Monday, 16 March 2015

Britain's pension reforms have 'disaster' written all over them

This week's UK Budget will probably see some headline giveaways. There's an election in the offing, of course, and no-one wants to be caught flat-footed, as Labour were when Roy Jenkins announced a pretty boring, 'steady-as-she-goes' package in 1970. Labour lost that election, and many in the party blamed their Chancellor's useless rectitude. George Osborne (above), a politician to the tips of his fingers, is unlikely to make the same mistake.

One thing he's going to do - and he's already announced this - is extend savers' freedom to take money out of their pension pots to existing pensioners. He liberalised the market for people running up to retirement last year, you may remember, and this carries the changes one step forward. The Conservatives know that older Britons vote. They've made sure that those senior citizens have kept hold of their free bus basses, cold weather payments and TV licenses while boosting the overall state pension via a link to earnings. Now they can draw down some of the money they've got locked up in Defined Benefits (DB) pensions. Want a conservatory? A cruise? A flat for your children? Certainly, madam.

We advise extreme scepticism and caution about these changes. Where to start? Well, as historians, this sounds very, very like the 1980s pension mis-selling disaster, when workers were encouraged to opt out of the State Earnings Related Pensions Scheme and buy their own top-up products? The results? Well, as chapter five of Anthony King and Ivor Crewe's excellent The Blunders of our Governments demonstrates, it was a disaster that we're still living with today. Lots and lots of unscrupulous providers moved in and ate up all the business; millions of Britons ended up with pensions that were far less generous than what they would have got if they've stayed in their existing schemes. 4.3 million people opted out of SERPS; 6.5 million people bought personal pension products at the height of the late 1980s and early 1990s fashion for such products. We're still picking up the pieces, and pensioners earn a lot less than they might have done.

That's one of the dangers of this new policy. Will mis-selling become once more a real and present danger to both the taxpayer and the pensioner? Perhaps it will: the record of UK regulation in this area doesn't give us much hope that the authorities know what they're doing as regards stalling this threat. Some experts are warning of an 'open season for fraudsters'.

And here's two more thoughts while we're at it. Defined Benefits schemes are already struggling, for all number of reasons, but primarily because of the historically low interest rates that we've had with us now for many years. This is yet another reason why they might struggle further, because withdrawals from those schemes might make them less table. The potential uptake of the drawdowns seems to be pretty high at the moment, and the Treasury has come back only with an extremely unconvincing response to the public consultation round. Basically, they've just said 'we'll issue some more guidance to schemes'. Well, that's reassuring. I won't be hurrying out and putting money in a DB pension.

The third point to make is that firing off all this cash - and let's face it, much of it will end up in the buy-to-let or mortgage market - will further reduce productive investment, which we desperately need to diversify at a time when the banks are still hobbled by debt. That 'march of the makers' that we keep hearing about will disappear even further over the horizon.

Instead of being open with people, and saying 'well, if you want high yields, you have to invest more, or hope that returns recover' (and they probably will), this is just a green light to go on a spending binge. And then come back to younger Britons (and the taxpayer) saying it's all gone.

Here's a thought: if you're British and you're under 45, you're likely to work pretty much until you drop. And these changes make that even more likely. You can draw your own conclusions about the fairness, the efficiency and the efficacy of the deliberate set of calculations that your leaders have made.

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