I am getting worried by the return of the word “systemic”. It pops up in Andrew Warwick-Thompson’s (otherwise) excellent article “a misunderstood shift” and it’s behind calls from those who know better to “just ban transfers”.
It would be as easy to ban transfers as to make pensions saving compulsory – easy but not right. For when you take away the right of someone to do something, even if it’s as negative as “opting out” you have broken a bond of trust between the state and the individual which is very important to us in Britain.
I would go so far as to say that the right to make mistakes is why we don’t have a written constitution.
Let’s be clear In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. What we are seeing in Port Talbot and elsewhere is not systemic, it is local and the result of a special set of circumstances. The ship of state may be leaking but it is not holed beneath the water-line.
Where I take issue with Andrew is not in terms of substance , but of tone. This statement comes from early in his article
Shifting pension risk from firms to individuals may be the only viable option in a low-interest-rate environment. But once the risk is borne by individuals, the danger that poor individual choices will create systemic imbalances could be far greater. People who are poor in retirement are a huge burden that society at large has to bear in some way.
This is more than the statement “the poor is with us”, it implies that poor people take poor decisions. In my experience, poor people don’t take decisions, they have them made for them as they don’t have the money to make free choices.
If you are wealthy, you get access to legal, accounting as well as pensions advice. You can read articles like Andrew’s (published in “Intelligence in European Pensions and Institutional Investment“). These are privileges not granted to most people in this country who have to make do with what they’ve got. I return to the choices that BSPS members told each other they were making.
Less than four in a hundred of people were directly exercising freedom and choice, everyone else was delegating. They were putting trust in financial advisers (83%) and their trustees (13%). That they were choosing advisers over trustees is a marginal decision (to someone who knows nothing about pension governance- they do the same job), what should shock Government is that only 4% of those who answered the snap-poll, felt they had the financial capacity to go their own way. This is hardly surprising, the decision on how to pay yourself a wage for life is “the nastiest, hardest problem in finance”.
This is not what I call systemic, this is behavioural. When faced with choices which are too hard, our behavioural instinct is to put matters in the hand of an available expert, the shift for the steel workers was that they rather trusted an “at-hand” adviser than a remote trustee.
This is a lesson to be learned – we can’t have two worlds!
Frank Field was right when he observed at the W&P Select hearing that the BSPS Trustees and members were in different worlds.
The problems at Port Talbot and Scunthorpe and Redcar weren’t because someone was buying chicken/sausage and chips, but because the Trustees weren’t. It is a long way from South Wales to Glasgow. Geography matters, the closer to BSPS headquarters, the likelier the bond of trust. There has been no reported transfer trouble at Motherwell, seat of the former Ravens Craig works.
Where pension trustees know and understand their members (and vice and versa) , issues of trust diminish. The vast majority of transfer requests in South Wales happened out of the breakdown of trust.
Member One ;don’t work for Twata anymore the thought of them having their grubby little fingers in the pension was enough to transfer out. I will take my chances .
Member four went private in a public way, many of the posts on the BSPS Facebook Page are cries of anger and frustration not at the system, but at the particular circumstance that members found themselves in when “choosing”.
Again, to claim that this is a systemic risk and that transfers should be banned, is to misunderstand the decisions that BSPS Trustees made. Looking back , I am sure that they will see that putting resource into the local areas was a higher priority than running remote helplines and websites.
These members went “private” as the “public” confidence had gone and that wasn’t just confidence in “Twata” it was confidence in the BSPS management and trustees.
If we are to keep confidence in collective decision making and collective pension schemes, they need to be relevant to the second decade of the twenty first century. We need to look forward and not back
Restoring public confidence means recreating collective pensions so that they give people the freedoms that they find popular without over burdening people with choice.
The suggestions that are coming from our discussions on CDC are at last addressing these very specific issues. We are asking questions like
- Should people be able to transfer away from a CDC scheme while it’s paying them a pension?
- Could people “shape” the kind of CDC pension they receive?
- Can we explain how smoothing works – when applied to transfers in particular?
- Is the administrative apparatus up to giving these options?
Good IFAs should be asking similar questions of their clients. For instance.
- Would you be able to manage without me?
- Have you got a succession plan if I’m not around to advise you?
- How do we deal with matters if our drawdown plan goes wrong?
- Do you understand what you are paying and what it is for?
I think that those of us who are thinking about CDC , should be thinking about individual drawdown at the same time. We need to ground the arguments for both in the specifics of individual choice and understand the different needs for wealth management and collective pensions.
Systemic arguments – especially arguments about systemic risk- aren’t that helpful!
At this moment, we need to think of how we develop pension policy around freedom and choice , not instead of it.
Banning transfers, or imposing CDC are equally bad things to do. Helping people towards good decisions – as nudge does – is a good thing to do.
Treating people as incapable of making good choices is retrogressive, but giving people options if they can’t or don’t want to take big decisions is progressive.
Trust is everything and trust comes from “being there” rather than in another world.