legislation broke all previous promises, even for the pre-1987 folks like me. By introducing this so called 'simplification' which is anything but, our legitimate expectations of benefit were removed. Illegal I said at the time, a belief shared by the UK's Law Lords who threatened to retire immediately as a protest. So they were exempted. As by the way is the Chancellor of the Exchequer and the Prime Minister last time I looked.
So after "simplification" that would be that eh? No chance. From April 2006 until April 2014 another 176 changes have been made, with more broken promises and a decision process for folks with various pension plans collected over the years that's frankly almost impossible (unless you have an experienced independent eye to guide you). Trust me you should check with real experts if you don't want to be short-changed. Even auto enrolment has traps for the unwary.
If in doubt, keep on reforming
And to crown it all in October 2014 yet another 60 page Bill on Pensions Reform sits on our desks. "Wonderful ... Freedom ...Greatest Thing Since sliced Bread "call the media, theorists, academics and others with little savings or knowledge.
What do you think the chances are this government are any different from their predecessors who made 565 changes to Pensions Law since 1987? Changes that in the main have removed benefits and made everything so complicated that you are likely to be short changed UNLESS you talk to folks who act in your best interest and know what's what ...and that's where we come in.
For and on behalf of Alan Steel Asset Management
Authorised and Regulated by the Financial Conduct Authority
Award Winning Investment Advisers