The focus on state pensions yesterday, and the successful strikes on this issue, had the additional benefit of highlighting the real pension crisis in this country, which is that it is the private pension sector that is really failing.
There are good reasons for that, and all intensely logical.
First, employers have removed provision to increase profits. It's not that they can't afford it. Over the last 15 years or so about 5% of GDP has been shifted from payments to labour to payments to capital in the form of profits in the economy - that's near enough explained by the refusal of employers to fund pensions. This is a minority taking income and wealth now to deny it to those in old age. The unaffordability argument simply does not stack.
Second, the rate of return on pensions has been abysmal. with it still being the case that up to two thirds of pension fund money is invested in the stock market, that has paid not net return over the last decade and dividends rarely sufficient to cover fund manager costs, people have rationally concluded that they are better off putting money in ISAs and other cash based arrangements instead of investing them with fund managers of pension funds.
Third, instinctively people know that this low return is inevitable: there is little real innovation going on in the stock market but there is massive rent seeking behaviour by all who manage it. So fund managers take excessive fees, stocks are churned wholly unnecessarily by funds, excess commissions are paid as a result, and all to align returns with those working for banks. Paying money into a pension has simply been a way to support City bonuses.
And again, instinctively, people know that pension funds are a giant Ponzi scheme - with the markets only remaining as high as they are because month in and month out a wall of money comes in from pension funds for fund managers to play with, loot and fritter away. Of course people have no desire to be a part of that.
It's not that private sector pensions are bad: the whole private sector pension system is based on a fallacy that saving in the stock market can provide a long term future for all when that is plainly not so in any situation, but is impossible when that system is looted for current private gain.
This is the situation that has to be remedied.
And that's why I proposed People's Pensions, with Colin Hines and Alan Simpson, then an MP, back in 2003.
I'd change some of that proposal made then: I'd certainly focus less on ownership of assets and more on bond issues to finance their development now. Colin Hines and I have done that consistently since. So as I said in 'Making Pensions Work':
We recommend that if enforced saving is to be required by the government then that 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. At least £20 billion a year would be released into the UK economy for new investment.
By coincidence this is the total sum Osborne is looking for now from pension funds for infrastructure investment: I suggest it would be available annually.
And I suggest, very strongly, that if any confidence is to be restored in private pensions - especially in the light of the plan to make pension saving much more widespread from 2013 - then funds of the sort I sugest have to be the way forward.
They are simple: they would hold bonds in funds invested in the region in which a person lives.
They would be transparent: a person could see what was being done with their money. The current rate of return would be obvious. The basis on which a future return would be paid would be equally clear.
They are risk free - because they're state backed.
The charges would be tiny - the structure guarantees it.
As a result unlike existing pension funds they would pay a real rate of return.
And that return would be now in the communities in which people live, now in work for those communities and in the future when the next genration pays the retired generation for the capital they had bequeathed to them in exchange for which they give up part of their current income to look after those in retirement. This reflects the fundamental pension contrat which almost all private schemes ignore right now. As I say in the Courageous State:
The fundamental inter-generational pension contract that should exist within any society is that one generation, the older one, will through their 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 the 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.
The pension scheme I suggest reflects this.
But more than that it creates work, it funds what society nees, it's guaranteed and it's attractive and it cuts the exploitation of the City out of the pension loop.
That's why we need it now.
Not compulsorily - but for all who want it.
A Courageous government would offer it. Now.
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It depends on whether you look at the crisis from the perspective of the government, the pension industry or the man in the street. Personally, I wouldn’t believe any long term promises made by either the government or the pensions industry: both will always put their short term interests (either popularity or profit) above those of the pension investor.
Which is why my pension money is largely tied up in imperishable, tangible items. Gold, jewellery, artworks, stamps, coins, land. Stuff that nobody can take away from you and which has a proven value over thousands of years.
What a waste
And how completely pointless as a recommendation
That’s because you see money as a resource that can be utilised for the common good. Most pension investors see it as a measure of security that can guarantee their comfort in old age. Both points of view are valid, the problem is persuading the pension investors of the “socialist” view (I don’t mean that pejoratively, just as a shorthand).
They key point to me is this:
“In exchange for the 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”
We all know what future demographics look like. The question for those of moderate wealth is do they want to invest in the infrastructure of the country in the hope that there will be enough working people to fund their retirement, or do they maintain sufficient control over their own assets to feel secure? Most people want financial independence from the state. It is those people you need to persuade.
Most people are going to realise that financial independence from the state in old age a) does not happen for all but the 1% and b) is not desirable
The more we try it the more people will die of cold, hunger and unnecessary illness
It seems to me Richard, that both you and Roger are involved in binary thinking here. I can see the merits of both your positions. I have kept a chunk of my pension invested outside pension funds because I don’t trust pension trustees or professional investors or the government to do whats best for me. Ironically the government believe we can’t be trusted to invest cash on our own account for pensions, so I can’t get tax relief for this portion of my cover. I like Richard’s idea and would happily invest in my local community if there was a suitable vehicle. The trouble is with our globalised investment “professionals” local has been forgotten, too much trouble and not enough fees. In my view we should scrap all pension tax relief and employer provided pensions. Pay everyone fairly and guarantee everyone a decent state pension. If people want more they can sort themselves out. We can then shed a massive overhead on these “professionals” and city types and they can get useful jobs.
Yep the integrity of the art market is preferable to under performing pension funds ?
Dear Richard Murphy, do pension fund trustees have a fiduciary duty to invest the fund wisely, can they be sued if they do not? How can those sitting on the panels which look after pensions calculate if they are paying too much in fees of if the fund is keeping up with their benchmark? I notice in the Bernie Madoff affair that Madoff would pay a 5% kickback to introducer’s.
Should we always be asking why do not pensions funds invest in low cost passive index trackers? I noticed a few years ago a fund manager was taken over at a huge price, this price indicated the value which was being extracted from the funds under management.
Fair Pensions have great material on this
Go to their web site to check it out
This is so obviously a good solution that I am at a loss to understand why it was not taken up when you first proposed it. But given it was not I am fully persuaded it has no chance of being implemented now. Mr Osborne does not want people to have security, or decent living standards. He wants everyone to dance over the abyss all the time: I think he believes that will make them work harder and be grateful for any crumbs his pals allow them to have …..
I commend Jerry Jones’ article on pensions in today’s Morning Star: http://www.morningstaronline.co.uk/index.php/news/content/view/full/112556.
I went to the morningstar website but I could not find a business section
The article is under Features. Are you joking in expecting a Business section in the Star?
Nice to see a fellow Morning Star reader on the blog. As with a lot of events the Star’s take on it is spot on.
Of course pension funds should fund public infra, but in no way can you describe long duration sov backed debt as risk free, sure no chance of a nominal default, but a real default by letting inflation rip is a real possibility and is already, to an extent, happening. Ultimately pension assets should as far as possible be diversified. DB schemes do not have the same equity weightings that they once had, they have been gobbling fixed income.
I’m not sure how people putting money away for their retirement backed by government bonds can be inflationary. Money is saved and therefore not out circulating, is it not?
A sovereign nation with its own central reserve bank would not default as they can simply borrow or print the money they need.
And, unless we end up like Argentina before 2001 with inflation rates at 1000%, it’s a scenario that isn’t likely to happen.
Inflation isn’t really that high at the moment. It’s just that wages are so criminally low.
So you can either risk the extremely unlikely scenario of hyperinflation by spending to create much needed work, or you can continue to run the economy down until you get the more likely scenarion of deflation as the economy falls apart.
I know which one I’d choose!
Hi Richard,
Correct me if I’m wrong, but I believe your idea for private pensions is being used, and has been used for the past 50 or so years, in Singapore. The funds are invested in building the infrastructure of the country, with something like 30% of each employee’s salary/wages being paid into the fund.
Anthony