Our politicians don’t seem interested in making pensions better

The pension system has undergone revolutionary change in the past decade. But with a General Election looming, neither Tories nor Labour have a vision for where it goes next, writes editor Edmund Greaves.

What a difference a week makes. When I wrote my weekly column last week, all was more or less business as usual. One week later, and we’re in the depths of a General Election campaign.

We have had a couple of pensions-related announcements. But so far, I have seen little to suggest our politicians have anything intelligent to say about the issue. Or that they even care, other than to offer politicised giveaways to their respective bases.

Firstly the Conservative Party say it will INCREASE the protection of the State Pension triple lock, calling it the ‘triple lock plus’. This is an obvious sop to wavering older Tory voters.

A triple lock plus would increase the income tax personal allowance in line with inflation and state pension increases, supposedly freeing the benefit from ever triggering income tax charges.

It would see pensioners protected from the fiscal drag everyone has recently suffered from income tax band freezes, and which have no credible end in sight. It is also a remarkable return to unfair privileges for politically useful groups which had been largely scrubbed out of the income tax system in the past decade.

For a benefit that is already very heavily protected, this is quite a lot.

Secondly, the Labour Party, has just reaffirmed its commitment to reinstate the pensions Lifetime Allowance – something that has only just been abolished.

Aside from whatever political machinations are at work with this commitment, it is just reckless policymaking to chop and change at such short notice, leaving large numbers of people in the lurch unable to make long-term plans.

They’ve also said they want to find a way to carve out exceptions for NHS workers (read, well-off doctors), something they previously admitted was extremely difficult to do in practice.

It really underpins the short-termist attitude of our political classes in search of cheap triangulations to win voters. It is absolutely no way to manage a system that needs long-term care and attention.

There is so much else we’re not doing to improve the pension system, and which no one seems interested in discussing.

Take for instance, a major flaw in auto enrolment pensions that sees working people collect an extraordinary number of pensions over the course of a career.

I had one such example drawn to my attention by David Henderson, head of pensions at pension tracing app Penny. Speaking to David on the Mouthy Money podcast, he revealed that one client of Penny had used their service and found 11 lost pensions. 11!

The client, called Gary, had an unusual career in that he contracted into pharmaceutical firms often for short periods of time. But each new job he’d get a new pension and ended up with a mess of pots that he had lost track of.

This is something of an extreme example, but David told me that Gary isn’t even the Penny client with the record number of pots!

So what’s the problem here?

Back in the day we had what were called final salary pensions or ‘defined benefit’. These were pensions that you’d pay into a fixed amount and then receive valuable guaranteed pension income and benefits for life when you retired. These kinds of pensions went hand in hand with the way that people used to work – often staying with one company (or indeed, for the Government) for their entire working lives.

Such pensions were extremely valuable – so valuable that companies (and the Government) found them too expensive to sustain. There is, I believe, just one company in the FTSE 100 that still has such a scheme open, and most Government versions have also fallen by the wayside.

In their place came ‘defined contribution’ or DC pensions. These amount only to what you put into them (typically a minimum of 5% of your salary), with employers obliged to contribute a minimum amount of around 3% of your total salary.

These came hand in hand with auto enrolment, a change to the pension system that saw workers automatically included in company pensions schemes when they started a new job.

But the crux of the problem is that we have a much higher tendency to move jobs than in the past – which leads to everyone having a mess of pension pots, which often end up forgotten or lost.

Solutions, but in the bin

The Government has already suggested a solution to this problem.

In the last Budget, Chancellor Jeremy Hunt announced that the Government would be consulting on the idea of something called ‘pot follows person’ or ‘pot for life’. This is a situation which already exists in Australia, who we have a long-term tendency to follow on pensions policy.

It would make pensions work in the same way a bank account. Instead of getting a new one every time you change job, you get a new one at your first job, then every time you move, you give your new employer the equivalent of a bank account number and sort code, and they just put your contributions straight in there.

This system would simplify the mad proliferation of pots we currently have, but does come with drawbacks.

For one, critics say this would put all the consumer choice onto normal people, who are often not well informed. This could lead to people paying higher charges than necessary or making investment decisions that aren’t right for them.

However, these problems are, for me, an issue of design not overarching aims.

The single biggest problem for all this actually, and the overarching problem with pension policy in general, is the whim of politicians.

The Labour Party (who are likely to be in charge come 5 July) have not made any commitment to this proposed solution. There’s a strong likelihood the whole thing will go in the bin as a new Chancellor comes in with wholly different priorities.

And this is ultimately what is broken about our pensions system. It’s not that we don’t have solutions. It’s that our leaders are fickle and short-termist. Pensions policy is something that needs – like a pension – management over decades.

Otherwise we’ll just end up back where we started (and where we are now) – with an incomplete mess that just generates more problems than it solves.

For more, listen to the latest Mouthy Money podcast episode, where editor Edmund Greaves talks about tracking down lost pensions with David Henderson, head of pensions at Penny.

Photo credit: HM Treasury Flickr.