Jonathan Stapleton asks Malcolm McLean OBE about the key pension challenges ahead and why he believes those responsible for jargon like UFPLS 'should be sacked'.
Malcolm McLean OBE was crowned Pensions Personality of the Year at this year's UK Pensions Awards but he is already well-known in the industry – having been involved in pensions for many years.
McLean's career began in the civil service, where he held a variety of roles in what is now the Department for Work and Pensions before he became the general manager and secretary of the Occupational Pensions Board in 1994. In 1997 he became the chief executive of The Pensions Advisory Service before taking up a role with Barnett Waddingham in 2010.
Malcolm was also awarded the Greatest Single Contribution to Occupational Pensions 1998-2007 accolade at the UK Pensions Awards 2007 and is a regular commentator on TV, radio and in the national and trade press.
JS: What do you think are the biggest challenges we face with regards to pensions today?
I think there are three main challenges.
First, we have to make sure the pension freedoms actually work and it is not completely clear at the moment just how this is going to develop. There are a number of risks attached to the freedoms - not least the possibility of people spending the money too quickly and running out of money, overpaying tax and getting caught out in scams. The support for consumers in this is absolutely critical and – while we have Pensions wise, the second line on defence and so on - we really have to make sure all this works well otherwise there are going to be a number of casualties.
The second thing is that we are now at the stage of auto-enrolment where the smaller employers are coming on board and I think we are going to see some differences in terms of what has happened up to now with opt-outs and what will happen from now on. We need to try and make sure this works as well as it has up until now: auto-enrolment has been a massive success and we want to keep that going.
But attached to this is the other issue, which is making sure the contributions actually deliver the level of pensions that people aspire to - and, at the moment, the minimum contribution levels are clearly inadequate for that purpose for most people. I understand where the government is coming from on this - to start low and get people used to the idea of contributing and then build it up through auto-escalation or something afterwards - but it is not completely clear to me just what the plan is and that needs to be sorted out.
Thirdly, and finally, I think the new state pension is going to be a disappointment to many people, certainly in the early years, because of the deductions that are made for contracting out.
Initially the government was talking about this new, more generous, flat-rate state pension - well it is not more generous for everybody and it is not flat-rate for a number of people. There are going to be some issues around this and the government probably needs to look again at the deductions that are being made for contracting out.
But if we can successfully meet these three challenges - if we can get a decent state pension which forms a base for private saving, make sure people take advantage of auto-enrolment to top this up, and we have a system of pension freedoms that provide flexibility to people - then that will take the pensions system quite a good way forward.
JS: After we have achieved those three things, will we be at a point where we can say ‘no more change' and let it all bed in?
We really have had enough change at the basic level - obviously there are some things that need to be kept in check, but the main planks of policy going forward are there.
Saying this, the one thing that I think we have singularly failed on - and this is one of my real bugbears - is our inability to simplify the system as a whole and to communicate it well.
I spent a considerable part of my career trying to demystify pensions and to grapple with concepts such as trivial commutation, which, of course, nobody understands - ‘cashing in a small pension' would be a much simpler way of explaining it. And we are still at it now - we have got the latest piece of jargon from HM Treasury or HM Revenue and Customs, the Uncrystallised Funds Pension Lump Sum (UFPLS) - whoever thought of that as an expression needs to be sacked in my view. It is completely unbelievable that we should be talking about people taking their money in cash instead of in the form of a pension and calling it by such a ridiculous expression - I do sometimes despair at all this.
If we really do want people to engage with pensions, then we have to get people onboard, and I know from my time at The Pensions Advisory Service that the majority of people out there just don't understand pensions and people will shy away from a system they just don't understand and that is part of the problem.
There are some big challenges here in trying to educate the public and explain pensions in a way they can understand and I shall continue to resist some of the more ridiculous expressions we are coming up with. But it will be a long haul to get out of a system that has the inherent problem of people not understanding it and now, in many cases, making mistakes arising from the new freedoms. Personal accountability must be accepted but we really do need to try and help people understand the system much better than we have up to now- and hopefully help them make some of these decisions.
JS: If you had to pick just one thing to change about pensions - would it be the language the industry uses?
It would be the complexity of the system, which has never really been addressed, and the language that accompanies it. The two are connected obviously - but if you do have a complicated system then it makes it more important to have a system of communication which ordinary people can understand and relate to.
The necessity of demystifying the system and making it clear to people seems to me a challenge that we have singularly failed on over the years and hopefully we will be able to improve on going forward. We probably need a period of consolidation to help with that as well - the more the system changes, the more people worry about them and struggle to understand them.
Communication always has been a big issue but it is an even bigger issue now with the pension freedoms.
JS: What do you think the world of pensions will look like in 20 years' time?
It is inevitable there will be further change. The extent of those changes though depends on a number of things and goes back to the three things I have mentioned above - it depends on how successful auto-enrolment is and how the freedoms bed down because, if you think in terms of the freedoms, we have moved some way away from the original concept of a pension scheme, which was to provide an income in retirement, and we are providing people with the opportunity of having access to money in retirement, which is a slightly different thing. It may well be that, in light of experience, we may have to change tack on this a bit and what we need is a new form of annuity, a new form of guaranteed income for life. We have moved from having a pension scheme to having what is almost a long-term savings scheme and that brings in questions, inevitably, for the future about tax relief and whether the government will continue to allow tax relief for what is just another form of saving. So that could change.
Also, if auto-enrolment flops badly, and it could yet do, as the vast majority of employers are still to stage, then that brings in the question of full-scale compulsion, ie auto-enrolment without an opt-out, which changes the nature of things completely and, again, would put a question mark against the need to give tax relief - why would you give tax relief to a pension savings scheme which people have no option but to join.
All those things could change and radically alter the situation but, at the moment, we are in the middle of a period of change and how it beds down will, no doubt, determine the position long term.
The extent to which people can be encouraged or cajoled into private saving depends on the success of auto-enrolment and, ultimately, the pension freedoms will determine in what form that saving is delivered at the end of the day.
