Burglars thrive when they know they can’t be seen. Of all the dark places, nowhere is more obscure than inside the black box of pension funds. Virtually no one understands their pension scheme. Even those who think they do can’t know what is shrouded in secrecy: the real charges paid over a lifetime, hidden in the dark where City burglars prosper.
Yesterday, faced with the mass obstruction of the pensions industry – in effect the entire City – the government beat a hasty retreat. Sneaking out a written statement and avoiding questions, Steve Webb, the pensions minister, backed away from capping the charges imposed by pension funds, most of them secret. To understand the full force of this U-turn, here’s what Webb boldly announced last October: he would conduct “a full frontal assault” on the pensions industry. He calculated someone saving £100 a month all their working life could see “the huge sum of £160,000” lost in charges. “Enough is enough,” he said, urging “an outright ban on all charges above 0.75%”.
That too was a U-turn. Ed Miliband named pension funds in his attack on “predatory capitalism”, warning charges were the next big scandal, with a cartel of just four insurers controlling 70% of the industry in myriad schemes. The Association of British Insurers protested that his “scaremongering about charges runs the risk of putting off many people from saving into a pension.” Webb agreed, calling Miliband “irresponsible” for “stirring up cheap headlines”, sneering: “Why doesn’t the government set a price cap on a tin of beans?”
But he abruptly spun round as the wind changed with a surge ofpensions critics, including the Office of Fair Trading, some leading Tories and a campaign in the Daily Mail. With new reforming zeal, Webb compared pension companies to the innkeeper in Les Misérables – “Charge ’em for the lice, extra for the mice, two per cent for looking in the mirror twice” – as he accused them of “ever more inventive ways of extracting money from their clients”. He quoted the OFT’s discovery of18 different sorts of charges as fund managers churn shares to skim commissions.
But the pension funds have had the last laugh, with Webb’s sheepish statement that, contrary to his promise, “any cap on charges will not be introduced before April 2015”. No one thinks he will introduce them in the middle of an election campaign, either. It’s a dead duck on the dust heap of Department for Work and Pensions disasters. Responding to U-turn headlines, the DWP hastened out another statement late yesterday: in April 2015 there will be a cap, size unknown, but only on auto-enrolled pensions.
Here’s why this matters more than ever. Auto-enrolment – relying on inertia to enrol every employee into a pension scheme – is already being rolled out. Sharp-eyed critics warn this may become a massive mis-selling scandal, as the low-paid find hidden charges eating up their small pensions. Many risk no gain at all if their pension falls below the threshold for the minimum pension guarantee when they retire, losing everything. The only gainers will be the government and the pensions industry. That’s grand theft mis-selling.
Miliband will return to his first critique of the industry, aided by Gregg McClymont, his astute pensions shadow minister, who has relentlessly dogged Steve Webb through the labyrinthine pensions undergrowth. Calling pensions a “broken market”, McClymont presciently predicted that the government would never stand up to this greatest of vested interests.
Drawing up their own policy, Labour should study a radical paper by Michael Johnson – former Cameron policy adviser and investment banker turned gamekeeper – from the Conservative Centre for Policy Studies . Titled Costly and Ineffective, it’s so radical and egalitarian that it caused the resignation of CPS board members, including Lord Forsyth, doyen of many a City investment bank and insurance company who was reportedly “apoplectic” at what he called a “Stalinist” policy. No surprise, for it proposes the demolition of the pensions industry.
The paper pulls the rug from under the rationale for most tax reliefs, exposing vast sums the Treasury could claw back. Relief on contributions, national insurance, tax-exempt lump sums and others amounts to a phenomenal £48.4bn a year. Half all tax relief goes to the top 8% earning over £50,000, who need no incentives. Just abolishing higher-rate relief would bring in £7bn.
The crucial point is that the young no longer trust pensions. Now defined benefits are dead, no one knows what they will get for locking away cash in high-charging funds until the age of 70: paying off university debt and buying a home come first. Pensions as we knew them are over: when interest rates rise, many now auto-enrolled may drop out. The industry claims tax relief is just tax deferred until retirement, but Johnson shows how only one in seven higher earners ever pays it back, as most pay only basic rate once retired. What’s more, charges snatched by the industry amount to more than the tax relief. This is benefit dependency for the City.
Johnson proposes something more attractive and fairer to all. Pensions and ISAs should be rolled into one, allowing savers to withdraw money as they like. The Treasury would add £1 for every £1 saved, equal relief for all, but anyone taking out cash before retirement would lose the Treasury contribution. It would cost less than today’s relief and make saving understandable and attractive, with transparency on charges. His conclusion is devastating: the pension system is “hugely expensive”, “ineffective” and “skewed towards the wealthy”; failing to create a savings culture in the young is “exacerbating the looming generational inequality”. Most tax relief is anyway “captured by the industry.”
Such radical reform would, says Johnson, “require preparedness to confront deeply entrenched vested interests within the savings industry”. But the government has just failed that test, even on the modest first step of capping pension charges stolen from the “hardworking” to line City silk purses.
The pension bill now in parliament has no cap, or transparency on charges. On Monday Lord Lawson, putting forward amendments similar to Labour’s, demanded compulsory disclosure and independent supervision, complaining that “the foxes are regulating the hen coop”. Here was a former Tory chancellor – a Tory chancellor! – saying: “There is absolutely no correlation between investment management fees and performance” – adding that “portfolios are being deliberately churned to generate commissions”. That’s Ed Miliband’s tune. Is anyone surprised this government has caved in?