Pension reform will increase young people’s sense of betrayal
‘It’s my money. I’ve saved it. I should be allowed to spend it how I like,’ seems to be the refrain that played a part in Chancellor George Osborne’s decision to liberate the pensions market in the Budget. A liberation that many have described as a revolution (though you would expect a Conservative, especially a Chancellor, to be philosophically opposed to revolutions). But is it really that simple? Or will allowing unrestrained access to billions of pounds in the years and decades ahead merely store up huge financial and social costs for future generations, whilst simultaneously undermining the principle of shared risk?
Of course, the present debate about pension provision is one that we all have an interest in. We all want to live comfortably in retirement, yet the small monthly amounts that most of us struggle to save are never likely to be anything more than a top-up to a diminishing state pension. It is natural therefore that we should feel we should be entitled to spend it how we like and when we like, because it’s all ours isn’t it? Well actually, no it’s not.
Pension contributions receive tax relief, either at the basic rate, or for the better paid the higher rate (an anomaly I’ve always struggled to understand. After all, if you are already earning more than most, how can it be equitable for taxpayers to subsidise the pension contributions of the more affluent, at a greater rate than the wealthiest are subsidising the pensions of amongst the poorest?). So it’s not only your money. The state, through a process of mutual support, has decided it is in the interests of us all to pool our risk. By doing so, greater security is brought to the pension market and, in theory at least, annuity levels, due to their being a larger pot of money in circulation amongst assurers, should be higher.
But annuity rates are low I hear you cry. True, though that has nothing to do with the concept of pooled risk, merely another example of the financial markets not working in the interests of the consumer. It may also have something to do with excessively high charges that many pay to have their savings invested by fund managers. Of course, the government proposal to cap workplace pension fees at 0.75%, rather than the 1% that insurers wanted, is designed to alleviate this and whilst the cap is of course welcome, is unlikely to make a significant difference to those with very small pension pots. It is also unlikely to placate consumers, 13.5 million of which claim to have been miss-sold a product by a bank or building society in the past.
Undermining the age old principle of mutual risk is for some enough to persuade them that the Chancellor’s proposal is inherently dangerous, whilst The Observer has warned that “the cycle of mis-selling and compensation bodes ill for Osborne’s pensions revolution.” This is a warning we should all surely heed. After all, is it not such financial deregulation as proposed for our pension provision that led to the nations present national financial woes?
The danger in Mr Osborne’s plan may be further exacerbated by millions raiding their pension pots. Not so much to buy a Lamborghini, as Pensions Minister Steve Webb suggested, but by simply running out of money many years before death. However prudent we may all think we are capable of being with our savings, most of us, when provided with a large lump sum bigger than most of us have ever had access to before, are likely to over estimate how long it will last, hence the requirement for an annuity. The government response to this very real concern is that they will insist that free impartial advice is offered to those retiring after April 2015. Of course, consumers have been promised such impartial advice in the past that often turned out to be neither impartial nor particularly beneficial, other than to the financial institution providing it.
If many of us do run out of money some years before we die, the state, the lender of last resort, will have to pick up the pieces, or more specifically, the bill. All at a time when an ageing population will continue to outstrip the numbers in work and therefore those paying tax. This will surely mean an even higher cost to the state for social care, a budget already being relentlessly squeezed. An ever decreasing pool of financial capital will be forced to provide for an ever increasing pool of the frail and elderly, with the inevitable consequence of more of us living in desperate poverty.
Is it any wonder therefore that the next generation, already expected to fund their university education, somehow put aside cash to contribute to their own future social care costs and find the ever growing amounts necessary to have even a faint hope of putting down a deposit on a home, are disengaged from the political process and feel betrayed by the political class? After all, politicians seem incapable of helping to nurture our children’s generation, whilst seemingly having endless political and financial capital to chase the grey vote. A grey vote that is bound to become more powerful in future, as those who can afford to will seek a further return on their liberated pension pot by indulging in buy to let property schemes.
Whilst politicians continue to tacitly approve of a financial system that asks ever more of our children, but one that provides them with less security in return, that sense of disengagement and betrayal will surely increase. If all our children hear is a Chancellor seeking to persuade them that he is simply giving them more choice, when the choice being offered is Hobson’s, are they not likely to conclude that he is neither talking to them or about them.