I note there are those griping on this blog and elsewhere that any change in pension rules by the government will make pensions even less affordable than now and undermine the credibility of our pensions arrangements.
Let me be clear: this is wrong. Our current pension arrangements do not and can never work for reasons I explained in 'Making Pensions Work'. In that report I said:
It is our suggestion that this scheme is unaffordable because it ignores the fundamental pension contract that should exist within any society. This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
This compact is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.
Tinkering with tax reliefs, and even compelling people to pay into funds that ignore this reality will make no difference to our ability to pay pensions. That capacity is not based on our ability to save (limited as that is). Our ability to pay pensions is based on our capacity to invest - and that has almost disappeared right now. This is why pensions do not work. And that is why in that same report I recommended:
If pension saving is to be encouraged or even enforced then the government has a duty to ensure that the funds so saved are invested for the common good. Pension fund performance over the last decade has a been a history of almost perpetual loss making despite the enormous subsidies that pension fund tax relief has provided to the City of London and stock markets, all of which they have frittered away. Investment in local authority bonds for local regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects would have prevented those losses — because all of these would have paid positive returns to pension fund investors. It is for exactly this reason that we recommend that such assets be the basis for any new state pension fund in the future.
The impact of our proposals would be significant. If 25% of all new pension contributions were to be required to be invested in projects creating new jobs primarily in the UK then at least £20 billion a year would be released into the UK economy for new investment.
People would then understand what their pension funds were doing, and could hold them to account for it.
State subsidies to pension funds would then produce real economic returns for the government.
And the incentive to save in pensions would be real — because people would see the benefits of doing so for their immediate well being, for their own future income and for the benefit of their children.
To date pension funds have been an almost perfect example of what Keynes described as ‘the paradox of thrift' — saving that sucked demand and well being out of the economy. We need something very different now. We need pension funds that can build economic will being for the present and the future. The recommendations in this report show that sensible reform of pension funds and the tax subsidies they enjoy could make pension funds the engine for economic regeneration in the UK. No reform is of greater importance than that.
This is the basis for a viable pension arrangement. What we have is not. It's time we acknowledged the fact that we have the economics and mechanisms of pension provision wrong. Then we might effect real change. Right now we continue to give money to the City. And that's the last thing we need to do.
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It is astonishing that fees and hidden charges are now so high that these schemes have an effectively 0 return. And the lock in clauses are appaling. I really hope the City has killed the goose with the golden eggs on this one. I wouldn’t buy one of their awful products, don’t know what I will do about pension provision….
Far better for the state to provide liveable pensions out of hypothecated tax. Current workers pay for current pensioners. No middlemen, no waste
That’s how all pensions are actually paid
Like it or not
The rest is sham
Richard, no, that’s how only state pensions are paid.
Read Making Pensions Work
All private pensions are covered by the cost of tax reliefs right now
So all pensions actually work that way
To show some even handedness – I agree entirely.
UK pension money should be funneled back into the uk economy, too much of it goes abroad to seek returns. This is good for the individual, but bad for the economy as a whole. On approach would be to tie pension relief to qualifying schemes – which in turn should be required to invest a sizable portion of their holdings in UK projects/companies.
Local Authority bonds, infrastructure projects, SME loans, corporate bonds and PFI-type funding are all obvious candidates – the difficulty is how to handle equity investments as the FTSE 100 is a very international index and so most of that money is not going to the UK.
Still too complicated. KIS – state provision of decent pensions – other savings look after themselves. Profits belong to those who create them: workers.
I am not sure that the mechanisms you suggest would be sufficient to get effective investment going again within the UK – the reality is that we really do need to get the investment management sector/City of Londow working in our interests rather than relying solely on alternatives to get things moving again. The reality is that institutional fund managers control an awful lot of the funds available for investment – and that isn’t going to change in the immediate future. The truth is that the fund managers are the ones who should have been looking after their investors interests and putting their savings in solid real investments rather than the financial engineering products that the banks favoured – they were the ones who had the fiduciary duty and they failed absymally. Measure that could be considered to deal with this problem might include:
– the complulsory separation of fund managers from financial institutions gauged in other activities
– legal changes to their fee structures so that fees are based on long term investment returns
– liberal use of the fit and proper criteria by the FSA to clear out the 2nd rate people who pose as fund managers and clearly failed in their duties in 2007
– strengthened powers of scrutiny by pension scheme trustees and investors, including access to skilled resources to challenge investment managers and actuaries
– much tougher systems requirement for investment managers and audit thereof
– encouragement of the training and education of skilled investment appraisers ( I have a real doubt that we have sufficient people in this country able to perform proper investment appraisal in either the public or private sector – largely because we haven’t had much experience in doing so)
It’s worth remembering that this problem hasn’t just arisen – I think Harold Wilson when he was a civil servant wrote a report on trying to improve investment in the UK economy by the City of London.
Until we fix the fundamental flaws in our monetary system, until we stop subsidising the banks, the pension schemes are doomed to fail. Banks are indeed the most heavily-subsidised businesses in the world: http://bit.ly/kSJpoe
For too long, pension funds have been used as the plaything of investment banks and finance companies.
The funds either sit there in zombie accounts not doing anything or are borrowed for investment porposes purely to make money out of money or, more accurately, more debt out of debt!
Investing this money into socially necessary, wealth creating projects would be the ideal thing to do to get the economy moving.
I do agree, however with Carol Wilcox who says that there should be state provision of decent pensions.
Incidently, Richard, this phoney argunent from the government that the economy can’t afford decent pensions: isn’t it correct that this year or next, the NI surplus will be in the region of £115 billion?
That’s SURPLUS, mind you! If this is correct, how van the government claim there is not enough money to maintain decent pensions unless people work longer, put in more contributions and get less out?
I don’t actually have much of a problem with the corporate sector paying for much of the pensions of those whom it used to employ and actually helped build said sector in the first place – especially since the corporate sector has pretty healththy surpluses at present ( this is the other side of the govt deficits that they are never to keen to talk about). One of the biggest scandals around is how many companies have been able to reduce the cost of their pension provision by moving out of defined benefit into cheaper defined contribution schemes – using the argument that they couldn’t afford the change because of demographics. Usually the first thing thing any private equity acquirer of a business would do would be to close down the defined benefit scheme to the employees.
“I don’t actually have much of a problem with the corporate sector paying for much of the pensions of those whom it used to employ”. But they only do this indirectly. The money they put in is top sliced by the middlemen and then gambled. Better for them to pay a tax hypothecated for current state pensions.
Quite so