I would love to change our country and our world for the better. But there’s one overriding reason that I don’t go into politics: there are too many things that I think should be done that will never get taken up by any of our major political parties. So whether you agree or disagree with me, I’d love to hear from you.
The UK has a pensions problem. Everyone would agree that it’s a bad idea to let the elderly die in penury, and you have to go a very long way right to find someone who doesn’t think the state should play a part. But the level of the basic state pension is derisory (£4,566 per year in 2019, compared to a median pre-tax income of £29,400). At the same time, the cost of the old age pension is one of the biggest items of government spending – in 2019-20, it’s expected to be £101 billion or around 12% of total government expenditure (which is higher, for example, than education).
And it’s getting worse. People are living longer and requiring more money to be spent on their healthcare. Increased labour mobility has broken up families, destroying the model of multi-generational households and making it hard for people to care for elderly relatives who are now distant.
But there is little political agreement on what to do about it: in fact, there are hardly any ideas for a comprehensive solution. Rather, successive governments of all political flavours have provided a series of kludges: the Thatcher-era push towards private pension provision with “contracting out” and the “state earnings-related pension scheme”, the Blair-era “stakeholder pension schemes”, the “auto-enrolment” workplace pension system of the Cameron-Clegg coalition.
Each of these kludges has piled legislation upon legislation into the pension area. More regulation came about in response to scandals like Equitable Life (where a major pension provider became non-viable because it had not anticipated changes in the financial markets); more still resulted from the decreased trust in financial institutions in the wake of the 2007-8 global financial crisis. The result is a morass of complexity so great as to be almost totally impenetrable to the overwhelming majority of the population. To give you a flavour of how bad it is, here is a typical extract:
The trivial commutation rule will only apply to defined benefit schemes. This is because defined contribution benefits may be taken as an ‘Uncrystallised Funds Pension Lump Sum (UFPLS). You have to add all the benefit values of all types of pension (company pensions/personal pensions/stakeholder pensions/retirement annuities/buy-out plans, but not any state pension) together. If they do not exceed £30,000 trivial commutation may be a possibility. In addition, trivial commutation can apply from age 55, or earlier, if in ill-health.
Do you have the foggiest idea what this is talking about? Because I don’t. I’ve run multi-million pound businesses including subsidiaries of major public companies and I’ve done my own tax return and company VAT returns for years, which I figure puts me in the top 1% of financially literate people in the country. But when it comes to pension documentation, I don’t even come close to understanding enough to make a reasonable decision about anything. I currently have four pension schemes, none of them enormous, accumulated from different jobs. They all send me masses of mandated documentation, all of which is largely incomprehensible. I have no idea whatsoever how to manage these schemes wisely.
Many of the reforms, from Thatcher onwards, have been made in the name of giving consumer choice. But when consumers are utterly unequipped to make any kind of informed choice, that’s a nonsense. The official response to this is to suggest that you get professional financial advice, but that’s simply shifting the problem: consumers are equally unequipped to make a good choice of financial adviser. Take a look at a “find an independent financial adviser” page like this one: I defy you to give me a reliable set of grounds for working out which of these providers are any good.
My one good pensions experience has come not in the UK but in the 18 months that I worked in Singapore in the early 1980s. The system was really simple: I paid what felt at the time like an alarmingly high percentage of my salary into an account held in my name in the “Central Provident Fund”. Had I stayed in Singapore until retirement age, my pension would have been paid out from the fund (since I left the country, they paid out early).
I believe the UK should have a National Pensions Service: a single fund in which every individual has a named account, into which they make substantial contributions from an early age. Everyone should get the same investment return rate: the whole concept of consumer choice and the morass of documentation around it should be abandoned. The concept of a workplace pension should also be abandoned, getting rid of the massive risks for pension-holders of the bigger schemes and the recent onerous bureaucracy of auto-enrolment for small businesses.
This isn’t to say that the private financial services sector has no role to play. I have no problem with anyone being able to make private investments: I just don’t see why they should be subject to any special tax relief. And I also think there could be a role in the National Pensions Service for private investment managers: the NPS could parcel out chunks of the fund for management by private companies, who would tender for the work and would be assessed according to their performance. Their fees, however, should be a small fraction of the 1-2% of capital per year currently charged by the industry.
The level of contribution – and to what extent the state should top up the contributions of those at the lower end of the income scale – is a matter for the usual left-right political debate. But the principles are clear: (a) have a system where the investment returns are the same for everyone; (b) get rid of the titanic confusion levels; (c) get rid of the titanic waste of money currently expended in the financial institutions on management, marketing and compliance as well as on their own salaries and profits.
The transition plan would need a lot of attention (and is probably the hard part of all this). Most probably, a deadline would be set for people to migrate any private schemes to the new NPS, or face loss of their tax advantages – but a softer transition may be more viable.
Are you listening, UK political parties? In the Labour Party, are you too mired in the past glories of the workplace pension to countenance such an idea? In the Conservative Party, are you too much in bed with the Financial Services sector? Or are you both too timid to tamper with something that is so long term and won’t translate into an easy vote-catching slogan?
Sources for the data: