PENSIONS: Grand theft auto
Defusing the political timebomb posed by personal accounts
The pension world we are heading for in 2012 looks like it will be very different from the world we live in at the moment.
The private-sector final-salary schemes that have been so dominant in the workplace for nearly half a century will probably be almost gone by then.
The vast majority are already closed to new employees and are a long way down the road to complete closure. By 2012, I doubt that any such schemes in the private sector will remain open to new entrants and many, many more will have shut down for existing employees, too.
By and large, these dying schemes are being replaced by group personal pension schemes and I would guess that by 2012, GPPs will be widely regarded as being the norm for workplace pensions in the private sector. In such circumstances, it is more than lucky that the European Commission is prepared to recognise GPPs as "good" workplace schemes as far as auto-enrolment is concerned.
However, it will not just be the pension world that will be different in 2012. By then, we will have had a general election, probably in 2010, and we will therefore have a different Government. That Government could be formed by a different political party or the same party as now but with a different majority. Either way, the make-up of the Government after 2010 will be different from the one we have now.
The Pensions Bill going through the legislative mill in 2008 will be sitting on the statute books by then and there will be plans in place to launch the new national private-sector workplace scheme of personal accounts along with auto-enrolment of millions of unpensioned employees.
That process of auto-enrolment, whereby up to 10 million mainly lower paid employees will be swept into either personal accounts or "good" existing workplace pension schemes, will come with a political risk. Indeed, I would say there is a very good chance that the people swept into saving in that way will eventually come to understand that the underlying system of pension credits and other means-tested support for the elderly will mean that the poorest savers will face the real risk of tax rates of between 40 and 100 per cent effectively being applied to the value of their savings.
They will not be happy when they find out that the new pension scheme, that will understandably have been hyped up in its launch phase, will have come with such hidden dangers to the value of the savings of the poorest in society. If recent voter revolts are anything to go by, I doubt that the Government in 2012 will be happy either, if it is seen to be responsible for something as awkward as 100 per cent taxes being applied to the savings of the poor.
One way of fixing this will be for means-tested support systems for the elderly to be completely overhauled before 2012, so that such catastrophic losses of the value of savings induced through auto- enrolment will not upset people. That is something that cannot be done quickly. It would probably take a generation for the system of credits to be reformed, not a couple of years. It would also cost a lot of money that we do not have.
It seems to me that the easiest way out of the problem, and certainly the most politically expedient, would be for the new national scheme of personal accounts to go ahead as planned but for the process of auto- enrolment to be dropped quietly. That would defuse the political dangers for that future Government.
Personal accounts would then be free to offer a no-frills alternative to personal pensions for employers and employees who may prefer them as a potentially cheaper option, assuming that rates of take-up and persistency allow the scheme's designers to construct a commercially viable product that can undercut the costs of existing pensions. However, they would not cause the unfairness to poorer savers that would result from utilising inertia selling in the imperfect environment dominated by means-testing that we are unfortunately stuck with.
First published in Money Marketing, 19 June 2008