The pension rules that cost you

The government wants intelligent regulations. It would do better to simplify them

March 18, 2021

If you are wondering why you struggle to understand your pension documents, it is not your fault. There are now over 200,000 pages of pensions regulation of one sort or another—and more on its way now that the Pension Schemes Act 2021 has passed. And the rules insist that the scheme has to dump usually impenetrable paper on you.

Shred the paper—what really is going on in the pensions world? If you made it alive through the pandemic, your pensions, whether organised through your insurer, your employer or your self-invested personal pension, might be in reasonable shape. First—and there is no easy way to put this—Covid-19 will have sadly reduced overall liabilities by reducing the ranks of pensioners. Second, the quantitative easing that is bringing interest rates into negative territory (that is, the bank charges you for letting your money stay in the account) improves property and share prices, which many pension plans are invested in. And third, with the government committed to the triple lock (increasing the state pension by the higher of inflation, wage growth or 2.5 per cent), we should be able to afford a decent holiday once we are all released into
the community.

However, inflation may be bubbling underneath the economic volcanoes, and not all pension arrangements are index-linked. The government’s need for tax may at some stage snip a little more off the pension pots of the more financially astute. A small tribe of fraudsters, unconcerned about regulators, is doing its damndest to part you from your pension through pension scams. 

More new rules pressure your pension fund to be ethical. Pension funds used to be an economic force in the land; collectively they owned around 80 per cent of the stock market. Because regulators forced funds to move to fixed income, that share has declined to around 20 per cent, which is why so much of their political power has diminished and their trade association is a shadow of its former self. The government now requires your fund to explore and adopt what are called ESG factors—environmental, social and governance—in its investment decisions. But most pension funds are too small to make much of a difference to the conduct of hydrocarbon or tobacco companies nowadays—and anyway, measuring how green you are is difficult to do with any certainty.

For example, Carillion had the highest governance rating from an independent governance agency just before it went bust a few years ago. Elon Musk’s company Tesla was criticised by one of the largest pension fund investors in the US for appointing some of his schoolfriends to his board—he told them if they wanted good governance they could buy Ford shares. Tesla of course is now worth more than Ford, General Motors and Fiat Chrysler combined. And it wins on environmental comparisons.

The new Pension Schemes Act is a response to the fake news in recent years that Carillion, BHS and Arcadia behaved badly with their pension plans. BHS and Arcadia were run by Philip Green. Carillion’s chairman when it failed was (a different) Philip Green. The one lesson we may need to learn as a pension fund investor is to avoid companies with a Philip Green involved. 

There are other changes on stream. Individually they all seem simple; collectively they add to the pile of compliance you have to pay for. There are going to be caps on charges on small pots (under £100)—which are worthless anyway. The unintended consequences of ESG have been pointed out already. There is now (1) a pooled pension fund voting taskforce; (2) a pensions dashboard (it’s a good idea to have all your pensions visible in one app, but most pension funds will have to rebuild their IT systems); (3) reporting requirements to yet another regulator, the Competition and Markets Authority; (4) auto-enrolment obligations that will in the end provide only minor benefits but are intended less to inform than to frighten you into paying more into your pension; (5) draconian penalties on trustees who make a mistake, which may dissuade good people from representing your interests; and (6) the donation of unclaimed pension assets to good causes, rather than your pension. Auto-enrolment won’t give you much in retirement, since it will be invested cautiously and inflation may hit it badly. Finally, none of these initiatives dissuades the scamsters, now creaming around £500m a year from pension fund investors.

There is no real need for pension funds to be this complicated or this vulnerable. With the present government looking at more intelligent regulation, it is time to simplify the system to make it easier to use for all of us, and to protect us against fraud. Meanwhile, the best advice is to draw your pension as late as you can: remember it’s a pension, not a savings plan (it gives financial protection against living too long) and remember that there are bad people out there. The Pensions Regulator has increased its budget around ten times in 15 years, and is now asking for a 60 per cent rise. And the Financial Conduct Authority was firmly attacked by the House of Commons Work and Pensions Select Committee for being asleep on the job. 

Our pensions would be better if they were dissolved; until they are, do not respond to phone calls about your pension, look askance at internet pension ads, avoid investments in unusual locations offering ambitious returns, and remember that regulation is not protecting you against bad guys. All that documentation you get is not designed to protect you; it is to protect the regulators.

This article is featured in Prospect’s new “The Road to Recovery” report, published in partnership with Lloyds Banking Group, the Government of Jersey and Jersey Finance. Read the full report PDF here.