he wanted government decisions on tax and other policy areas to deliver “higher levels of confidence, investment, profit for British businesses”, adding that financial services were not seen widely enough as “the foundation and engine of greater investment and therefore potential growth in this country”.
This meant moving beyond the “post-financial crash obsession with regulating for risk”, he said, arguing for a better balance between risk and growth.
This is the ambition stated by our new Chancellor and it should send a tremor though the pension world which has been dominated for the last 20 years by an obsessions with “de-risking”. The obsession has concentrated on the process of de-risking pension risk to a point that we no longer provide pensions but instead hand over pots. This is not “de-risking” but risk transfer to those who are least able to take it.
No longer investment , “pensions” are now just taxation
Since the risk of paying pensions has been minimised to it, the employer is instead obliged to pay what has become a tax. Auto-enrolment contributions are taxes that are paid into a a few wealth funds which are called “workplace pensions” but which pay pots but no pensions to their beneficiaries (the staff).
The risk of paying back the money accumulated to those saved is no longer with employers. To retune to John Healy’s quote, the job of regulating for risk has been completed and it has driven us down a cul-de-sac out of which we need to reverse.
It will not be the employers risk , it will be shared between staff in collective pensions. The task for private sectors employers will be to participate in collective pensions and fund them to levels needed to meet staff’s expectations.
De-risking has become an obsession with protecting wealth
Those who have regulatory power or influence are generally in DB pensions , being in the public sector. They get to hear the private sector through the ABI and Pensions UK who have an obsession with protecting the wealth of those they represent.
With the focus on retirement saving about pots , there is a new obsession, on how to protect it from being taxed when it passes to another generation.
…. from next April, pensions will come within the scope of IHT, significantly increasing the number of people who will have to pay the tax — and sending feelings of both dismay and fear through those who have built large pots.
According to Clare Moffat, a pensions and tax expert at Royal London, IHT is now almost all her clients want to talk about. At a recent webinar the pension provider held, the panel received 56 questions on IHT submitted in advance. “And we weren’t supposed to be covering it as a [subject],” she says.
The problem with wealth as a risk is threefold.
- We are as a nation getting older
- We are getting more wealthy
- We see retirement not as a time to draw a pension but to save for others
But the people who are making the noise about inheritance are vocal but few, when compared with what Bernard Levin used to call “the silent majority”.
For those who have inherited money. a house with mortgage paid off and often a pension accrued in early days, the risk is that wealth may not “cascade down the generations” as John Major dreamed when prime minister.
The important thing for Andy Burnham, John Healy and Torsten Bell is to ignore the loud voices of the wealthy and focus on the needs of this silent majority who will not have adequate pensions – there’s 15m of them who have no fear of inheritance tax but the prospect of a massive wage cut in retirement with the financial horror of later age when the cost of social care is most likely to bite.
While Reform and Conservative parties battle with each other as to how much to reduce welfare bills (a further extension of regulatory risk-reduction). It is of course not risk reduction but of risk-transfer with no obvious opportunity for those who have limited wealth or income to pay the bills.
This is why we need to focus pensions not on the needs of the 20% who have issues with inheritance tax but the 80% who have inadequate resource to meet the needs of their own later life.
Answers for the rich and poor
The answers to problems with IHT for the wealthy can be resolved through whole of life insurance or through the purchase of an impaired life annuity (the choice depends on whether the worry is living too short or dying unexpectedly when healthy).
The problems of adequacy can only be sorted by a replacement of a focus on wealth with one of the retirement wage. It will of course need more money paid in but this cannot happen till private pensions become popular again. There is silent approval of the pensions earned in the public sector and private misery that there are no private pensions being earned. That is because of the de-risking of pensions to the point that they are no longer being earned by most of us.
We need to make “pensions” popular again and that means a move to collective pensions and away from personal pension pots. For a generation who are at a point when they could take a pension (let’s say those 55 to 75), the question is when moving to retirement income is possible and the pension dashboard will go some way towards helping people recognise how far they are from reducing or ending work.
But we will need Retirement CDC and Guided Retirement to move people to affordable retirement when they are pot-dependent. The annuity guarantee will be de-risking too far for most of us.
The workplace collective pension (CDC) will begin the process or re-risking pensions to a point that they can grow enough to meet John Healy’s ambition and reduce regulatory de-risking”.
Pensions have been de-risked to pots by regulation and as Healy says we need to move beyond the obsession with this regulatory risk.
We need to re-risk pension funds to create the growth that people need to get paid a proper wage and the country to be re-capitalised.
It will take a time to undo the damage of regulatory de-risking . But we have a much wider workforce who can get a retirement wage. We have greater inclusion in future pensions and a chance to do what the Pensions Commission II has been set up to promote.
