Pension provision should be removed from the control of large insurance firms and a new system should be implemented to provide a state-funded pension for all, a White Paper has claimed.
Richard Smith, founder of financial education firm MoneyTrainers, has published a 20-page White Paper, called The Great British Pension Swindle', in which he lambasts the existing structure of pension provision in the UK.
He suggests overhauling state and private provision to remove the disincentives of high charges and perverse tax incentives, and instead tweak the current state pension to "secure a pension for all".
The paper, which has been sent to Mr Smith's local MP, Henry Smith, HM Treasury, the Department for Work and Pensions and to Labour party leader Jeremy Corbyn, claims the current state pension is no more than a "giant Ponzi scheme".
He also claims company pensions, including auto-enrolment schemes, charges, financial advisers and providers are all "problems" contributing to the mess that is UK pension provision.
The White Paper states: "Advisers are a problem. They have built their businesses on things staying the same, levying ongoing charges for providing not a lot.
"Providers' business models are based on the status quo being continued. Pension contracts run from age 18 or so right up until death, depending on the pension options chosen."
He said when the 60 or so years of charges on this are added up, this "makes pensions an attractive proposition for a provider".
Moreover, the government subsidy in the form of tax relief at source is no more than an "immediate gift" to the large insurance companies in the UK who provide the underlying scheme, according to the document.
The White Paper states: "Pensions tax relief costs us, the UK taxpayer, some £41bn a year - based on the present population, that's £624 per person each year - and has done little to improve the lot of the pensioner.
"Based on the current set-up of most pensions, all of this relief is lost in charges, and therefore more of a benefit to the providers as they levy their charges on the pension contribution/fund once the tax relief has been added, thus increasing their take."
The document added: "Pension contribution tax relieve subsidises the income of advisers and providers at substantial cost to the taxpayer."
Mr Smith mourned the demise of the final salary scheme, calling defined contribution schemes "poor value, offering poor investment returns, with little control for members", and was particularly scathing about the flagship auto-enrolment scheme, the National Employment Savings Trust (Nest).
He commented: "Again, it seems a government-created provider is no better than a private company at this whole pension thing - the problem is, as a taxpayer investing into a Nest pension, you pay twice: once in charges for your own fund, and secondly for the taxpayer subsidy it is getting."
Mark Rowlands, director of customer engagement at Nest, commented: "Nest is a great value, not-for-profit pension scheme for our 7m members, demonstrated by our Pensions Quality Mark Ready status and Defaqto 5-star rating.
“We have clear plans to repay our government loan in-full and at no overall cost to the taxpayer.”
Instead of the current system, Mr Smith recommends diverting the tax relief on pensions to a funded state pension. He said: "This £41bn [of reclaimed tax relief] funding a year could then be invested for the good of the nation.
"It could be used to build homes, hospitals, stations or roads. It could fund just about anything the government would normally borrow for. Importantly, large amounts of money could be made available to solve some of the environmental problems we are facing.
"As government repays the debt, then the state pension pot would grow exponentially, making sure that pension money works for us as individuals and for the good of the country."
The White Paper outlined how this properly funded state pension would:
- Provide a secure and increasing long-term pension for citizens.
- Ensure money is available to fund important projects.
- Reduce the level of charges and insecurity felt by pension owners.
- Include those people in society who are currently locked out of pension provision [such as the self-employed who are not in auto-enrolment].
To date, only two responses have been received by Mr Smith from the copies of the White Paper that he sent to government bodies: from HM Treasury's Insurance and Pensions Markets division, and from his MP, Henry Smith.
In Henry Smith's letter, he wrote: "I will be following up on your behalf with the chancellor, Philip Hammond, to ask him to look into the concerns you have raised, with particular reference to the £41bn annual cost of pensions tax relief."
The Treasury letter stood by the FCA's retirement outcomes review, published on 28 June, stating: "The government stands ready to work with industry and regulators to ensure customer demands are being met, and any potential barriers to a thriving, competitive market can be addressed."
The letter, seen by FTAdviser, also highlighted work by the FCA on the issue of charges in the retirement income market, and reiterated the "importance" of people being able to access affordable financial advice from private sector providers.
"People may be put off from seeking pensions advice because of the cost. The government has therefore increased the income tax exception for employer-arranged financial advice on pensions, and introduced the pensions advice allowance," it stated.
However, the Treasury letter dismissed the idea the state pension in its current form is inadequate. It stated: "The government is committed to ensuring that older people can live with the dignity and respect they deserve, and the state pension is the foundation of state support for older people."
simoney.kyriakou@ft.com
