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Looking on the Bright Side of the Pensions Crisis
There's
been a lot in the media about the supposed pensions crisis. Most of it is poorly
argued. Worse - it is poorly titled. Calling it a "pensions crisis"
creates the very crisis we are trying to avoid. There are two ways to manage the
supposed pensions crisis - bad and good. We are all struggling to move from the
bad to the good, but we keep shooting ourselves in the foot. The Government, regulators,
the financial services industry, workers and consumers need to work together to
improve things. But they need to know how, and we all need help in removing some
barriers for this to happen. We also need to end the culture of guilt and bullying
- applied mutually by government and industry - for the good to happen. To get
there, a lot of people need to be persuaded to think and act differently - so
stand forward, marketers!
Yes, we
have lots of older, under-pensioned people about to retire. Yes, we have new generations
of older people refusing to save or to trust financial institutions, preferring
instead to concentrate their risk by investing just in housing, and making their
assets illiquid unless they move to some kind of equity release scheme. Yes, we
have a financial services regulator beating institutions up on so many different
fronts. Yes, we have tax laws on pensions that continue to change, forcing financial
advisors to remain experts in taxation and product terms rather than advising
customers. Yes, we have very large numbers of people playing the benefit fraud
game to ensure they do better even if they are not entitled to. Yes, we have lots
of people who made bad pension and investment decisions crying wolf and blaming
the whole system rather than their own failure to diversify pension plans or move
into cash near their retirement. Yes, we have had some financial services providers
making related errors, either promising unsustainable bonuses to pensioners or
failing to move enough funds into lower risk assets to match their rising short-term
liabilities. Yes, we have many investors panicking about the current value of
their investments even though in the long run they are likely to do OK. Yes, we
have increasing incidence of long term ill-health (brain, muscular-skeletal, cancer,
heart - often occurring for protracted periods when it seriously drains assets).
Yes, we seem to have more financial shocks (whether from terrorism or failed governance)
which seem to focus the risk on the individual citizen whose pension is with the
private sector rather than the state. Yes, a fixed retirement age encourages people
to plan unrealistically. Doom, doom, doom……
Come on
marketers. What's our great shared objective? I think it is not to solve lots
of small problems, but to get one big thing right. It is to make it good to age
in England. We need to help people spread their lifetime income so it matches
their lifetime need. We need people to be more aware of what life is likely to
hold for them financially - in the long run. Those who remain active and healthy
could be encouraged to look forward to an extended period of semi-retirement (much
healthier for them), during which they draw less on state and private pensions
and benefits, where couples might think about one giving up work earlier and one
later - or as is sadly usually the case, where one remains healthy and the other
gradually becomes less healthy, where the healthier one works longer until the
ill-health of the other means that retirement is necessary. Perhaps we need to
think differently about intergenerational transfer of property, so that estate
duty does not force people to give away property early and so not use it for their
own care. All this is entirely possible. Yes, our population is ageing - but more
gently in the UK than in most of Western Europe, because of our higher immigration.
We are staying in work longer too - we have far fewer long-term unemployed than
most other countries in Europe, so can stay working longer.
However,
all this means big changes in how government and business approaches policy. The
Government, the Treasury, the Inland Revenue, the Financial Services Authority,
the Department of Work and Pensions, the financial services industry, mass-market
employers possibly even the construction industry, should be working closely together,
to one agenda. Pension age should be abolished, as should detailed restrictions
on how people should take pensions. People should be given quick estimates of
what pensions rights they have, what they will have left each year if they start
taking pensions, and how they can improve the situation.
The Government
might consider allowing introduction of an asset class linked to e.g. mix of FTSE
250, bond index and cash where providers follow prescribed investment strategy
and performance is underwritten by the taxpayer, not (as currently proposed) by
successful pension providers, with their profit coming from a fixed agreed charge
for entry, concurrent administration and exit, so competition would be through
the efficiency of companies managing it. Business could be allocated by tender,
reducing marketing costs to the minimum. No switching provisions need to be built
in, nor is there any reason to switch as all performance will be the same.
In short,
encourage people to work longer, move to part-time, take longer holidays, develop
new part-time occupations. Encourage them not to invest for quick gain and early
exit. Encourage them to understand what is likely to happen to them in their last
20 years and how to match financial assets (total amount and allocation) to it.
Encourage deferral of state pension (but not all or nothing - allow deferral of
part). Acknowledge that a prime role of government is to sustain investment performance,
and create a taxation regime that is good for pensions based on shares. Focus
governance issues on this (are directors and senior managers acting in the best
interests of shareholders, rather than their own?), and this does include issues
such as sensible distribution of profit to provide stable income. Keep the focus
on the positive - how to age nicely in the UK. All government departments and
those they are involved with in industry should speak as one voice about it to
the media and the electorate. And try to act as one.
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