This is a blog written on Hilary Salt’s Facebook page which everyone should read. They aren’t my views and I don’t agree with a lot of what Hilary is saying, but this is the first coherently argued position I have read from the left.
It finishes with a paragraph that sums up why Hilary is a personal hero of mine and why her voice should be heard in any serious debate about pensions.
The headlines are mine- the picture of George is Hilary’s.
These are my top ten reasons for not liking the Chancellor’s proposals to remove the need to provide a long term income from pensions savings:
1. DIY annuitisation is massively inefficient. Annuities are a collective way to provide an income for life which allow the pooling of mortality (and survival) risks. It very clear that not building up pensions collectively is inefficient. If for every 100 people, we expect 97 to be alive at retirement, saving collectively means we need to save 3% less – saving individually costs 3% more. Pooling to avoid this inefficiency is one reason why collective schemes are better. Annuitising individually is inefficiency squared. Everyone needs to spin out their savings to cover a long life expectancy instead of everyone buying an income based on average life expectancy. (This is an economic point rather than the behavioural point covered in 4 below). So at a macro level, private, individual, DIY annuities are massively inefficient.
2. Individual drawdown is likely to mean a reduction in the amounts invested in companies building long term growth in society. It’s already clear that individuals investing on their own account can be “recklessly prudent” and even setting aside wrong decision making, those investing individually rather than collectively are less able to withstand the volatility of high levels of equity investment. (Of course, this was equally a problem with annuities and lifestyling in individual accounts – another good reason to support CDC or collective db schemes).
3. Not requiring annuitisation undermines auto-enrolment (perhaps fatally?). I can support (just – I struggle with auto enrolment) employers being made to contribute to a pension arrangement for staff – but should they be required to contribute to a savings scheme? And should immediate tax relief be given to contributions to a savings scheme?
4. Some people will of course cash in and spend their retirement savings although the Australian experience doesn’t show this as being widespread. And at least some of those who spend their savings and fall back on the State would otherwise have only been able to buy an inadequate annuity so would have been claiming additional benefits from day one. Equally worrying though will be the large numbers who choose the underspend, worrying that they will run out of cash over the course of their retired lives. And there is a real danger that people will draw down cash, look around for somewhere to put it, end up putting it in a bank account earning zero (negative real) interest. Again this is a massively inefficient way to provide retirement income.
Not much wrong with annuities
5. I am unconvinced there is too much wrong with annuities. The FCA review indicated that people lose on average 7% from not shopping around – given that many had very small pots, I’m unconvinced I would be bothered. I do think we as an industry need to take some responsibility – when we throw around terms like annuity rip off, it’s unsurprising people don’t like annuities. In fact annuities can be a good product. I think people should definitely be buying them later and perhaps in tranches. I do think new and better products were starting to be designed – the real push would come when we got to a stage where many more people were reaching retirement with substantial dc pots which made innovation worth while.
The legislation of “pension liberation”
6. Removing the need for annuitisation will have a massive effect on closed db schemes. Those consultancies who have aggressively marketed derisking services to employers are already working on new services. So you offer all the deferred members in your closed db scheme s transfer value (or just cash if under the new trivial commutation limit of £10,000). Of course this is a time limited offer as the Chancellor may change his mind so roll up, roll up for the new flexible personal pension. Employers won’t even need to think about enhancing transfer values. This is the legalisation of pensions liberation.
DB schemes won’t invest in UK industry
7. So closed db schemes will end up being largely pensioner only. This will of course decrease the length of their liabilities and is likely to result in their decreasing the level of equity investment – again unlikely to help in long term investment in UK industry.
People will give up good DB promises
8. And open db schemes may well be saying goodbye to deferred pensions. Again the lure of a shiny flexible individual plan may mean people abandon good db promises.
A strain on the PPF
9. And how will a massive shifting of db liabilities out of schemes affect the funding of the PPF?
Removing the safety net
10. A major safety net for people who now have inadequate dc schemes is the legacy db benefits they also have. If these are also sacrificed on the altar of choosing to transfer to a flexible individual pot, this will leave them with no protection.
The real problem of course is that these proposals are hugely attractive to employers and to individuals. So standing up and saying they are wrong will be very difficult. That is why the Labour Party are struggling to sound coherent in their response. But anyone who wants efficient and sensible pension arrangements needs to really question these proposals. The proposals transform pensions savings into individual tax planning arrangements. We need to argue for sensible ways to provide dignity in retirement to the vast majority of working people.