Wednesday, 22 February 2012

Is the Personal Insurance Policy The Personal Pensions Mis-selling Scandal - The Return

The Welfare Reform Bill is all about fairness. Fairness to whom? The Tories (IDS, Grayling and Freud) say "to the taxpayer". This would be true if you defined the taxpayer as those people that are really rich and natural Tory voters. Why do I say this? Think about it. One of the proposals is to restrict the availability of a benefit targeted at disabled people with the intention of changing the behaviour and spending patterns of ordinary people, so that they buy PIP Insurance from a company that may or may not be donor to the Tory Party. Er, um! Where was I? (in-joke, sorry!). Bear in mind, that if you reduce Public Expenditure the taxpayers that benefit are generally those on the higher rate tax. The way our tax system is constructed is that a reduction in public expenditure gives a 20% benefit to lower rate taxpayers and a 40% benefit to higher rate payers.

So, we are going to put people in control? Has this happened before? In the 1980's Keith Joseph and his buddies came up with a jolly wheeze. They wanted to encourage Labour market flexibility and remove the incentive for inertia in the job market. As it was, people tended to want to stay in their job, especially those with years invested in their pensions!

So, the Conservative Government changed the law so that it was no longer compulsory for a company to provide occupational pension schemes for its employees. The buzz word became Labour Market Flexibility.  However, before you could convince people that it was OK to job hop around every 2 years and give you the freedom to shut down many of the countries biggest employers (British Coal, British Steel, British Leyland, Britain!) some of the structural obstructions to employee mobility had to be removed.

Does anybody remember the introduction of Personal Pensions? Workers (well, a lot of them!) used to belong to Company Pension Schemes, where they and their employer contributed to a pension based upon receiving a percentage of your final salary every year as a pension. This percentage was often defined as 1/60th of your final salary for every year you were in work. In many cases this was index linked so it was protected against inflation. Personal Pensions gave you your own pot of savings. Yours! You could move job and take it with you. It never stopped being relevant until you retired. If the Stock Market soared you got all of the benefit into your pot. You didn't have to share any capital gains with your company.

Sounds great.

But did anybody think about:-

a) Under final salary schemes you got a defined benefit. You knew what you were getting for your money.
b) Companies contributed towards final salary schemes.
b) Final salary schemes were portable. I moved mine from BT to BG when I changed job.
c) The new schemes cleverly transferred all of the "Investment Risk" to the employee.
d) Annuities are not free. You have to pay commission for one. The costs of setting up your pension used to be born by your employer.
e) Index linking disappeared or became an optional extra. Many people ended up with non-index-linked pensions getting poorer and poorer.
f) The systemic opportunities to encourage a Personal Pension Mis-selling Scandal!

Who did this change benefit?

1) Companies no longer had to pay for pension administration or bear the investment risk.
2) Companies found it easier to "move on" unfashionable workers.
3) Financial Service Companies found a new market and made lots of money.

What are the long term effects?
1) With an ageing population and an imbalanced World economy companies (or should I say Shareholders) have less financial liability towards their employees.
2) The State can say that people with personal pensions don't need to receive a state pension (what exactly does "National Insurance" mean?). If you think this won't happen, my ill-health pension is subjected to "means testing" and I get no additional state benefits (save for a monthly compensation payment because I had an accident at work!). This allows the state to reduce the state pension as it will claim everybody had the time, means and incentive to provide for themselves.
3) Pensioners are bearing more financial risk than they have in the past.

Why is all of this relevant?

DLA is the responsibility of the State.
PIP is the responsibility of the individual.

Remember, there were transitional arrangement for this move to Personal Pensions. The State Pension continued alongside personal pensions for a long time up to the present day.

What are the Transitional Arrangements for the move to PIP? Who is going to sell a disabled person insurance against becoming disabled?

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