The Pru plots a pension revolution

Michael Drewett reports on a plan to harmonise provision and eliminate confusion among savers

PRUDENTIAL, the UK's biggest life insurance and pensions company, is proposing a radical streamlining of current pension rules which it says would allow price cuts, reduce complexity and confusion, and hopefully encourage people to take greater advantage of tax breaks available for saving for retirement.

The insurer is drumming up support from politicians, other companies and - it hopes - even the Consumers' Association, and plans to put its proposals to the Government next month.

The idea is for a single type of personal pension available to all to embrace a number of existing pension arrangements and a no-fuss set of rules for the majority of people saving up to pounds 6,000 a year for retirement.

"The sum result of pensions legislation is horrifying," says Prudential's head of pensions, Steve Bee."If someone wanted to sit down from scratch and design a system that perpetuated a priesthood of consultants and experts, then the current model would not be far off. To most people, it's pure rocket science. If, however, the intention is to encourage financial self-sufficiency in later life, it is time to bring out a new broom."

Prudential says the existing pensions framework is failing in its singular purpose of helping ordinary people to save for their old age. A succession of legislative and regulatory amendments has created a web of complication and expense, it says, with savers in a variety of schemes with different rules. People have been put off saving altogether, and the complexity feeds through into higher costs.

Pensions companies have not been blameless in exacerbating the complexities and taking advantage of consumers' confusion. Only last week five companies, ironically including Prudential, lost a legal case which is seen as establishing the right of people who believe they have been mis-sold a personal pension to sue through the courts. The companies wanted an existing review led by the Securities and Investments Board, the City watchdog, to handle the thousands of potential complaints.

Prudential wants to see a simple, harmonised set of pension plan rules for the majority of people making modest individual savings for themselves for retirement. This would cover everything bar the main pension schemes at work and state provision. It would include existing personal pension plans, old-style plans called retirement annuity contracts, and top-up plans called AVCs (additional voluntary contributions) or what are known as free-standing AVCs .

For people saving up to pounds 6,000 a year - most people - there would be an end to distinctions between these types of pension. At present, for example, if you have been contributing to an AVC and decide to leave your job to become self-employed, you have to stop the payments and start a personal pension from scratch, even though the two plans are in effect trying to achieve the same thing. In practice, because people forget to cancel direct debits for AVCs, this can cause an administrative nonsense of contributions having to be returned and then paid in again to a new personal pension, says Prudential.

With so many plans there are also different rules on how much money you can pay in and the amount of tax-free cash you can take out at retirement.

Existing regulations could be left in place for those wishing to save large amounts. But Prudential wants to see a pensions "safe haven" made available for people saving up to pounds 6,000 a year. They would not be subject to the now onerous checks on contributions and benefits designed to temper abuses by the well-off minority, but which companies say increase contract charges for everyone else.

Prudential is also proposing that unemployed and non-employed people (such as housewives) with savings they want to put aside for retirement could get the same tax breaks as the employed and self-employed - the only people who can currently contribute to personal pension policies.

Prudential put forward its proposals at a high-powered seminar of politicians, consumerists and pension company executives just before Christmas and, says Mr Bee, received "a great deal of empathy". Attending the seminar were the pensions minister, Lord Mackay of Ardbrecknish; Frank Field, a Labour MP and pensions expert; the Consumers' Association; and the bosses of a number of the UK's biggest pension companies, including Standard Life, Legal & General, Norwich Union and Equitable Life.

Prudential is now drafting a plan for bringing about the changes to give to the Government next month. Labour's Mr Field said he would be putting his name to it and Prudential hopes to get similar backing from the Consumers' Association and other pension companies.

Requiring people to contribute to a pension plan is something currently being studied by the Labour party leadership, according to Mr Field.

It may also be recommended by the Retirement Income Inquiry, a body sponsored by employer-based pension schemes, which is due to publish a report on the future of pensions next month.

The National Association of Pension Funds, which represents employer- based schemes, and Frank Field have both recommended compulsory saving for retirement.

q Additional reporting by Steve Lodge.