Did IT Problems cause A Day pensions shock?

The much hyped A Day reforms initially looked set to revolutionise attitudes to pension investment. From April 2006 there was to be almost unlimited freedom to hold different types of assets within a pension fund and investors and product providers eagerly awaited the chance to include residential property along with more exotic assets such as vintage cars and fine wines within the tax efficient wrapper of a self invested scheme.

All assets placed within the pension would have qualified for the same generous income tax relief that currently applies only to a relatively limited range of equities, bonds and commercial property. As pensions suddenly became the staple topic of discussion of the Sunday money pages, dinner parties and pubs alike, the pensions industry ploughed millions of pounds into systems and training to meet the anticipated demand. Pensions provider Standard Life alone received £1 billion of investments into its Self Invested Personal Pension.

However the Chancellors pre-budget report on 5th December killed several years of expectation and planning when he announced that he was backtracking on the reforms and that these new asset classes would not now benefit from the tax breaks associated with traditional pension investment.

It has now emerged that a fresh episode in the seemingly never-ending saga of civil service computer implementation problems could have been a major contributory factor in this sea-change in the authorities attitude to the new rules.

Industry commentators point out that the launch of the computer system to monitor such investments was at least six months behind schedule. The Association of Member-Directed Pension Schemes learnt that three weeks before the Chancellors U-turn, HM Revenue and Customs (HMRC) announced that it was significantly behind on a computerisation programme to monitor transactions involving this wider range of allowable investments. This admission was surprising to say the least as Government mandarins had last year received representations from the pensions industry voicing concerns that the new rules would be unworkable without considerable investment from all parties in back-office systems to administer and monitor the explosion of allowable assets. There were reassurances at the time that the authorities would do their bit to make the new regime work.

Those same industry figures were informed that the computer systems were not going to be in place in time for the new investment freedoms. HMRC released a statement saying that they were running into general problems with their new process to collect information and to apply tax charges and rather than roll out the process in one go that they would phase-in the new system and on November 11, Ivan Lewis, economic secretary to the Treasury, stated “Pension Scheme Online service will not initially be as comprehensive as originally intended”.

This was undoubtedly a major factor in Gordon Browns 11th hour decision to backtrack on the reforms and leaves the industry with a multi million pound investment programme without a market to service.

With the ongoing debate about the retirement funding crisis in full flow and unprecedented consumer interest in investing for the future, an ideal opportunity to encourage far greater pension investment may have been lost. Freedoms next year allowing 100% of salary to be invested will spark an enormous boost to contributions and it will now be down to product providers to re-engineer products with the investment flexibility required by those would-be self investors. In particular providers are now pinning their hopes on the new REITS (real estate investment trusts) legislation as a backdoor entry into the residential property market but it will be a long time before the industry recovers from the shock to the system that the Chancellors untimely announcement has caused.

Return to Articles page