The Pensions Management Institute's Tim Middleton explains why the impact of freedom and choice on existing policy demonstrates the need for depoliticised pension commission.
Options available to most DC members were poor, and a combination of extremely low interest rates and ever-improving longevity meant annuities looked to be terrible value for money.
Ending the de facto requirement to annuitise, and allowing members to enjoy any amount of their accrued fund in the form of a taxed lump sum was a triumphant coup de theatre which put pensions on the front pages of the national press.
And yet this, curiously enough, was the problem.
To create stability for policies designed to last for decades there must be consensus – not just between political parties, but also between politicians and the broader pensions industry
Was Osborne looking solely to make dramatic improvements to long-term pensions policy? I would suggest not.
This was principally a short-term tactic with a purely political motive. With a Liberal Democrat as pensions minister, this allowed the Conservative-dominated Treasury to intervene in pensions policy.
By ensuring the changes took effect in the month before the general election, this allowed the Tories to court older voters.
It also created a new opportunity to increase tax receipts, as accrued funds that had previously been tax-exempt would now be taxable if members exercise the ‘uncrystallised funds pension lump sum’ option.
New regime
There has been relatively little discussion of the impact freedom and choice had on existing pensions policy.
The DC-plus strand of Steve Webb’s defined ambition project was effectively killed off.
The original objective of auto-enrolment – improving levels of private pension coverage among the nation’s employees – has been significantly compromised as money originally saved to provide pensions may now be diverted to cash payments.
It is difficult to foresee how successful the new DC regime will prove to be over the longer term.
To date, fears that vast numbers of members would simply cash out have proved unfounded – much to the disappointment of the nation’s Lamborghini dealers. There is, however, an important lesson here.
Pensions policy has to be designed with the long term in mind. To create stability for policies designed to last for decades there must be consensus – not just between political parties but also between politicians and the broader pensions industry.
There is growing support for the establishment of an independent pensions commission that would develop policy in an appropriately depoliticised environment.
This would ensure changes are made and introduced in a manner that would be of genuine benefit to future pensioners and free of the political temptations offered by short-term gimmicks.
The idea of an independent commission is one whose hour has come.
Tim Middleton is technical consultant at the Pensions Management Institute
