Changes to personal pensions in the 1980s.
Pensions: not something that many people think about on a day-to-day basis, unless they work in taxation, accountancy or as a financial advisor.
Not many kids grow up thinking 'I want a career in pensions!', however, as sure as death and taxation, retirement is an event that thankfully almost everyone experiences, and to a lesser or greater degree has to prepare for. With a large, increasingly affluent and aging population in the 1980s, there was a huge amount of money 'in' pensions, and it was a sector that naturally attracted the attention of Mrs Thatcher's government. In many ways practices reflected the ideological trend of the government's policies emphasising the individual over the group, and encouraging, even fetishising, personal responsibility over state or employer intervention.
From 1984 until the end of the decade (and beyond) I worked in the world of pensions in one of Edinburgh's many long-established financial services companies. At the start of the decade individual pension provision and investment was aimed at the self-employed or company directors, and sometimes 'staff' employed on a real or notional basis who could benefit from generous tax reliefs afforded pension contributions.
However, most people were members of occupational pension schemes run by employers and often run wholly by insurance companies, although investment and administration were often split between separate, specialist organisations. These schemes could be vast, with massive memberships and eye-watering financial power and surplus funds that frequently ran into the billions. Their size meant that 'in-house' investment and administration were financially justifiable.
In the 1980s early signs of change arrived in the form of a 'buy-out' policy, run by insurance companies; these were made available to people who left an employer's service and allowed them to take the value of their accumulated pension and move it to an individual policy. This was a 'win-win' for employers, who didn't need to worry about the administration for an individual, often small pot of money, and for employees keen to break their ties with their former bosses. And if a company ceased to exist, 'buy-out' policies became the go-to product for dissolving pension schemes.
However, a major shake-up occurred in 1986, with the Financial Services Act. This introduced the notion of the personal pension, and removed the ability of employers to oblige employees to join their pension scheme, if they provided one. Freed of this obligation, an employed individual could purchase an investment vehicle usually run by a life insurance company in exchange for regular contributions that could be made by the policy holder and their employer. These plans replaced and looked remarkably similar to retirement annuities, hitherto the preserve of the self-employed. Division of the fund at retirement was simple; 75 per cent had to be used to buy an annual pension (annuity) and 25 per cent could be taken as tax-free cash.
The simplicity of the final pay-out may have been attractive given the apparent complexity of the occupational pension schemes, where pensions were allocated according to a set of rules involving fractions of final (or other definition of) salary according to years and/or months of service (or other qualifying term). People rarely think of anything in terms of eightieths or sixtieths (or indeed any fractions smaller than a quarter). Pension scheme rule books were always available, but often esoteric to the point of arcane and distinctly boring reads. Furthermore, personal pensions provided employed people with a tax-efficient means of saving towards a pension where their employer did not provide a pension scheme.
Thus free employees could, from 1 July 1988, buy a personal pension plan in place of their occupational scheme membership. What is more, if they had one they could move their accumulated pot of money from their existing occupational pension scheme to their new plan, without having to leave their employer's service — the 'buy-out' plan, without the inconvenience of having to move jobs. And speaking of which if one did subsequently move job, the personal pension could go with you.
The other attraction, of course, was that as the owner of the plan, the individual, could choose how their money was invested — a tantalising range of exotic sounding unit-linked funds were made available with descriptions more thrusting and exotic than team names on 'The Apprentice'. Monthly contributions, less charges, were used to buy a 'unit' in the chosen fund based on the day the money was received at the insurer. Everyone, in short, could become an investor. What was also appealing was that estimated projections of what could be earned were an obligatory part of the deal. Upper and lower funds, pensions and tax-free cash projections promised fabulous returns as long as interest rates remained between 12 and 8 per cent a year, which for the late 1980s was quite conservative.
The insurer always retained the right to review their charging structure annually
Unfortunately, these levels of interest were never going to be sustainable, and investment in unit-linked funds also meant that, over time, values could rise or fall, depending on the whim of 'the market'. And while no one ever hid the charges that covered the insurers' costs, their accumulated effect over time was more debilitating than anticipated. The insurer always retained the right to review their charging structure annually, and they subsequently did. Less clear, but nevertheless not hidden, was that there were rates used to buy units that were different to rates of selling units, in favour of the insurance company of course.
More worryingly, however, was when a person moved their fund from an occupational scheme to a personal pension. Attractive commissions were paid to agents who persuaded occupational pension scheme members of the benefits of transferring their employer sponsored fund to a personal pension plan; needless to say the cost of the commission was borne by the plan not the provider.
However, there was not sufficient clarity on how much better or worse off their fund might be if it had stayed where it was and comparing the two was like comparing apples to oranges. Most occupational pension schemes took the form of defined benefits — in exchange for a contribution the scheme was obliged to pay a fraction of salary for each year of qualifying services, as defined by the aforementioned rules. The money to pay for this was drawn from the accumulated fund of the whole scheme (that is from all employees and their employer). When transferred to a personal pension, this money, and any additional contributions made by the plan holder, became defined contributions, more or less the exact opposite of the defined benefit. At pension time, the accumulated fund was used to buy an annual pension based on actuarial factors to do with the person's age and prevailing trends in finance at the date of retirement, such as interest rates. And the fund was unit-linked, so might have performed less well than anticipated.
Furthermore, personal pension plans were supposedly obliged to cover the 'contracted-out' element of the State Earnings Related Pensions Scheme, where applicable — and it was clear early on that charges, actual fund performance and so on were often insufficient to cover this guaranteed minimum pension. Transferring from an occupational scheme to a personal pension replaced the obligation of the group to provide the funding for what was promised in terms of years of service and state pension requirements and left the individual to take their chances (or more rarely to deploy their skill) in the market. The mass persuasion of people to divert money in this way was to become the focus of the misselling scandal that insurers spent much of the 1990s untangling.
In microcosm, the personal pensions market reflected the shift to the emphasis of the personal over the social in the UK in the 1980s. The individual could 'go it alone' with their future, and seemingly leave everyone else behind. However, while the personal pension allowed employed individuals to save for their retirement if their employer did not provide a pension scheme, they did not provide the equivalence in security of the group — hopelessly optimistic projections, top heavy charges and commission fees, monthly charges and unit-linked funds all scuppered the chances of accumulation of anything comparable to a corresponding group pension, unless one could afford to pay a huge amount towards the plan. Possibly unforeseen at the time, however, the personal pensions market provided a huge leap in new jobs in financial services, mainly for school leavers, many of them unravelling the justified claims of misselling made by policy holders well into the 1990s.
