Time to put the payroll back into pensions?
12 March 2018
This article was featured in the April 2018 issue of the magazine.
Henry Tapper, director of First Actuarial, argues it’s time to upgrade our pension system
Have you been watching recent television messages from the Department for Work and Pensions (DWP), that ask you to get to know your workplace pension? I want to know what bit of my workplace pension is the ‘pension’, as the dictionary describes a workplace pension as a “regular payment made during someone’s retirement from an investment fund to which that person or employer has contributed during their working life”.
Until April 2015, a workplace pension had to be exchanged for an annuity unless you were pension rich (or very brave). Now there is no such requirement, I can find nothing in my workplace pension booklet that suggests I’m in line for a pension.
Could this be the biggest pension mis-sale of the lot? I’ve a good mind to write to Guy Opperman, the current pensions minister and ask him for some guidance.
For some time, I’ve been worrying about how I will manage my pension pot into a regular payment for the rest of my days. I really want to upgrade my pot for a pension, but I don’t want to buy an annuity that, like everybody else, I see as poor value, inflexible and bad news if I die early.
Ideally, I’d like to give my pot to someone who can pay me a pension and – if I really needed it – give me a pot back. Until recently, I thought that just a pipedream, but now I’m not so sure. It now looks likely that the 142,000 postal workers who have settled their differences and agreed a pension solution, will get the right to upgrade their defined contribution (DC) plan so that they get a pot and a pension.
...we should accept that the tax relief is being wasted...
We’ve always been able to get a quarter of our savings as a tax-free cash sum (pot) but Royal Mail’s plan is to collect all the rest of the workplace pension savings and pay out pensions to people in fair shares. That means that those who have saved hardest and longest will get pensions that are bigger than those who haven’t. But the pension people will get will be based on the size of the great big pot and not on a guarantee from Royal Mail. (This is known as a ‘collective DC’ plan.)
If it’s possible for 142,000 postal workers to club together and have a pension scheme rather than a lot of little pots, couldn’t it be possible for the rest of us? By the ‘rest of us’, I mean nearly all of us. Apart from those of us working in the public sector, almost everyone has a workplace pension, and everyone has some kind of ‘non-workplace pension’. The Financial Conduct Authority published a paper (http://bit.ly/2EG8B40) early in February asking what we should be doing about the £400 billion knocking about in self invested personal pensions (SIPPs), stakeholder pensions, retirement annuity contracts and personal pensions – none of which has anything to do with work.
And the DWP and the Pensions Regulator continue to fret about the security of our workplace pensions, not least because freedom and choice could lead them being over- or underspent in retirement and not doing what they were given tax-relief to do – provide people with a wage on top of the state pension.
The rest of us could do with a default way to spend our pots – which brings me to the title of this piece. If we really believe that tax relief is granted so that workplace pensions can provide ‘deferred pay’, we should accept that the tax relief is being wasted. It is being wasted by the rich who are using SIPPs as wealth preservation vehicles (e.g. inheritance tax avoidance) and by the poor who are cashing out their savings and buying second hand Lamborghinis.
If we are serious about upgrading our pension system, we should start with our workplace and workplace tax-incentivised savings and think how we can turn them back into a ‘wage for life’.
I hope that the payroll industry, which has a good commercial reason for seeing this happen, will be prominent in calling for this to happen. Payroll has the capacity to regulate the way in which we spend our savings – it has been operating pensioner payrolls for decades and been doing a very good job of doing so.
The rest of us have need of getting onto a pension payroll and I hope that once the Royal Mail has got its new scheme up and running, other large companies will look to upgrade their DC schemes so that they pay a pension not a pot. And I hope that organisations, whether for profit or not for profit, will start thinking of ways to organise multi-employer, or even retail schemes – which will allow small- to medium-size enterprises and private individuals to upgrade their DC pots to a wage for life scheme.