Is there anything that the woebegone United Kingdom pensions sector can teach the internationally admired system of Australian superannuation? The best bet would be how not to get into the same mess. The UK industry was in a healthy state back in the 1980s, but some well-meaning pieces of legislation led to crisis.
Giving employees too much choice will lead to bad choices
The damaging changes of the 1980s were made at a time of innocence, says Steve Delo, chief executive of independent trustee firm Pan Trustees and one of the foremost spokespeople in UK savings. Introduced by Margaret Thatcher’s conservative government of the late 1980s, the changes followed the philosophy that a free market leads to the most efficient allocation of resources.
“Back in the 1980s we had a really good system which, in retrospect, we looked to have had accidentally. A combination of things happened that in isolation looked reasonable but done at the same time was catastrophic,” he says.
The introduction of personal pensions for those not in workplace schemes coincided with a law that made it illegal for employers to force employees to join their schemes. The trouble was that financial advisers found it easier to sell defined-contribution personal pensions to those who were already in workplace schemes with employer guarantees. The low profile of pensions and the low comprehension about the generosity and workings of defined benefit all helped lead to a massive mis-selling scandal. It all came to a head in the early 1990s. Providers were fined millions of pounds, individuals were compensated – in all, not a bad settlement, but the reputational damage has left the workforce suspicious about orthodox retirement savings – many cite the greater transparency and self-management of property as preferential.
Large assets at low governance institutions makes fraud easier
The greatest tragedy to befall the UK system sprang from the misappropriation of several hundred million pounds from the newspaper company Mirror Group Pension Scheme that came to light in 1991.
The fraud was dramatised in a television drama which portrayed a charismatic and bullying Robert Maxwell, chief executive of the Mirror Group, putting pressure on the scheme manager into making a loan to a failing company. The fraud was inevitable in that many defined benefit schemes by the 1990s had gained greater assets under management than the market size of the companies they were representing – though governance and legal protections had not kept pace.
Too much case law clogs up the system
The Robert Maxwell scandal caught the imagination of the public, so the British government reacted with the 1995 Pensions Act, which enshrined safeguards, but also rights, for employees that were in the past only implicit or dependent on funding levels. Some employers were quick to close schemes to future accrual, but many woke up too late to the growing risks these liabilities would pose to the health of their companies.
The strength of the act created lots of work for lawyers, but even the lawyers came to hate the complexity it caused. Here is leading pensions lawyer Robin Ellison, head of research at Pinsent Masons, sounding off on this topic for Pensions World magazine.
“In 1989 there were about a dozen reported [court] cases in total since 1921… now there are around 100 cases a year.
“Many of the earlier judgments were no more than a few pages long. Now they regularly exceed 50 pages and in rare cases 100 pages. This is partly because the matters are more complicated: there were around 300 pages of regulatory stuff in the 1980s; now there are around 50,000.
“The downside to all this proliferation of free and expanding case law… is that it is becoming unwieldy for users. If you need to prove a point of law, or find a case that helps your defence, using a search engine when you are searching through tens of thousands of cases can prove overwhelming. You find cases that are not relevant or only slightly on the point – or you miss cases that are important simply because the library is too big.”
A lack of joined-up legislation and competing government departments clogs up the system too
The UK has four different organisations with a say in how pensions are run. Two of them are often competing government departments. Her Majesty’s Treasury (HMT) sets limits on how much saving can avoid tax, while the Department of Work and Pensions (DWP) creates the general law that governs schemes. While the Pensions Regulator (TPR) sets standards and in this way can act like a head teacher for employer schemes. Lastly the Financial Services Authority (FSA) sets rules that force providers of savings products to have the best interests of consumers at their heart.
Tom McPhail, head of research at Hargreaves Lansdown and one of the biggest intellects in the industry says this is too many organisations. “The quad approach, with the DWP, TPR, FSA and HMT all having a say in pension policy has meant that some issues have fallen between the cracks. So one message [to Australia] is, keep the regulatory framework simple and as far as possible, make sure that one body has sole responsibility for oversight of pensions.”
The threat of global legislation
This might be the least relevant warning to the Australian system, but it is worth a mention. As a member of the European Union, the United Kingdom is bound to abide by legislation designed to make it easier for cross-border trade. In theory this is a noble aim, but it has led to all sorts of agony as the UK occasionally faces legislation that forces it to make expensive changes to already beleaguered business sectors. A European directive on pensions due in 2013 will force employers to make greater capital provision for their defined benefit schemes. At great cost and energy the UK is forming alliance with Ireland, the Netherlands and Germany to prevent this from coming to pass.
David Rowley has been an editor of magazines covering the UK pensions industry and employee benefits for the last nine years. Before joining Investment Magazine he edited Pensions Week, a Financial Times publication and while there he was a regular contributor to the fund management section of the FT.