Pensions - Articles - Fidelity calls on Govenment for pension changes to be simple

 With only three weeks to go, Fidelity has set out clear set of five criteria that it believes will be crucial to deciding whether any change is a success.

  

 1) Is it simple? - research conducted by Fidelity last year showed a very low level of understanding of how pension tax-relief works. Indeed, three out of four people scored less than 40% on our test of their understanding of pension tax with 13% of people answering “Don’t Know” to all questions. People with the least saving scored even less. Against this backdrop there is clearly significant scope to create a system of incentives that makes sense to savers. Anything that improves understanding has got to improve the effectiveness of incentives. Continued complexity will simply add to confusion and further increase administration costs.

  

 2) Is it inclusive? - current rules on tax-relief are disadvantageous to both high and low earners. It is important that any reform of incentives keeps everybody in the system. Ensuring lower paid individuals are encouraged to make provision for retirement is clearly important. Higher earners are also important too. Larger pot sizes keep overall charges low as they contribute significantly to the fixed costs of running pension schemes. Losing these people from the pensions system will result in a loss of this cross-subsidy potentially increasing charges for those who remain.

  

 3) Does it keep employers interested? - employers are central to ensuring effective pension provision. Our research showed that over half of those surveyed would save more if their employer matched their saving. Employers are also trusted much more than government or pension providers. Any changes must preserve or improve upon existing employer incentives for pension saving. Direct incentives are important but so are the costs of administering pensions. Changes to incentives that result in yet more work and cost for employers run the risk of undermining their commitment to pensions and so the potential for millions of UK employees to get the retirement they have worked so hard for.

  

 4) Is it sustainable? - any system of incentives needs to be affordable now and in the future. Our research showed that one of the biggest barriers to increased pension saving was the constant changing of the rules around pension taxation. This increases complexity and undermines trust; an essential ingredient of creating a sustainable pension system. Whatever changes are made, they need to be for the long term and not invite further tinkering over coming years.

  

 5) Is it deliverable? - there will be an appetite to implement any change quickly and so reap the benefits in this parliament. But fundamental changes to pension incentives will require significant effort from employers and pension providers. The introduction of pension freedom demonstrated the ability of the pensions industry to effect rapid change but this is not without risk and cost. A rushed implementation of any changes simply increases the risk that they will not be delivered effectively. We have to take time to get this right.

  

 Richard Parkin, Head of Retirement at Fidelity International, said: ““Having made great strides in improving pension coverage through automatic enrolment and added flexibility through pension freedom, increasing pension contributions is the last piece of the jigsaw. There is a huge amount at stake here in economic terms but also in creating a pension system that people can engage with and trust. The constant tinkering with tax relief that we have seen since the introduction of the current framework in 2006 has created confusion and undermined confidence in pensions.

  

 “The government needs to be honest with people about what the State is going to provide in retirement and the importance of making additional provision. Tax relief reform should focus on providing a framework for that which is supportive and sustainable.

  

 We have a long way to go to get contributions to the level they need to be to support decent living standards in retirement. The Chancellor has a once in a lifetime opportunity to create the tax environment that can deliver that.”