Why so complicated?
01 July 2019
This article was featured in the July/August 2019 issue of the magazine.
Ian Neale, director at Aries Insight, explains why and how pensions has become so complicated
Workers and employers pay contributions into pension schemes building funds out of which the schemes pay money to the workers to live on in retirement. What’s complicated about that?
The answer in part is all the rules and regulations that encumber the process. Fifty years ago, however, pensions legislation hardly existed: just 29 pages in the Income & Corporation Taxes Act 1970. Even by 1988 it was still only 57 pages. However, the Inland Revenue (now HM Revenue & Customs (HMRC)) enjoyed wide discretion in interpretation, and its published guidance was already becoming very complicated.
Tax legislation sets the ceiling; social security law the floor. Prior to the Social Security Act 1973 that introduced preservation, there was no protection for pensions. The remorseless deluge since was fuelled by contracting-out; the clean-up operation – reconciliation of and now equalisation for guaranteed minimum pensions – will go on for years.
The ‘Maxwell’ scandal triggered the massive Pensions Act 1995, introducing sweeping new controls with a regulator (the Occupational Pensions Regulatory Authority), multiplying trustees’ responsibilities. The Welfare Reform and Pensions Act 1999 introduced stakeholder pensions and pension sharing on divorce – arguably the most spectacularly tangled web of legislation ever woven. Pensions legislation twenty years ago had grown to 2,000 pages. Who could remember it all?
Then in December 2002 the government published proposals for a genuinely radical simplification of pensions tax legislation. This result was 180 pages in the Finance Act 2004: everything was codified; gone were uncertainty and inconsistency. Pensions were going to run on rails.
Although the real world is not amenable to being codified in a rigid framework of prescriptive laws, politicians were sold on the idea. Nevertheless, pleas for reasonable exceptions multiplied. Every situation had to be covered by law, because HMRC discretion was a thing of the past. Together with several thousand pages of official guidance the result was an administrator’s nightmare.
In just the last fifteen years we have suffered 21 finance acts, 7 pensions and pension schemes acts and over 1,000 new sets of regulations affecting pensions. One experienced pensions lawyer has estimated the number of pages of pensions legislation in force now at around 160,000.
It’s not just the sheer volume we have to cope with: with modern IT that might be manageable if it was not being amended constantly, with so much conditionality attached, or if it was not written in such a convoluted style.
...consequently, in pensions ‘the past is never history’...
The prevailing Treasury belief that pensions are uniquely (and very generously) tax-privileged (rather than tax-deferred) arrangements has led to ever-more frequent tinkering. A particularly egregious example of legislative incontinence leading to unnecessary and indeed unworkable legislation is the ‘tapered annual allowance’ introduced from 2016–17.
Trust in pensions is in short supply. Regulators behave more like police than facilitators, and constantly demand new powers. The cost of compliance is a serious burden. A blame culture in which fault has to be penalised and compensated creates a desire on the part of industry for certainty in detailed regulations, in preference to the unpredictable whim of regulators who might be tempted to use hindsight.
There are other reasons, of course. Pensions are property rights, politically very difficult to abrogate once accrued; so, at every tightening of the screw, a new layer of protections is required. New rules generally cannot be applied retrospectively; consequently, in pensions ‘the past is never history’.
The voluntary nature of UK pension provision up to the arrival of auto-enrolment in 2012 is another reason for the enduring complexity. Considerable scope for sponsoring employers to make their own scheme rules in the past has led to infinite variability, and consequently myriad combinations of circumstances, some impossible to anticipate.
Pensions are a long-term proposition: some schemes have existed for almost a century. It seems axiomatic that the governing legislation ought to be similarly based on a long-term political consensus. Everyone might then have more confidence in saving for the future. But we do need more certainty if we are to agree to lock away our money until at least we reach age 55.
That magical moment is the earliest most people are allowed to break open their money purchase pension pots, since the ‘pension freedom’ stable door was flung open by the chancellor of the exchequer George Osborne five years ago. Regulators are still getting to grips with what happened, including rounding up the scammers who spotted people with huge amounts of money looking for some more attractive alternative to annuity purchase.
This year the Money and Pensions Service has been launched, with a remit to get us all actively engaged with saving for retirement. A good start to rebuilding the necessary trust in pensions would be legislation we can all understand. Indeed less prescription, more discretion and a broad-brush approach all round might be better.