In money managers we trust?
‘Annuities have not been the retirement income of choice in their own countries, but failure to promote them has been a weakness not a strength”
Unsurprisingly, the DCIF’s report concludes that the answer to the problem of the “money running out” is not a return to state controls but improved financial education.
“As a result of this failure to plan for long term requirements the next big shift has to be to persuade retirees to engage with their retirement savings and be prudent when turning savings into retirement income. Successful drawdown will require retirees to manage a dwindling resource in a complex and volatile environment”
This statement should set alarm bells ringing in the halls of academia. Research byLusardi and Mitchell into financial literacy in the US found that only 2/3s of those asked could tell they were losing money if interest rates were 1% and inflation was 2%. Similarly research by MAS in Britain suggested that 22% of us can’t read a bank statement.
Whatever the DCIF has in mind, it is going to be an ambitious program that gets ordinary people to manage money against their own life expectancy! But that may be to miss the point.
The UK economist Thomas Phillipon has devoted a lifetime to studying the impact of “intermediation” from the financial services industry; he has concluded that around the world, the rake from our money managers has remained consistent at around 2% pa over the past 120 years.
The cynical among us might conclude that higher levels of financial literacy might not be such a good thing for a fund management industry that has been getting away with it for so long!
A high water mark for the “pensions industry”?
I am not so sure that the UK Government is prepared to see further outsourcing of our retirement welfare program to the fund management industry. The imposition of charging caps on drawdown (where total fees well in excess of 2% pa are commonplace) is likely to follow existing caps on pension savings funds.
If we look at other countries, we see increasing concern that the fiduciaries entrusted with the contracting out of our retirement funding are coming under greater scrutiny. Nowhere more so than Australia, where the Cooper report has been highly critical of the lack of cost controls in the Super(annuation) System. Those countries with mature DC (or CDC) systems are looking to impose better governance systems to protect leakage from outsourced retirement savings into the back-pockets of the financial services industry.
Unsurprisingly, the DCIF report is scathing about uk cost controls, claiming they stifle innovation.
A much greater threat to the long-shore drift of benefits provision from state to the private sector is the removal of Government incentives to use fund managers for private savings, especially private savings collected through payroll in the workplace.
One idea being mooted in Treasury circles is the creation of a means to tax pension pots from within – effectively sending a proportion of pension contributions back to the Treasury where tax-relief might have been over paid. I have likened this to making the Treasury an additional fund manager and the process as a partial “Renationalising of Pensions”.
Are we at a tipping point?
The Office of Budget Responsibility are claiming Britain cannot afford to retain the current system of incentivisation where tax-relief is granted on contributions at someone’s marginal rate of tax.
It points out that this system is not only unaffordable but overly generous (relative to our OECD neighbours).
If , as is widely expected in March’s budget, the Chancellor cuts back on tax-relief and replaces it with a system of savings credits. then we may look back at the past few years as the high-watermark, for the private sector’s involvement in pensions.
A radical review – long overdue
What then of the State and its role in helping us fund our retirement and the cost of keeping us alive?
The issues of mortality and morbity are bed-fellows, the cost of a longer life is not just the need to feed, but the cost of healthcare. Being brutal, the longer we live the higher the cost of old age.
While Government response to this problem may vary according to the political persuasion of local Governments, there appears to be a long-term trend in Government, whether in the Americas, Euro-zone, in the Far East and in Australasia, to address this problem through state sponsored welfare programs. Obama care is the most obvious example, but there are many others.
Britain is not alone in radically reviewing the relationship between the state and its obligations to its elderly. The world is a smaller place for technology and the exchange of experience through data, is allowing Government’s to make informed decisions on what can and cannot be achieved privately.
In 1998 I was quoted by Barbara Castle as saying that the private sector aspires to the efficiency of state pension provision. No statistical data has changed my view. I work in the private sector and benefit from the work that the Government outsources to us. However, I am sceptical that we can create a management system for our money or an advisory system that helps us spend it, that can rival the simplicity and effeciency of the State Pension.
Nearly 30 years since the introduction of personal pensions!
I am pretty sure that the next thirty years, like the past thirty years, will see a battle between public and private pensions. For the last thirty years we have seen the tide in favour of the private sector. But just as funds go up and down, so do tides go in and out!
I am not sure that we are any better or worse in providing for our retirement than other countries, but with the help of friends who work on this question for a living, I want to find out!
We may live on an island, and we may be parochial in our thinking, but we have the internet, which knows no national boundaries. So by the time I get round to writing that article, I may have a better view.
Please mail me your thoughts on email@example.com or just drop a comment on this blog!