It appears that we must. The entire pensions industry is singing from the same hymn sheet in support of the forthcoming introduction of auto-enrolment enrolment, despite all its contradictions.

Of course, we’re all agreed that the country cannot afford to fund pensions at the current level in the future so it is vital that people start saving to provide for their own retirement. Indeed, the Minister for Pensions, Steve Webb, has made many speeches extolling the virtue of saving, warning people that the government will move to a new role where they will provide a standard, base pension to all but that any further improvement in their living standards after that can only come from each individual’s own prudence in deferring current pleasures for future financial security.

Strong leadership you might think. Indeed, many of the Minister’s actions to date are welcome simplifications of the system. So why does he shrink from applying the same simplification to the auto-enrolment process? At present, it is a mess of contradictions.

Firstly, it relies on the nudge process – enrolling people by stealth and hoping that inertia will prevent them from opting out. For those who opt out, the policy is to wear them down by re-enrolling them every three years and forcing them to opt out each time.

This is a sleight of hand that undermines the very principles of openness and transparency and worst of all, it is unlikely to work due to the contradictory rules coming from government regarding disclosure. These contradict the inertia approach by forcing pension providers to give regular updates about the value and projected value of these savings; at current auto-enrolment savings level of 8%, it is going to be difficult to make the final amounts look an attractive option in comparison to the pleasures foregone today.

Secondly, all the talk of making people responsible for their own future is undermined by the artificiality of the savings formula viz. 4% from the employee, 3% from the employer and 1% from the government. Any employee looking at that will not feel that pension saving is his or her sole responsibility – it appears to be a tri-partite split between the employee, employer and the government. The message becomes completely confused.

Thirdly, in reality, the government has no money, so that 1% is coming from the workers themselves and the employers 4% is coming from the wages of the workforce (just ask the Australians if you don’t believe this), therefore in reality the entire 8% is coming from the employees. Those who realise this will feel cheated and distrustful of the whole process.

What we need to do is to simplify the whole approach by removing the opt-out and charging the entire contribution to the wages. Yes it would look like a tax, but the current approach is like a trick tax that is only paid by those too stupid or lazy to cop on to the truth.

Leaders, not ‘nudgers’, brought about major changes in UK society; people who were not afraid to describe the future and bring it in. Bevan’s introduction of the health service wasn’t done on the sly nor was Thatcher’s privatisations.

Getting all citizens to take responsibility for their own futures is a huge change to society. The Minister needs to find some backbone and introduce the pension reforms unambiguously and unashamedly.

Tom Murray

Twitter: @TomMurrayDublin

What do you think? Is Steve Webb’s simply nudging citizens instead of leading them? Voice your opinions in the comments below!

“@Exaxe: Latest Exaxe Blog: “Pension reform requires leading, not nudging” ow.ly/aWsmU” #GoodArticle

— Jonny Taylor (@SirJonnyTaylor) May 16, 2012

Latest @Exaxe Blog: “Pension reform requires leading, not nudging” ow.ly/aWsmU

— Fergal O’Doherty (@fodoherty) May 16, 2012

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In the May 2012 issue:

• The conundrum of simplified advice
• Exaxe announces latest appointment as part of its continued expansion
• If you can’t meet ‘em, tweet ‘em
• Exaxe Solutions
• Is the insurance industry losing faith in its actuaries?
• Exaxe Client reaches for the skies to attempt world record in aid of Alzheimer’s Society
• Whitebread can’t organise p%$@£€ in a brewery
• Pooled Registered Pension Plans are a no-brainer
• UK Budget 2012 – Good for pensions in the long run

To view this quarter’s TechLife printed edition as a downloadable PDF please click here: http://exaxe.com/wp-content/webimages/2012/05/Newsletter_May2012_Web.pdf

One thing they have in common is that people need to take control of their own pension provision as neither government nor employers are able or willing, to maintain that liability into the future.  As a result, everything is focused on finding ways of bringing individuals to the point where they realise this and take action to sustain their own lifestyle in retirement without relying on anybody else.

The second thing that all the reports have in common is they immediately diffuse this message by invoking the almost axiomatic view that the solution must be a tripartite solution between individual, government and employer.  Starting from this base, the results are all variations on the same theme and it is no surprise that they all end up just tinkering around the edges; recommending increases in state pension age, simplified low-cost products and various levels of nudges / compulsion.

Nobody seems to stop to challenge this basic assumption by asking why governments and employers are involved in this area at all.  Despite the fact that any government contribution has to come from employees in the form of tax and any employer contribution must come from employees in the form of reduced wages, experts insist on this complication of the pension issue.

Governments’ role in the provision of pensions is surely a straightforward one.  They have no money of their own, so they should provide, from general taxation, a floor level of provision that no one can go below, as no society wants to have the elderly looking for food on rubbish dumps.  While the rich don’t need this, universal provision of this floor is necessary to avoid complicating the system via means-testing and dis-incentivising people from taking personal responsibility for their own future.

Employers don’t even have this role.  Given that there are laws in most western nations to avoid the exploitation of labour, it is hard to see why employers should have any involvement in pension provision at all.

Up to about 50 years ago, most people worked for a single employer all their life, so it is easy to see how a paternalistic approach crept in.  The world has changed significantly and most people now have many employers across their working life.  Employers are now no more responsible for a workers lifestyle after retirement than they were for the cost of raising and educating the children that will eventually form their workforce.

If we remove the employer, and restrict government to the role of safety net, then it suddenly becomes clear to people that the standard of living that they have in retirement is entirely down to the provisions that they have made for it.  Passing over responsibility for retirement provision to the individual is the stated goal of all governments facing the current pension crisis and this would achieve it.

So why are all reform programmes reluctant to even challenge the basic tripartite solution.  Could it be that the think-tanks and experts involved are mostly QUANGOs or government departments?  After all, if you remove the employer from the pension equation, what happens to all those public service pensions – the ones that are currently dragging most countries balance of payments into the abyss?

It may well be that those currently doing most of the thinking about pensions have too much to lose to really challenge the status quo.

Tom Murray

Do you think vested interests are preventing true pension reform? Should the responsibility lie with the individual? Let us know in the comments below!

Are vested interests preventing true pension reform? exaxe.com/vested-interes… via @Exaxe

— Ampersand Advisory (@AmpersandAG) April 26, 2012

@TomMurrayDublin – Pretty controversial thinking there, Tom. -> the Exaxe blog on #pensionreform lnkd.in/qGDDsz

— Jamie Macgregor (@JamieMacgregorC) April 26, 2012

Are vested interests preventing true pension reform? exaxe.com/vested-interes… via @Exaxe >v challenging! From 2 wks ago – glad I didn’t miss it

— Andy Leggett (@sipphound) May 10, 2012

Open any newspaper and it’s hard to avoid an article decrying the on-going bureaucratic interference in the workplace by health and safety officials.  Every day, bizarre situations are trotted out to underline the stupidity of the situation, such as police officers that can’t jump into a pond to rescue a young child because they don’t hold a certificate in dealing with water rescue issues or universities who ban graduates from throwing up their caps afterwards because a student was previously injured by a hat on the way down…

Read the full article in the Actuarial Post: Actuarial Post – Issue 12

Actuarial Post is an online and printed publication offering actuaries insight into the market, an extensive library, news and the latest job listings. With a dedicated comment section; the most talked about topics in the actuarial market are discussed by actuaries dealing with the issues on a daily basis. Articles focus on the latest trends changes in regulation and the  areas of pensions, investment, life and insurance.

Exaxe, the specialist IT solutions provider for the life and pensions industry, today announces the appointment of David Morrissey as its new Head of Development, Technology & Innovation. The move comes following a recruitment drive and an announcement that the company plans to expand the business in the UK, Ireland, Australia, Canada and the Nordic regions over the next 2 years. David has been brought on board to continue driving this expansion by providing technological and innovation leadership within Exaxe. This role is responsible for all aspects of the software development life-cycle including: functional and technical spec development, software design & implementation and application testing.

Norman Carroll, Chief Executive Officer at Exaxe says:
“David joins us having spent 8 years with FINEOS Corporation within the professional service department leading and managing local and distributed technical teams with responsibility of teams up to 55 people. Prior to this David has also worked as the Central Development Group Manager with responsibility of FINEOS product customizations throughout NA & EMEA project, and in various engineer roles in IBM and HP.

Carroll continues:
“David’s 13 years’ of technical consultancy, team management and software engineering experience will be a great addition to Exaxe. David will work closely with our Chief Solutions Architect and Head of Product Strategy on our technology roadmap and aligning our technology strategy with our business strategy.”

About Exaxe
Exaxe®, www.exaxe.com is a specialist solution provider for the life & pensions industry.
Established in 1997, it has implemented products and has client reference sites in Ireland the UK and the Netherlands. Exaxe markets best-in-class solutions in the areas of Illustrations, agency and commission management and policy administration. Its Service Oriented Architecture and component based design has been key to its success.

Media Contact:
Sharon McGuire
Marketing Manager
Exaxe
Email: sharon.mcguire@exaxe.com
Tel: +353 1 2999100

So it makes a pleasant change to see Canada’s Minister of Finance, Jim Flaherty taking a more sensible view of the pension issue. Given the fact that the Ottawa Government is basking in compliments from all sides on its handling of the economic crisis and the fact that it is widely regarded as having one of the best pension systems in the world, it is good to see that they are moving counter-cyclically to restrain pension spending at a time when they could afford to let it drift. They are attempting to do this by making relatively minor changes to the framework that is already in place.

Canada sorted out its Canadian Pension Plan (CPP) in the nineties and now it is fully funded. This ensures a solid return from those who have saved within it via the earnings-related deduction scheme. Now they have moved to get the costs of the Old Age Security (OAS) programme under control with a view to ensuring its long-term viability.

The OAS starting point is being moved to 67 from 65 in states, starting in 2023 and finishing in 2029, in order to reduce the future liabilities on taxpayers well before those liabilities become a serious budget issue. This is vital for Canada as the OAS is the largest federal spending programme.

By taking a proactive approach, the minister is ensuring that the safety net of OAS and its Guaranteed Income Supplement (GIS) counterpart, which provides additional income for low-income seniors, will be sustainable into the future.

In parallel, the recent introduction of Pooled Retirement Pension Plans (PRPPs) has made it easier for those who are normally excluded from the Registered Retirement Savings Plans (RRSPs) plans to access low-cost pension savings vehicles.

Canada has taken a reasonably minimalist approach to pension reform, taking account of the existing pension savings infrastructure and moving to improve its long-term viability rather than by radical restructuring or creating new government entities or major regulatory reform.

This is the smarter approach. Canada is widely regarded as having one of the best pension infrastructures in the western world. Minor tweaking to improve affordability and encourage more saving is surely a better bet than foisting new unproven programmes upon the population. Ottawa deserves great praise for resisting the temptation of the grand gesture and going for a restrained approach to improve what’s already working. This obeys the golden rule that so many politicians find it impossible to keep: if it ain’t broke, don’t fix it.

Tom Murray

@Exaxe For the record, #PRPPs are the Grand Gesture…for the part that is broke!

— Scott MacDonald (@scottrmacd) April 5, 2012

@Exaxe @scottrmacd #PRPPs at least give opportunity to those excluded, although not all will be in a position to take advantage of them.

— Tom Murray (@TomMurrayDublin) April 5, 2012

The government has made a significant change to the hotly contested ‘opt-in’ provision of the Future of Financial Advice (FoFA) reform, which dictates that advisers must ask their clients regularly if they are happy to continue paying for their services and receive affirmation back that they do. Advisers, who seem to fear that clients will not value their services enough to keep paying, have heavily attacked this clause.

In the end, the government has allowed those financial planners, who sign up to a code of conduct monitored by the Australian Securities and Investments Commission (ASIC), to avoid this regulation. This is a clever move as it means that clients of compliant advisers will not get regular reminders from their financial planners that they are paying for a service; a reminder which might actually make them reflect on the quality of the service and actively decide whether to continue or not. Instead, ASIC will be the arbiter of good quality advice and some clients will remain paying for something that they don’t really want.

The disclosure documents have also been pared back, with financial planners no longer having to reveal future fees and charges.

All in all, it’s a good day for the rogue financial planning sector and a bad day for both the professional financial planners and for the consumers. The teeth have been pulled from the FoFA legislation and all they are left with is a ban on commission, which is delayed because it is far more complex than was originally considered.

On top of these changes, the government have pushed back the start of the FoFA reforms by a year. Yes, they dressed this up as it being ‘voluntary’ for the first year, but effectively that’s just window-dressing. After all, there was nothing to stop any firm operating in a FoFA compliant way for the last two decades; it’s just that nobody wanted to.

It would be nice to think that the above score was a half-time score and that there was the possibility of a comeback, but, given how quickly the government has surrendered to pressure from the financial planners, we might as well leave the stadium now and wait for a rematch, possibly with a different referee.

Tom Murray

Yet, to listen to commentators representing the elderly, you would think the government had decided to put everyone over 65 on the breadline as the primary means of getting the deficit under control.

Let’s look at what Osborne actually did. Firstly, he committed the government to a basic pension of £140 per week with the aim of giving those saving for a pension a clear view of what they will get in the future. This level is set above the means test level and will underpin the auto-enrolment process, allowing people to save even small amounts with the confidence that they will benefit from the process.

Secondly, Osborne has given a substantial lift to the current basic weekly pension amount of £5.30, the largest cash amount ever given. And finally, he has frozen the extra tax-free allowances related to age, which will eventually disappear.

Aside from being ageist, these tax-free allowances are making the whole system far more complicated than it needs to be. The allowances also fail the fundamental test of any taxation system – fairness.

Credit should also be given to the Chancellor for resisting the pressure to go for the easy option of hitting the higher rate tax allowance for pensions. He is to be admired for holding to his course and steering for a simpler, fairer system that can be understood by all.

The government are making big strides towards simplifying the whole pension system and increasing the numbers saving for retirement. It’s not possible to make an omelette without breaking eggs and the gentle phasing out of the age-related tax free allowances is a small price to pay for the UK to have a robust, straightforward pension system, where means-testing, with all its distorting effects, becomes a thing of the past.

We’re all in this together and there is a big budget deficit that needs to be addressed. Pensioners should forego the moaning and see the bigger picture.

Tom Murray

Budget Good for Pensions. Excellent blog on the impact of Budget 2012 on pensions from @exaxe. exaxe.com/uk-budget-2012-–-good-pensions-long-run

— Stewart Reeder (@SReeder01) March 22, 2012

At a time when the government is enforcing a ‘semi-compulsory’ pension saving system on the masses via the auto-enrolment project, it seems bizarre to be removing what has always been one of the best nudges to long-term retirement savings. Yet this is precisely what the Chancellor is being urged to do.

The vast amounts of money involved in the pensions area will always cause the Treasury to look enviously to see if there are ways to tap into it; this is what lay behind Gordon Brown’s raid on pension fund dividends, which played a significant part in undermining so many defined benefit schemes, as well as inflicting severe damage on the defined contribution sector.

Just because it is easy way to raise money does not mean it should happen. The government themselves are undertaking a major initiative to increase the level of retirement saving and they are sending out constant messages about the effect of increasing longevity on the ability of future governments to support pensioners.

What kind of message will it send to people if the government removes one of the key nudges that encourage people into saving via the pension system? What will be the effect if retirement savings drop or if the pension funds no longer have the resources for significant long-term investments?

Abolition of higher rate tax relief on pensions is a short-sighted policy based on the politics of envy, based on the assumption that anyone on the higher rate of tax must automatically have huge amounts of spare cash. Considering you only have to earn £42,475 to be liable for the higher tax rate, this view is ridiculous.

The abolition of higher rate tax relief will result in middle-income earners, already struggling, finding it much more difficult to provide for their own retirement. And if they don’t, then future taxpayers will ultimately have to pick up the bill.

The Chancellor must listen to advice from all shades of opinion when considering his budgetary options, but in this case he would do well to lash himself to the mast to avoid the lure of the siren song coming from those who see the prudence of others as an opportunity for easy pickings, and keep his eyes focused on the long-term direction pension policy needs to proceed in.

Tom Murray

Indeed, I imagine that the end customer will feel very aggrieved once they come into force. Having purchased a policy and paid substantial commission, under the impression that he or she would have no more to pay, it now turns out that the advice they felt they had already paid for over the lifetime of the policy will now have to be paid for again by having additional fees added on.

Subsequently, active clients who switch funds regularly, and had never expected to pay any extra for the privilege, now have to stump up every time they feel they want to change their investment style or even when they want to discuss it with an IFA and then decide to leave well enough alone.

To date there has been no fuss over this, as the knowledge of how RDR will affect existing policies has not extended much beyond financial services professionals. Once we get in 2013, we can expect a lot of fuss from clients who find they have to start paying for something that they understood they had already paid for.

The reason that these rules have been introduced is because of the excessive focus of the FSA on the adviser industry rather than on the actual consumer. Oh, they consistently bang on about customer detriment and the dangers of customers being ripped off by dodgy IFAs, all of whom they seem to believe attended the Arthur Daly School of Customer Fulfilment.

However if they stopped for a while and considered the position of the actual consumer, they might have realised that existing consumers believe that the payments outlined in their original quotations were all that they would ever have to pay. Therefore they are bound to be a little teed off when they find that advice is now closed off to them unless they stump up more money.

If the FSA had really been concerned to avoid customer detriment, they would have drawn a line between pre 2013 sales and post 2013 sales and left it at that. Simple to understand, it would have enabled customers with legacy policies to shift to a fee-based situation if they wished but to retain the commission approach that they originally contracted for if they wanted.

But of course, that would have meant approval by default by the FSA of the wicked IFA class, their scheming life and pension partners and the whole existing commission approach. And that wouldn’t do, would it? It’s far better to have complex rules that will be expensive and difficult to enforce and let the consumer go hang. The rules on legacy policies are a classic example of the FSA not being able to see the wood for the trees.

Tom Murray