“We all live in a Robbie Fowler House” , sang half of North West England (or so it seemed to any football fan ten years ago). The Fowler pension solution was to create a for profit social housing organisation with the beneficiary Mr R Fowler.
Nothing wrong with that , my friend Mr David Hargreaves would point out that this is sensible pension planning. Though the value of Mr Fowler’s property portfolio has risen and fallen over the past ten years, the income has risen in line with rents, and rents tend to rise with the cost of living. As David never ceases to point out to me, this is pretty well what a pension should do.
David’s point is that what people needed was Robbie’s capital and what Robbie needed was people’s income. Robbie simply cut out the middlemen (and we were all winners).
The British Government has access to capital through the Capital Markets but also from its citizens either through tax (unpopular) and through paying interest on people’s savings (popular).
Retiring people have quite a lot of savings, money that comes from their private pensions (25% of which is generally taken as a tax-free lump sum) and money from peripheral retirement saving (ISAs ,building society accounts and share portfolios (thanks Sid).
For those retiring, the first thing thing missing is the pay cheque, it may still come-diminished- but it is not what it was and may not be there at all. Instead there is a regular payment (hopefully) from an annuity and from the DWP in Newcastle and a lot of cash.
Recently the Government has opened the door to people who have cash and want more state pension. People retiring before 2016 can increase their basic state pension by up to £25pw by paying a cash sum to the Exchequer (details here).
This seems a sensible way of going about things, provided that the rate of exchange from capital to lifetime income is fair. There are two ways for the Government to set this rate of exchange, either it can compete with the markets and give as little for your money as it has to (this is how the gilt market works) or the Government can offer you a pension based on what it projects as being its true costs of doing so.
Now you might think that the Government would be hamstrung using the second methodology and would have to pass on all the inefficiencies of the public sector. It may surprise you to know that , at least in terms of paying pensions, the Government is an extremely efficient provider and in fact it is able to pay, pound for pound, more pension for your capital than anyone else. There are a number of reasons for this
- The Government is genuinely not for profit and it does not have high fixed costs relative to the size of the population it serves
- The Government does not have distribution costs, it is one of one in the UK.
- There is no fund to pay the pensions , there is however a guaranteed source of revenues to meet interest payments and the cost of people living longer than expected
- There being no fund, there are no fund costs
- The Government is not subject to European rules on reserving which push up the cost of annuity provision to private suppliers
I could go on but won’t. The Government’s costs, relative to the private sector, are so much lower that it could buy back our savings and pay off the national debt (if it so chose).We would be pension rich and capital poor but like Robbie Fowler- we’d probably see that as a fair long-term exchange.
Re-reading some of my blogs from the Autumn of 2010, I am reminded that when the Government last set the annuity conversion rates for occupational pension schemes relative to personal pensions, they gave occupational pensions a big thumbs up. Read my blog Treasury stop messing with Pensions and you’ll get the idea.
The point is that the Government know very well that occupational pension schemes are able to provide certain pensions at a fraction of the cost of insurance companies. By extension they know that they can provide pensions much cheaper than occupational pensions. The question is why they don’t.
The only answer I can think of, for why the Government won’t extend the capacity to buy extra state pension beyond £25pw (and that for a limited number of annuitants), is that to do so- it would have to accept that the annuity market is hopelessly inefficient. Indeed it would also have to admit that were occupational schemes be able to behave like Government and pay pensions on the expectation of future revenues, they would be almost as efficient as Government (they wouldn’t have quite the economies of scale).
Which brings me back to Mr Fowler and his DIY pension , based on him being a for profit social housing company. What Mr Fowler has done, is cut out most of the layers of intermediation between him and his pension. Those in the Kop and the Kippax could as easily have sung “we all live in the Fowler pension fund” (except it isn’t quite as fun).
The day that the State takes the bull by the horns and starts punching to its weight on pension savings, is the day I know the Treasury are serious about retirement living standards. Right now, I reckon they are in the ABI’s pocket and would rather not talk about the true cost of the State paying pensions for fear of offending the life companies on whose revenues , short-term finances depend.
We are in the grip of a private sector double-bind which is quite unnecessary. When the nation wakes up to the fact that we are better off with the efficiencies of state paid - or at least state underwritten – collective pensions , then we can dispense with our reliance on insurers.
Or put the other way round, the moment that the Treasury wakes up to the fact that it has more to gain by getting its financing from the retirement savings of its population than tax-revenues from the private sector insurance companies, then we have a way forward.
At the moment, we have to recognise that the true power in pension provision, rests with the insurers who seem capable of wriggling out of anything, simply by playing the get out of jail card that pay more tax.
Cutting the private sector out of the payment of private pensions altogether is not feasible; nor is everyone living in a Robbie Fowler House. Ultimately we need some level of intermediation to make the system work. But I argue that currently we have the balance wrong and it’s time that the Government progressed its role as a partner in private provision, further than the tentative steps it has taken this parliamentary term.