Prodigal pensions

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Of all the parables in the bible the Prodigal son was one that always disturbed me.

For those of you that don’t know the story it tells the tale of a father with two sons. The younger of the sons demands his inheritance early and goes off to live la dolce vita, the older son stays with his father continuing to work the land.

After time, once the money is blown and he is destitute, the prodigal son returns. His father embraces him and celebrates killing the fatted calf, much to the annoyance of the brother who stayed behind. The tale ends with the father instructing the elder brother in the value of forgiveness, that they should celebrate for their lost brother is now found.

There are many ways to interpret this story. That is after all the purpose of a parable. But it always confused me as I sympathised with the elder brother. The prodigal son had gone and blown his money and was now returning to the family to be showered with gifts and presumably getting back into the family will. In effect the prodigal son was going to receive his inheritance twice, and this was punishing the thrifty hard working elder brother.

I suspect that’s why the recent debate over pension reform is also resonating with me so strongly because it just feels like we’re living through Luke 15.

The trouble with pensions is that they are so darn complicated, and it can take some time for everyone to follow through the implications of the radical changes that were proposed without any industry consultation.

As always with this sort of complication its the details that matter and its in the area of contracting out payments that represent the most acute example of the prodigal pensions parable.

In the beginning (come on it’s a biblical theme) we had SERPS, a government sponsored pension scheme paid for by national insurance, but by 1988 anyone in money purchase pensions (those that build up a pot of money) could contract out and receive a rebate into their pension in lieu of the right to a government backed pension. This right was further extended to final salary schemes (those that pay you a pension based on your final salary) and many (well above 6 million) duly took advantage of the option.

One of the key conditions of the contracted out rebate was that it had to be invested in a separate “protected rights” pot. There were also restrictions on the form of benefits that protected rights could be used to purchase as they were after all designed to replace government benefits.

In April 2012 protected rights were abolished in the name of freedom and simplification. These pots were just folded in to everyone’s pension account and you could do whatever you wanted with them within the normal rules for a pension.

At the budget last week the last part of that sentence has been deleted, anyone who previously had protected rights will shortly be able to do what they want with them, it is after all their money. So the prodigal sons who have contracted out can now live the good life funded by the taxpayer.

Last year it was announced that SERPS and contracting out would be abolished in favour of the single tier pension which would mean that everyone would receive a minimum income which was above the means tested level.

Now the government’s defence of the pension reforms is that they are just enabling people to have control over their “own”money. If someone blows their money on a Lamborghini  then so be it they will have nothing other than a nice car and the new single tier pension and the latter will mean that they are not a burden on the taxpayer.

Except, and this is where the elder brother starts to get angry at the prodigal son, if you have been contracted out then you lose a proportion of your entitlement to the single tier pension. You need 35 qualifying years to receive the single tier pension and contracted out years don’t count!

So we’ll have millions of people who will have access to capital provided by the taxpayer  to spend on whatever they want. If they run out of cash then they will receive a reduced single state pension which will then be topped up through means testing by, yes, you guessed it the taxpayer!

So like the elder brother in the parable many taxpayers should be asking the question why should these prodigal pensioners receive their pension benefits early and end up receiving the same benefits as someone who has not received their contracting out rebates?

I’ve been told by many people that I’ve misinterpreted the parable of the prodigal son, and perhaps I have. However in the case of prodigal pensions there is a strange lesson emerging and it seems to be spend your future now and don’t worry we’ll still look after you no matter what happens. Is that really the message we want to go out?

Contracting out rebates are at the sharp end of this argument, but they illustrate the inequality and the poor outcome that this reform is going to bring about.

I’ve no doubt that this policy will end in tears, after a brief but wonderful period of partying by the Baby Boomer generation. At that time we can expect many politicians to stand up with the benefit of hindsight and say that they were never in favour of it. But leadership means standing up against something popular but you know is wrong, not waiting until the chickens come home to roost and then condemning after the fact.

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