How have pensions evolved over the last 20 years?

Mike Morrison discusses the key pension milestones in the industry over the last 20 years.

When I first started at AXA Wealth (though back then it was Provident Life, then Winterthur, before becoming part of AXA Wealth) in 1990, there were two major pension issues.

The first was a real techie one that many people will probably have forgotten – the Barber case (Barber v Guardian Royal Exchange Assurance Group ECJ 1990). The case determined that pensions were, in effect, ‘pay’ and that therefore were subject to the legislation on equal treatment for the sexes. This was important as it made us realise that pension schemes were likely to be subject to a lot of the anti-discrimination legislation from Europe. The echoes of the case are still around, with issues regarding equalisation of guaranteed minimum pensions (GMP) still prevalent.

I also think there is a wider lesson we can draw from this in the current discussions about tax relief on pension contributions, in that pensions are pay and that part of this pay is being put into a pension scheme for future consumption and future taxation. So, is it tax relief or tax deferral, and should you only be taxed on your pay once – when you spend it?

The second key issue in 1990 was the introduction of self invested personal pensions (SIPPs) and the fact that Provident Life was one of the first entrants into the market. As we all know, the SIPP market has moved on considerably, and these days virtually every personal pension has a wider range of investments. In those days all we had was ‘Joint Office Memorandum 101’ from the Inland Revenue and the rest was about interpretation, discussion and negotiation. It was exciting being right in the middle of it all!

In 1995, we saw the introduction of income drawdown. Until this change, the only realistic option for converting a pension fund into an income was through annuity purchase. The perceived inflexibility of annuities and the worsening annuity rates meant a degree of disillusionment with annuities and this resulted in the launch of so called ‘flexible annuities’. The Inland Revenue responded with the rules on income drawdown and the ability to withdraw an income from the fund while leaving the rest invested.

Part of the furniture

Income drawdown, known since A-Day as unsecured pension (USP), has also gone from strength to strength and is now part of the furniture however it could still be refined even further. The drawdown limits are broadly based on annuity rates and as they continue to fall the limits can be restrictive.

One of the logical progressions to the introduction of drawdown was the introduction of alternatively secured pension (ASP) and the continued discussions about compulsory annuitisation (sic) and options at age 75.

Let’s now jump forward to April 2006 and the run up to what was termed A-Day. This heralded the concept of ‘pensions simplification’ – an oxymoron if ever there was one!

In the Budget of 2004, the Chancellor announced radical measures to simplify pensions with the overall aim of reducing the number of pension regimes from eight to one, with the idea of allowing pension schemes to invest in ‘esoteric’ investments, including residential property.

Initially, I was a bit concerned that if it was all made too simple then there may not be any need for technical pensions knowledge. How wrong I was! Here we are just over four years later and pensions have become even more complicated. We do, in effect, have one regime but we have various other options. We never got the extra investment flexibility – an infamous U-turn saw the end of that, possibly just as well as the current economic climate would have caused all sorts of problems with residential property in pensions.

There are a lot of other factors that I could have written about from my first 20 years, but sometimes it is as good to look forward as to look back. My hope is that in 20 years time we will have rekindled a savings culture and that people will have realised that if they want even a reasonable standard of living in retirement, that they will have to supplement the state benefit with private provision and that the government(s) will have realised that this is socially desirable and have incentivised saving accordingly.  

Mike Morrison is head of pensions development at AXA Wealth