BeeHive > BeeLines > Workingman’s Blues #3
Workingman’s Blues #3
It must be the modern times we’re living in, but it seems to me that the value of pension saving is not properly understood. You’ll all have been following the ‘battle of the blogs’ last week I hope and will be pleased to know that James Purnell, the Pension Minister, has replied to the comments I posted on his blog on the DWP website. You can get to a copy of James’ response by clicking on the following link - http://www.dwp.gov.uk/pensionsreform/weblog/.
I thought that that response needed another response from me and so I posted the following onto the DWP website yesterday afternoon. You might be interested to read it and I’ll let you know if I get a further response to respond to:
James
My comments did see the light of day on your blog; thank you. And thank you too for replying to many of the points I made. However, and although I don’t mean to be a pain, some of the things you said still don’t seem quite right to me.
It is good that we agree that consumer protection must be built into the proposed personal accounts just as it is in our existing pension system, but I wonder why we can’t seem to agree on why that must mean people should only be encouraged to invest in savings products that are suitable for them. The two examples we have been discussing, that of a saver entitled to the Pension Credit and their non-saving next-door neighbour show that both would receive means-tested support from the state, but that the non-saver would receive more support than the saver. We don’t disagree on those facts. In these examples the saver has £100 a week in state pension entitlement and £20 a week from their private pension and therefore receives a £15.50 top-up in Pension Credit. The non-saver, on the other hand, also has £100 a week in state pension but, as they have no private pension savings at all, they receive £23.80 a week in Pension Credit. Their respective weekly incomes are therefore £135.50 and £123.80 1.
The saver has managed to make herself £11.70 a week better off than her non-saving neighbour, but only by putting aside enough money to make herself £20 a week better off. That seems odd to me and doesn’t sit right with your claim that our system ensures that it pays to save. I say that the outcome is the same as though people are being taxed for saving, but you don’t think it’s like a tax at all. Indeed, you say in your reply that it only goes to show there is a clear incentive to save because the saver in this example is £11.70 a week better off than the non-saver. That same argument could, of course, be applied to someone who was just £1 a week better off, but it’s really a question of value.
You point out that, “£11.70 per week may not seem much money to some, but it is quite a lot if you are on just over £100 per week.” Well, I know that, and that’s exactly why I wrote to you in the first place and why I’m so concerned about the direction your reforms are taking. £11.70 a week is a great deal of money; and so is £8.30 a week. That is precisely my point. It is the value of that weekly income that I’m not sure you appreciate.
Using an average of the annuity rates shown on the current FSA tables 2 I calculate that it would cost a 65 year-old woman £17,257 to purchase a weekly income of £20. A weekly income of £11.70 on the other hand would cost just £10,096 to purchase. That is a difference of £7,161 in the capital cost of the annuity. For a pensioner to whom £11.70 a week is a great deal of money I would imagine that the prospect of completely losing the value of an investment of over £7,000 would be quite catastrophic.
This is the point really. It doesn’t seem worth struggling to save up £17,257 in order to make yourself only £11.70 a week better off than a non-saver. It should, by rights, make you £20 a week better off; £8.30 is a lot of money to someone on just £100 a week. The savings simply aren’t producing the level of value that they should and as such must be unsuitable when judged against the other purposes to which the hard-earned money could have been applied. A system that rewards savers should at the very least treat them as well as it does non-savers. Otherwise we need to accept that it penalises savers, or as I have said, it effectively taxes people who voluntarily choose to save. I can see why you’re not comfortable with the way I choose to say that, but your counter argument seems to be that poor value savings are preferable to no savings at all and I just don’t buy that.
The problem with a pension system where so many people are potentially penalised by saving is that no financial adviser would ever recommend that saving for a pension was either suitable or advisable for everybody. That is where we are with our existing pension products today and that is why many of us in the industry feel that reform is so necessary if we are to have any chance of spreading suitable pension savings to those who are currently excluded from the pension system. That, of course, would need real reform where everybody, even those on low earnings, could rely on their savings to deliver proper value; but that is not what is happening here, is it? For pensions to be widely and economically distributed they must first be made suitable for all, or protective measures must be put in place to ensure people are always treated fairly.
The consequence of imperfect reform, quite apart from the wasted opportunity of getting things right, could be that the existing pension markets are irreparably damaged by the introduction of an alternative approach to pension saving that, although available at a lower cost than current pension products, could unfortunately for many be an unsuitable and poor value investment. For this reason I am not able to join the consensus you are looking to build around your proposals even though I have been an advocate of pension reform for many years.
17 October 2006
Sources:
1. The Pension Service.
2. Information taken from the FSA's Comparative Tables (www.fsa.gov.uk/tables) as at 12/10/06, based on a single life level pension with no guarantee for a 65 year old female.
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