There are some big changes in pensions next month and they are not all good news.
Today I am in Orkney on the latest stage of a pensions tour that has included training up our excellent new generation of pension board members. Talking to members, I always emphasise certain key issues that all members of pension schemes should be concerned about. The first is the benefits payable on retirement and second, what you will pay in contributions towards those benefits. Closely linked to both is how your pension pot is managed, what we call governance. That is something most pension scheme members should take a closer look at.
The big change in public sector pension schemes next month is the shift from final salary to career average schemes. This will actually deliver better benefits for most members as the disproportionate gainers from final salary schemes have these benefits more evenly spread. In the NHS scheme contributions are going up, due to a Treasury cash grab, but LGPS members are spared that because we control real funds here in Scotland. However, most members will have to work longer before they can access their pension.
The other big change is how the LGPS funds are governed. For the first time there will be meaningful member representation on the eleven boards that manage pension funds in Scotland. There are some big issues to be addressed here, including the huge sums of money poured into fund managers pockets and how the funds are invested. We will also be reviewing if we really need eleven funds in Scotland. Tonight's BBC File on 4 radio programme will look at the way Canada manages its pension funds. It's all a far cry from the British pension scene, where a hundred local government pension funds each run their own affairs separately and pay costly fees to City firms for investment advice.
The change I am most concerned about is pension flexibilities. The UK government has passed legislation which allows pension scheme members to cash in their pension as a lump sum rather than take a pension. I accept that something had to be done about poor annuities in Defined Contribution schemes, although it would have been better if they had addressed charges, which can be twice as high in the UK than in The Netherlands. However, that would have involved taking on their City pals and that would never do!
The government has now gone one further by allowing those in quality Defined Benefit schemes to also cash in their fund. Although noticeably not in the 'pay as you go' schemes (NHS etc) where they would have to pick up the bill. Members doing this could be faced with a big tax bill and charges from an industry that is preparing to make money out of this 'flexibility'. I know this because I had a phone call last night asking me if I would consider this. Pity the poor call centre salesperson who gets me on pensions! As someone who can recall the last pensions misselling scandal in the Thatcher era, I well remember members coming into my office having lost a fortune over dodgy sales pitches.
There are a growing number of organisations warning about this. The Westminster Work and Pensions Committee has warned that savers are at risk of being "ripped off" in a new pensions scandal after George Osborne rushed through these reforms with little thought of the consequences. They have added to calls from the TUC and Which? for the urgent introduction of a drawdown charge cap. The protections against misselling in the legislation are also nowhere near strong enough as Ros Altmann and others have warned.
Few people really understand their pensions, but they are hugely important deferred pay. They should not be used by politicians as a short term pre-election fix. There are long term consequences for scheme members and the next generation who will have to pick up the bill for pensioner poverty.
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