The pensions industry regularly treads a fine line between taking legitimate advantage of tax breaks and pushing the boundaries to exploit perceived loopholes in legislation and regulation.
Some of the schemes that are devised may give their originators a reputation for cleverness and a smug feeling of having ‘beaten the system', but in my experience they do more long-term harm than good.
Take a couple of current examples: There is a much-talked-about move back to trust-based pensions (occupational schemes) to get around the 2012 changes. The reasoning is that occupational pensions do not fall under FSA regulation, so can be used to avoid unwelcome aspects of RDR, including commission restrictions that may apply to GPPs.
Occupational schemes also have a facility for refunds of member contributions for those who leave in the first two years, and the fund from employer contributions for these employees can then be redirected to cut future costs for the employer.
Is this a loophole? Yes. Is it in the spirit of the rules? Definitely not. Will it be changed? Watch this space. But I sense a determination by FSA to tackle any attempts to avoid RDR, especially if there is a suspicion of churning activity. And once DWP and the Pensions Regulator see the potential scale of the issue I think they will look to act as well.
Then there is activity in the over-75s market. Scheme pensions are being increasingly used to provide higher levels of income for well-off people with substantial pension funds than would be available through alternatively secured pensions (ASPs). In my view, using scheme pension in this way is just on the right side of the line, although I see it as a fairly niche product which may well have a fairly short shelf-life. However, some of the suggested uses seem to me to be way over the line.
For example, I've seen suggestions that if the scheme member dies during a 10 year guarantee period, the scheme pension payments for the balance of the 10 years could be increased so that all the fund has been paid out by the end of the 10 years. That is blatantly against Government principles for pension provision. I'm also very uncomfortable with suggestions pension schemes should deliberately engineer unauthorised payments to allow the pension fund to be run down more quickly.
The problem with pushing the boundaries is not just that retrospective action by Government or regulators could leave those taking advantage of the opportunities worse off, but also that they destroy trust between the industry and regulators. The changes made then often go further than tackling the immediate issue and end up hitting those who are careful to stay on the right side of the line. So all of us, and more importantly our customers, end up worse off.
Sometimes the rules are plain silly. There is illogic both in the different regulation of occupational pensions and GPPs and in the treatment of pensions after age 75. But we should be tackling this through sensible and robust discussions with the authorities, including possible future governments, not by provoking further regulatory action.
Ian Naismith is head of pensions market development at Scottish Widows
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