‘Making Pensions Work’: don’t duck the issues

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I am intrigued by some early responses to ‘Making Pensions Work’ I have received on this blog and have read in some (typically abusive) commentary on the right wing blogosphere to which I do not link.

Without exception the commentary ducks the issue, which I find fascinating. The key issues that raises are:

1. The private pension sector has received a subsidy of £300bn a year over a decade and has appeared to lose it;

2. The private pension industry pays out less in pensions each year than the state subsidy it receives;

3. The assets in which the pension industry chooses to invest do not reflect the fundamental pension contract.

4. Many of the assets in which it has invested have persistently generated negative rates of return, despite which its investment behaviour has not changed.

5. The choice of investment it has made has resulted in speculative saving activity as the core focus of pension fund management when the economy has required investment to stimulate new economic activity, employment and innovation to tackle the real issues we face as a society.

It is these issues that motivated the recommendations made in ‘Making Pensions Work’. But the concerns raised have been along the following lines (with the challenge in italics and the response in plain text):

a. The proposal to redirect investment into productive activity will deny financial markets essential liquidity. But is it the states job to subsidies the liquidity at cost to future pensioners, is my response? And if this market cannot generate such liquidity itself why should we give it the biggest state subsidy any industry has ever received in the UK to overcome its structural defects? Shouldn’t the market resolve that defect itself?

b. The rate of return is not so bad. What? 1% before allowing for inflation and after receiving a massive state subsidy is not so bad? By this definition, what is bad? I am suggesting something better.

c. I'm promoting a massive private equity bonanza. No I’m not. I’m promoting investment in new economic activity. The fact that those making this comment think this only arises through private equity venture capital investment is itself significant: they’re saying in effect that the larger quoted companies in the UK are actually unrelated in terms of their capital funding to the stock markets that supposedly serve their needs but which in reality act as casinos for speculation. And anyway, much of this money will go into government bonds and related products. So this is wrong.

d. I’m breaching EU rules on capital mobility. No I’m not. There is a long history of UK tax reliefs being available for UK investment only. But if the investment base has to be broadened — so what? In marketing terms I am sure that the offerings made available will actually be UK based if the transparency I am seeking is also made available. The market will solve this problem.

e. Pensions are just income deferral. So is interest on that basis on a deposit account. But it does not deserve and does not get tax relief. Pensions are not deferred income. They are saving for old age. That’s it. If we are to subsidise the saving of the best off then we have a right to attach conditions.

But I note there has been no attempt to justify the subsidy.

Or to defend the obvious failure of this market.

Or to explain why half the deficit at the start of this crisis related to subsidies to pensions in the previous decade.

Because, I suspect these are indefensible.

This issue will, I suspect, begin to grow. Give it three years and I think this issue will be a major item on the UK political agenda — even a key focus for the next election. And hwy not when it is so important?

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