Shy on retiring

The Treasury’s call for evidence on early access to cash in pensions has kicked off yet another round of questions about what retirement savings is all about. John Greenwood reports

Consumer and pensioner groups have welcomed the Treasury’s plan to free up access to pension cash, while those charged with managing pensions are more concerned with the potential problems that will arise.

Any increased flexibility increases complexity, and complexity increases cost. Add to that the reduction in funds under management and it is easy to see why some in the pensions industry are cool on the idea, however much more appealing it may make products to the end consumer.

Andy Cheseldine, consultant at Lane Clark & Peacock, says: “DC providers will be alarmed because of extra compliance costs, as there are bound to be monitoring requirements imposed, communication costs and, most importantly a reduction in certainty over pricing models. They will be asking how many clients will remove how much from pension accounts and what does that do to profitability expectations?”

“For DB providers, that is, employers, it is even worse. Quite apart from record keeping costs, what will happen to the funding position if members start extracting the tax-free cash early? How do trustees ensure fairness across members in a scheme that is underfunded? How will unfunded government schemes find the cash to make these payments, which are bound to be front loaded, or indeed the PPF?”

It is inconcievable that 25 per cent of DB pension be allowed to walk overnight, so whatever approach is adopted, these schemes would need some form of special protection. But in the DC world early access could be introduced more easily.

Consumer and pensioner groups are supportive of the initiative. Ros Altmann, director-general of Saga says: “This could be fantastic news. At the moment, policy treats pensions as the only viable long-term savings vehicle. It’s pensions or nothing as far as getting an employer contribution is concerned, so if you are not willing to tie your money up until your mid- fifties, you may lose out on the benefits of long-term saving altogether.

“Of course, pensions are what the industry wants, because it is a captive pool of money to earn fees on for many years, and in theory it is best to ensure people cannot get money out and spend it before retirement. However, in practice, if that means people will not put money in at all, then we have made the best the enemy of the good.”

Policyholders will have to balance the potential for increased saving against the potential for increased AMCs to cover administration.

Some argue that employers have enough on their plates dealing with pensions as it is, without having to determine whether staff deserve to get their hands on pension cash.

Danny Wilding, partner at Barnett Waddingham says: “It is important that no further administrative burden falls on the trustees of occupational pension schemes as a result of new early access rules. In other words, it should not fall on schemes to have to determine whether members satisfy any new early access hardship test.

“This rules out permanent withdrawal or earlier access to the 25 per cent tax-free lump sum on practicality grounds and a feeder-fund model which mixes Isas and pensions into a single product would be too complex for consumers to value and would not therefore achieve the goal of increasing savings rates.

“The only model that we think has legs is therefore a loan model allowing individuals to borrow from their pension fund. This could perhaps take the form of allowing loans for certain purposes to be secured against pension assets, with part of the pension fund allowed to be liquidated early to repay the lender if certain conditions are met.”

A 2009 Pension Policy Institute report into early access looked at the four policy options on the table – a loan and repayment model, in the style of US 401ks, permanent withdrawal in the style of the Kiwisaver, early access to the 25 per cent tax-free lump sum and a feeder-fund model combining attributes of Isa and pension in a single vehicle.

That PPI report concluded that if the policy objective is to increase the amount that individuals save for retirement, then allowing loans might be the most appropriate choice as it seems to offer the greatest scope for a positive impact on individual’s retirement income.

But if the policy objective is to minimise the potential reduction in the value of individual pension funds, then allowing loans, feeder funds or early access to lump sums has less potential for reduction in individual pension fund size than allowing permanent withdrawals, it said.

Mike Morrison, head of pensions at Axa Wealth says more research is needed before we can be sure these solutions will not lead to significant reductions in retirement funding. “In the US there are current issues with the large number of loans that have been taken from 401k plans and never repaid, with the hardship provisions seemingly easier to meet in the current economic climate,” says Morrison. “In a modern simplified pension regime the ability to access pension money before retirement for specific reasons could be an attractive option but there will need to be considerable research and if introduced significant controls on such a facility.”

In light of the recent trimming of higher rate tax relief, Morrison is also concerned that such a relaxation should not be perceived as an ‘incentive’, and therefore used to erode the case for what is left of tax relief on pensions. Few in the industry would disagree with that.