Dithering while pensions burn

These are interesting times – to say the least – for the pensions and savings industry.   Pension specialists and providers are accustomed from much experience to the industry and its issues having a rather limited appeal to those outside our magic circle.  Trying to get anyone under about 45 interested in the subject of pensions used to be on a par with interesting the Pope in personal family planning.

Not any longer.  The man in the street is now very aware that not all is well in the pensions and savings industry.  News of stock market falls and scheme closures no longer hide on the inner pages of the financial section.  They are front page news, discussed in trade unions and around the water-coolers, and very few people can still be totally unaware that there are large and as yet unanswered problems with the nation’s provision for its future retired.

Even the Government has realised that we are on an unsustainable course – though quite how large the gap between our current savings and our future needs is remains a matter of debate, and the Government’s figures still seem to deny the full scale of the problem.  And sadly, all this valuable official attention to pensions and the problems of the savings industry comes after the Government’s biggest impact of all on pensions, the removal of ACT in the early years of the last parliament.  It is seldom that “Act first, think later” is the best course of action.

But at least the Government has now realised that we do have a problem, and having done so, no-one can accuse Whitehall of ignoring it.  We have had the Sandler Review, then the Pickering Report, and now the much-awaited Green paper, issued just before Christmas.  All these papers, in common with virtually all other commentators, agree that we must as a nation save more for tomorrow, and all agree that this inevitably means we must spend less today.

But three awkward facts remain:

The biggest issue for most companies who provide pension schemes is their cost.  Official moves to make contributions compulsory and increase scheme member protection – both ideas floated by the Government recently – merely add to employers’ costs, and will hasten the closure of any scheme that goes beyond the legal minimum.  So far, the pressure on companies to cut costs seems to be driving company pensions policy, and nothing the Government has proposed will turn this round in the short run.

The biggest issue for most employees is finding money to save.  Without large incentives, many, especially the lower paid, will continue to treat saving for their future as the optional extra which gets squeezed out of their budget. It may be that education can solve this and reorder people’s priorities for their finances, but the realists in the savings industry know very well that history, not to mention the markets’ recent track record, is against this.  And as the personal sector seems if anything to be increasing its borrowing for consumption at the moment, many people are increasingly of the view that the only way to have people save more is a degree of compulsion.

The biggest issue for the Government is that it is, itself, a major contributor to the problem.  This Government has greatly increased the taxation of pension funds.  Taxing pension funds takes money out of long term savings and puts it into current expenditure.  This is the exact opposite of what we as a nation need to do.  It is very difficult for the nation overall to move in the direction of greater saving when the biggest player in the economy, the Treasury, continues to take such a large amount each year out of the savings industry.

It used to be the case that we in Britain could point to how much better placed we were than our Continental neighbours for retirement provision.  With our large funded pension industry, we were able to believe that pension problems only happened to others, and that the UK was well provided for and insulated against the challenges the Germans, French and Italians faced.  As events of the last 3 years have proved, this is alas no longer the case, and indeed we are falling behind other countries as they tackle the issues more vigorously and directly than we do.  Some countries are already raising their retirement age, or realigning benefits.  Some have begun tackling the issue of compulsory saving.  Others have even begun to set aside funding – real money – for their state retirement schemes.

None of these are easy steps.  All require bravery and court unpopularity.  One looks in vain for signs that the UK Government possesses the former or is prepared to accept the latter.  Instead, it is clear that the Government’s main priority in solving the pensions crisis is to do so at minimal cost to itself.  And unless and until it is prepared to stop raiding tomorrow to fund today – as it does through its taxation policy for pensions – then their other ideas, useful as they are, will not provide the solution our future pensioners need.

This article first appeared in Professional Pensions