Reactions to Michael Johnson’s performance in front of the Work and Pensions Select Committee polarise between the enthusiastic (Michael Johnson) and the derisory (the pension establishment). In between are those on the Select Committee such as Richard Graham MP who didn’t know whether to titter or applaud.
A bit like my reaction to the world’s first “boob selfie” unveiled by the Metropolitan Museum of Art and the subject of a learned article in the Economist.
The performance, which you can watch on Parliament TV here , shows Johnson the economist, paint a portrait of an international bunfight in which Britain is a loser because of our failure to sort out the fiscal implications of our over-generous and misaligned retirement benefits policy.
Johnson has two remedies to this supposed calamity.
- Switching from a pension to an ISA oriented tax system for private retirement saving
- “Scrapping” the state pension and embarking on “Beveridge 2” (I’ll deal with this in another blog)
Johnson is a fan of auto-enrolment and believes that switching to an ISA based system of retirement would be welcomed by the public and that a workplace ISA (sitting inside the Lifetime ISA) could be introduced to include employer and employee contributions and become a Qualifying Workplace Pension Scheme for auto-enrolment purposes.
For Johnson, the employer contributions under the workplace ISA would be “locked-up” till 60, but the employee contributions could be used as the individual saw fit.
This plays to the Treasury as an extension of its Freedom and Choice pension campaign and to the DWP as a way to encourage individuals to blow their retirement savings on everything from property to fast cars.
Bosum buddies or a pair of boobs?
Putting aside questions of the fairness of TEE against EET (an argument that Johnson’s LISA wins hands down), Richard Graham on the Select Committee pins down Johnson on the short-term impact of introducing further choice into auto-enrolment.
Johnson brushes aside such minor considerations and ploughs on with an iconoclastic fervour that is entirely self-referential. Johnson’s performance shows him at his best (a proper understanding of the big picture) and his worst (a total failure to consider the practical difficulties people have in managing their long-term savings).
As with his later arguments on the state pension, Johnson assumes that given the freedom to choose, people will be happy to choose. Everything that I observe in people’s behaviour around retirement saving suggests that given the choice, most people will opt for a default.
In an auto-enrolment world, the choices are taken by employers and not individuals
- employers choose whether to use contractual or auto-enrolment – 99% default to auto-enrolment
- employers choose whether to pay full whack up front or phase in contributions-99% default to auto-enrolment
- employers choose whether to contribute against band earnings or a more expensive formula -99% default to auto-enrolment
- employers choose a pension – and the majority default to NEST
In all these matters an employer is making choices which (over a lifetime) will make a difference to individual retirement savings. We do not currently claim that employers should be liable for taking decisions not in the member’s interest (if we did then everyone would default to the most expensive option and we’d have an employer revolt.
But the point is that all of these decisions (with the possible exception of the choice of pension) are decisions that can be taken on the basis of cashflow. The default decision is cashflow positive. NEST is currently being used mainly because it is the cheapest pension for most companies to install and manage.
But a choice between a workplace pension and a workplace ISA is not one that can be made on cashflow grounds (unless the fiscal playing field is tilted in the employer’s favour one way or another. If the choice is made on anything other than a cashflow basis, then the only determining factors are
- What is best for staff in terms of outcomes
- What do staff want.
Opening that debate up to employers at this stage of the auto-enrolment implementation cycle is an extremely dangerous thing to do. Because I don’t think any employer can properly answer question one and while I think that most staff like the freedom to choose, they find these choices incredibly difficult to make and will ultimately resent having to make them.
Why I am Pro LISA and anti WISA
I am among the 58% of pension experts polled by Aon who like the idea of the LISA as a means for youngsters to hedge bets between spending on house deposits and retirement.
I am amongst the yet unpolled but I suspect majority of pension experts who see WISA as an unnecessary choice for employers staging auto-enrolment and a potential source of division for employees.
Running a WISA and a workplace pension in tandem would be a recipe for disaster at an operational level. Any employer with a WISA would have to run a workplace pension as well- if only for existing staff in a pension and for new staff joining when 40 or over.
But worse than that, it would create confusion in the minds of staff over why employers were taking these kinds of decisions with their money which could undermine the whole basis of auto-enrolment.
If you look closely at the inside curve of the left breast (as we look) you will see a mole. That mole was used to those in the know, to identify the owner of the boobs.
I am happy to see diversity (in pensions as in breasts) provided that the diversity is kept to private decisions (keep your boobs to yourself).
But in taking decisions about national pension policy, delivered through unwilling intermediaries (employers and their business advisers), I see no place for the kind of personal decision making that Johnson’s model requires.
Choosing between a WISA and QWPS would be as awkward as choosing between the left and right boob set before us. We know that they are not the same (the mole tells us that) but can we work out which is better?
LISA and workplace pensions can be bosum buddies but WISA and workplace pensions would make boobs of both of them.