This letter appeared in the FT on August 6th and has given me some cause for thought.
Toby Nangle (Markets Insight, July 20) discusses how the UK pension system might be reformed and better use made of its assets.
Perhaps we should start by asking who is the pension system for; government, business, the City or those who are being asked to contribute?
With any long-term saving scheme the focus should be on the best interests of those the schemes are being sold to, particularly those in the lower half of the income distribution.
Those selling the schemes probably wish to sell schemes that benefit themselves and it should be the role of legislators/regulators to try and represent pension savers’ interests.
I don’t think the market can be relied upon in this respect.
I would also suggest that UK pension policy needs to be considered in parallel with housing policy, the so-called housing crisis.
Many UK baby boomers in retirement own their own homes and therefore require less income for a full life in retirement as they do not need to pay rent.
This will not be the case, particularly in the south, for future generations. This development is a consequence of the ultra low interest rate policies followed after the credit crunch and the financial crisis of 2007-08, which boosted assets/houses prices and helped to wipe out defined benefit pensions.
Huge chunks of pension risk were transferred to the pensioners. Pension reform needs to tackle these issues.
Tim Shepherd Oxford, UK
There are three ideas here
- That the Government should regulate pensions by considering the value that accrues to the saver rather than the economic interest to the seller.
- That there is a generation of savers arriving at retirement who are relatively advantaged (especially through home ownership)
- That pension risk has been transferred to subsequent savers who won’t be so lucky
I think this articulates what Tim Shepherd is saying as my thinking is broadly similar. For most people of my (lucky) generation, the concerns around financial security are largely mitigated by the prospect of living rent-free in later life and pensions are not the worry that they could be because of that. If we did not have that comfort, would we have allowed the old private pension system to disappear as we did? I suspect not. Where the covenant was with the tax-payer and not the shareholder the old defined benefit system has stuck.
Tim’s question is whether the housing stock on which my generation relies, will trickle down to subsequent generations or whether there really is a housing crisis which will lead to genuine insecurity over pensions for our children. We will have to wait and see but I suspect that the days of “my house is my pension” are behind us.
The second question is whether a revamped private sector pension system fuelled by auto-enrolment and managed by value rather than by cost-control can do the job that DB schemes have done – provide security beyond the state pension sufficient for pensioner needs. This remains to be seen. It might, given sufficient support from the key stakeholders – Government, employer and saver. But a lot of things will need to fall into place for this to happen. I suspect that reforms over access (dashboard), contributions (2017+) and over pension payment, will improve confidence , but we need to see investments delivering stonking returns over time, for the risk transfer to pay off.
How are money is managed is of crucial importance, not just for the Treasury but for the security of members in generations to come. We cannot de-link GDP from pension security, pensions need to boost GDP so that GDP can boost pensions. There is a strong argument for home-bias in pensions and the Treasury will increasingly argue for it.
I do think we will see a return to “risk-sharing” rather than “risk-transfer” and that this will happen relatively soon. CDC is designed to make that happen. The acceptance that capital backed pensions may replace traditional sponsorship is another step towards risk sharing. But fundamentally, the principle of collective pensions needs to be re-established.
We can’t go on kidding ourselves that we can all be our own CIOs and manage our financial affairs in later life as if we had both the skills and the money to manage the risks of markets and our own personal liabilities. There needs to be a pooling of these risks to make them manageable. The VFM of pensions ultimately is about the delivery of the pension , not a flat pack with an instruction manual on how to do it yourself.
Listen to the very wonderful Pete Matthews explaining the mechanisms of getting money out of a pension. This is how it works at present. judge for yourself if these mechanisms represent a sustainable future for the “risk-transfer”.
