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Can pensions help you when you’re broke?

henry tapper

When I was a financial adviser, I often hear people say that they couldn’t afford to save into a pension. When I probed, this objection often boiled down to  a fear that “tying up money” left people scared that in an emergency, they would have no spare cash. Better to keep money in a building society (for a rainy day) than invested for the long-term future.

I suspect this will be one of the prime drivers for people opting-out of auto-enrolment.

It’s hard for me as someone who’s never had a problem getting an overdraft or credit card and someone who had the backstop of the “bank of mum and dad” to understand what being broke is really like.

I often see and hear comments from people similar to me, wondering why anyone would use Wonga with their 4000% APRs. I met a man two years ago who walked with a limp. It turned out that he had had his legs beaten by a gang after he had failed to repay them money. The long-term injury resulted from him not going to hospital to have his leg re-set , he told me he was terrified that the hospital might have forced him to report his attackers to the police, putting him and his family in more jeopardy.

He was a man in steady work, he still is though he has had to move jobs because of his injury. Had he had access to money from his pension plan, he would not have taken the loan.

This is an extreme example but it is fear of things like this that drive many people live with little money. For them Wonga is the acceptable face of payday loans. Wonga gets 98% of its loans repaid and though it is expensive, people know where they stand on its costs.

There are alternatives to Wonga. Zopa and other credit unions provide relatively cheap credit but are less accessible (partly because they do not advertise). The crunch for most credit unions is distribution, how can they get to the people that need them, cost-effectively.

Which is where the pension schemes can come in. I quote from a thread on mallowstreet which was discussing how pension schemes could be used to provide easy access to emergency credit to the staff of the sponsoring company.

I am not an expert on how this could be set up, just an idea.  But maybe you could do it like this:

1.  Allocate capital to a cash account set up as a management company, as if you were appointing a fund manager to manage capital.

2.  This entity then enters into loan agreements with individuals from the firm, probably a percentage of their salary, looking at Wonga I think they do up to around £1,000 for the pay day monthly loans.

3.  Charge interest and receive the loan back at the end of the period.

Is this any different to a fund manager going out and buying a gilt?

In answer to the question “no”- the need of the borrower is for cash, the need of the lender is for an income stream leading to a capital repayment.

As we see the rise of quasi-mutual mastertrusts, are we also seeing an opportunity for companies to team up with credit unions or even use their pension schemes as a source of mutual credit?

Turning the great pensions funds we have built up since the war to solve some aspects of the credit crisis in this way, then Nick Clegg’s hare-brained scheme to refloat the housing market using the grandparent’s tax-free cash. Ideas like this are relevent, not to the traditional middle class beneficiaries of occupational and personal pensions but to the people who so far have been excluded and who auto-enrolment will include.

 

 

 

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