PensionsAug 21 2015

What’s in a name?

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What’s in a name?

If a rose by any other name would smell as sweet, why are we so obsessed with names? Companies spend millions of pounds a year on brand research, on marketing campaigns, on rebranding initiatives. Yet, what does it matter what your firm is called?

The product or service you are selling is the same either way and that is what your customers care about, isn’t it? Big business is not stupid. Executives are convinced names matter, and with good reason.

Indeed, it is not the literal meaning of a name that counts. There are many examples of big brands whose names have no literal bearings on the products or services they sell, at least not any more. IBM stands for the deeply unfashionable ‘International Business Machine Corporation’, but does that really matter? Microsoft may have sounded cool in the ’80s, but ‘micro’ and ‘software’ are distinctly outdated terms now. Does that mean some of the biggest tech companies in the world should change their names? Not necessarily.

The fact is that once we are used to a name, we quickly forget what it means. What we remember are its connotations and associations – and those come from our experiences with the product or service. However, a good name can help with this process by being easy to remember, spell and say. If a rose were called a ‘burgleflarter’, it would not smell as sweet because the bloom would not have been adopted by generations of poets who have romanticised its association with sweetness.

Shakespeare’s contribution to the market for roses is difficult to quantify, but let us safely assume it is significant. The Bard was a branding genius.

So what of the name ‘pension’? The pensions industry is under attack once more from the government. This time, instead of a new round of tinkering, chancellor George Osborne means to do away with the pension altogether in favour of a Pisa. Yes, you heard correctly, that’s a Pisa (Pensions Isa, presumably pronounced like the leaning tower).

While the acronym may not survive a branding campaign, the product might. It involves swapping tax relief on contributions for tax relief on income. Under the new system, contributions are made net – rather than gross – of tax but income is taken tax-free. And so far the polls say people like it.

It is simpler to understand and because income is tax-free at the end, that means it is easier to work out exactly what you would get. If the proposals laid out in the current consultation come to fruition, that could mean the end of the pension as we know it.

What would that mean for pension providers, pension advisers and the pensions industry?

The fact is that the word ‘pension’ does not resonate with gloriously positive connotations in the minds of its audience. It sounds boring. It makes my wife think of Brussels sprouts. It reminds everyone of old age. It sounds like the sort of thing you were told to do by your granddad but never bothered. And increasingly it sounds like an expensive rip-off.

All thanks to widespread disinterest combined with a torrent of dramatic scare stories from the likes of the Daily Mail, the word pension is tarnished – but it might not be worth rescuing.

When Lehman Brothers’ European and Asian banking operations were bought by Nomura in 2008, were its new owners careful to maintain the legacy of its heritage and brand associations by keeping the original business name? You can guess the answer. Troubled brands can be rescued and recovered – but sometimes it is easier, quicker and cheaper to let them die and start again.

We should welcome the death of the pension – if that is what it is to be – and rejoice in its rebirth as something else. We are not pension advisers or providers – we are retirement-planning specialists and long-term benefit solution providers. Our customers do not care much whether they are taxed before or after they save. All they know is that they want to have happy retirements but they don’t particularly want pensions if they can avoid them, thank you very much. Even a Pisa sounds better.

With the potential advent of a new retirement product, however, comes the need to evaluate yet another option. Enter your friendly life-planning adviser to shine a light on consumers’ options. So, you will be asked, which is better financially: tax-free contributions or tax-free income?

The maths on this is slightly surprising. Take the example of a 30-year-old earning £100,000 a year and contributing £10,000 to a pension. Let’s assume he saves for 30 years (retiring at 60) and lives for another 30 years (dying at 90) and that pre-retirement he achieves a 6 per cent return net of costs, and post-retirement he takes a more cautious approach, achieving a 3 per cent net return. Under the current system, a £10,000-a-year contribution costs him just £6,000 because it is gross of his 40 per cent tax rate. That means that, at the end of 30 years of saving, he has a pot worth £838,000 which has cost him £180,000 in contributions. That allows him to take £33,500 a year in annual income, net of his new, lower-band tax rate, with his pot running out just after his 90th birthday.

Contrast this to what might happen under the proposed rules with contributions made from net income pre-retirement but with no tax due post-retirement. If he continues to make the same net contributions (£10,000 per year) then he will find his £838,000 pot will allow him to take just over £42,000 a year in retirement income – equivalent to the same income he would have drawn gross of tax under the current rules.

But this is not a like-for-like comparison as he is effectively saving more in the first place – putting in an extra £120,000 from his salary during the 30-year saving period. More likely, under the proposed system, our client would choose to contribute the same net amount – so £6,000 a year. That would mean his total contributions would be the same (£180,000) but his final pot would be considerably less, £502,810.

Even though his retirement income is tax-free, he could now only afford to take an income of £25,500. In effect, he has lost £8,000 a year in income. But ironically he has actually paid less tax overall. While he pays £120,000 more in tax during the accumulation phase, he pays £260,743 less tax in retirement. The net result is that both the client – and the government – are out of pocket. How can this be? The reason is that during the higher-growth phase of pre-retirement, less is going into the pot, which means the long-term effect of compounding is drastically reduced.

Both the client and the government are investing less. And even though less is going out post-retirement, this is a lower-growth decumulation phase where the pot is constantly reducing – so the compounding effect of growth post-retirement is much weaker. The two do not cancel each other out.

At least in this example, the proposed new rules do not work to the client’s advantage. The impact on lower earners, however, will be much less pronounced, which is why politically the proposals may not cause much of a stir.

And while the government gets less overall, it receives much more up front which is, of course, the main attraction of all this upheaval for Mr Osborne. So is this proposal to be recommended? Probably not for higher earners. However, there could be benefits from a change to the system, particularly if it creates more options rather than closing down old ones. In that instance, we should all welcome the opportunity to refresh our industry, shrugging off the long shadow of past scandals and dreary connotations, in order to build a new retirement product.

Even if it looks remarkably similar in the end, with a different name and a fresh image, it should smell significantly sweeter.

Bob Campion is head of institutional business at Charles Stanley Pan Asset Capital Management