The Government's Green Paper talks a lot about simplifying pensions, but unless the performance of these products improves people are unlikely to want to invest in them in sufficient numbers
The Green Paper on pensions provided a real opportunity for the Government to have a real impact on the future of pensions. Instead they've blown it on half-cocked measures and populist proclamations.
For the last few months the Western world has focused on global terrorists and the threat of weapons of mass destruction. We have waged war on third world countries, denounced the rise of religious fundamentalism and threatened Iraq. Our fear is, however, misplaced.
Weapons of mass destruction have been around for many years, frequently in the hands of rogue states. In this time they have never been used, bar the US bombing of Hiroshima and Nagasaki. Where chemical and biological weapons have been used, they have yet to cause the mass destruction catalogued in the more sensationalist media.
However, one of the greatest threats to Western stability has been overloooked ' the increasingly ageing populations. People are living longer than ever before, presenting Western economies with their biggest challenges for a generation. Quite simply, at current rates, we do not have the resources to sustain the ageing population in our current social, economic and demographic framework. Furthermore, with new medical technologies such as stem cells emerging, we could be facing an even greater problem.
The foremost concern for most Governments is the economic cost of providing for an ageing population, regardless of the social or political implications. The burden of paying pensions, as well as medical provision, housing, care homes is increasing exponentially. Without the individual taking greater responsibility for funding their own retirement, and the associated costs, the burden on the rest of the economy will become unsustainable.
The problem is not a distant one, it affects us now. There is currently a savings gap of £27 billion (ABI) between what people are saving to give themselves a comfortable retirement, and what they need to save. However, it is not just people's failure to save that is responsible for this shortfall.
The performance of pensions funds is as much to blame for the size of the gap. The longest sustained bear market in a generation has severely diminished the UK's capability to fund its retirement.
It is against this background that the Government has issued the Green Paper ' a blueprint for the future of pensions. The Green Paper is one of the most important government documents in recent years. So has the Government addressed these key issues? Has it paved a way to ensure the comfortable retirement of the elderly? Has it produced a flexible, perspicacious plan to cope with the challenges of the next 50 years?
In short, no. The Government has been off the mark on virtually all its initiatives. Where steps have been taken in the right direction, they have been tiptoes, not the giant leaps required. With this rare opportunity presented for significant reform, the Government has procrastinated. The measures announced are not sufficient to avert the impending crisis.
The Government has once again banged the simplification drum for pensions, arguing product opacity is a barrier to pensions provision. This has resulted in the simplification of the eight tax regimes, an undertaking long overdue. However, while it is clear the pensions tax regime should be simplified, this is because it is overly complex to manage, not because it will generate greater pensions take-up.
We have seen with the Government's stakeholder pension initiative that simplification alone will not necessarily drive pensions take-up (this failed to hit its targets). There is far more evidence that pensions take-up is correlated to pensions performance.
To get more people to save into pensions, the products need to perform better. It is not reasonable to expect investors to put their money into pensions which have not made money. Equally it is the underperformance of products which is as responsible for the savings gap as people's failure to save.
However, the pensions Green Paper did not focus on improving pensions performance. Such reforms would have centred on improving the performance of underlying assets, and in particular companies, whose performance drives equities and corporate bonds. Corporate mendacity, accounting scandals and overpaid directors have massively undermined company performance. This in turn has lead to the massive fall in pensions fund values.
It therefore seems logical that corporate reforms should form a cornerstone of any attempt to improve pensions provision. Through far reaching corporate reforms on Governance, accounting, remuneration and corporate crime, company performance can be improved. With company performance such an important determinant of pensions value, the savings gap is unlikely to be closed without far reaching corporate reform.
It has been argued that such corporate reforms would severely impact the competitiveness of all business. In reality, however, equity (and collective fund) performance is influenced by very few individual stocks. The FTSE 100 carries enormous weighting across the FTSE All Share. Since most equity collective funds (like unit trusts and many pension funds) effectively track these, their performance can be influenced by a few companies.
It follows, therefore, that the push of corporate reform need only be focused on the larger, and largest companies to create a positive impact on stock markets and pensions funds. We have seen from the US experience that it is the fall of large companies, such as Enron and WorldCom which has created the most damage. Corporate reform must be targeted if pensions are to perform.
The need to change the labour laws to solve the pensions crisis is paramount. Pensions were designed for people who would live for only a few years in their retirement. However people are retiring earlier, and living longer than ever before. It therefore follows that people must save more for retirement, or work longer before retiring.
The Government has recognised this in the Green Paper, with a loosening of labour laws to encourage people working on after retirement age. The minimum retirement age is being raised from 55 to 60, and the paper suggests the public sector retirement age may rise to 65. Equally proposals to put public sector retirement ages back is a step in the right direction.
However, these are small moves. A radical overhaul of the labour laws to allow more flexible working practices, create age specific workforces and industries is required. Companies need to be incentivised to offer elder workers jobs, but not at the expense of young jobseekers.
The Government has done little to instigate such massive overhauls, and to prepare companies for the challenges that would result from such changes. The effects of a demographic skewing of an ageing workforce would be enormous, changing working practices, employee benefits, remuneration and pensions structures. Additionally more elderly workers nearing retirement or in semi retirement could create further pressure on final salary schemes, finally sounding the death knell for them.
Despite these challenges, there's little sign of the radical steps required. The annuity age has not been risen in line with the proposed rising retirement age, and few definitive moves on changing the workforce structure. However, the biggest omission in the Green Paper must be on compulsion.
Although the Government is establishing an independent commission to look at issues surrounding compulsion, chaired by former CBI head Adair Turner, the process is likely to be protracted. Without compulsion ' either from an employee or employer perspective ' little dent is likely to be made into the savings gap. Rather than making a definitive decision on whether to pursue compulsion or not the Government has procrastinated, adding to further uncertainty.
Apart from tax simplification, little has been done to address confusions in the current system. In particular, many commentators are arguing that the current means tested system (the Minimum Income Guarantee) encourages people not to take out private pensions provision. This puts extra fiscal pressure on the country and exacerbates pensions problems. There will also be much confusion over what pensions simplification means for most people.
Indeed, the future for pension looks as confused as the system itself. Successive Governments for 50 years have failed to address the impending pensions problem. Now that the crisis has reached boiling point, we have seen action, but too little, too late. The Green Paper makes some right noises, but does not provide the answers required.
Once again the government has ignored the vital role that IFAs can have in closing the savings gap. Encouraging people to make sufficient future provision is a proactive undertaking, and IFAs are operating on the front line. It is high time the government joined forces with IFAs, rather than overlooking the essential use of face to face sales in encouraging proper retirement provision.
Until the Government addresses this, and starts taking decisive action on pensions, a sword of damocles hangs over the future of the UK. The pensions crisis remains an immense threat to the future wellbeing of the country. The Government must solve it soon, or face a massive cataclysm.
Green Paper ignores key issues like compulsion.
Underperformance of funds is key problem
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019