Wot about the workers?

Pension providers and advisers can hardly keep their mouths from watering. Today one Sipp provider, Alliance Trust Savings, published a survey showing that advisers are confidently predicting a sales boom once the new tax year starts on April 6. And tomorrow the industry is meeting government ministers to try to thrash out the eventual shape of the proposals flowing from the Pensions Commion led by Lord Turner. But the interests of the public seem to have got lost in all this clamour.

The rules that come in on April 6 - the so-called A-Day - will themselves give people much more scope to take advantage of the tax-friendly side of saving for their pension - something which successive governments have agreed is in the public interest, because they don't want millions of pensioners out of work and destitute, turning to the state to keep them alive. The trouble is that far too many people are expecting the state to do just that. Turner calculates that 9m people are not saving, but relying on the fact that no government can let the old starve - especially when there will be so many of them in future, thanks to the post-war baby boom and greater longevity.

For those who are willing to save, A-Day effectively allows most people to put an unlimited amount into their pension - the equivalent of their entire salary each year, or £215,000, whichever is less. And they will be able to pay into a personal pension alongside their occupational scheme.

Terrific. But Turner is more concerned about the millions who aren't saving. His Big Idea is a National Pension Savings Scheme (NPSS), which he wants everyone to be pushed into unless they choose to stay out. Saving by inertia, in other words.

Little of this concerns the pensions industry. They like the idea that more people will be cajoled into saving, because it will mean more money for the industry to make money out of. That is why their main issue is who will manage this vast pot of money. The government, predictable, wants to control it, farming out the grubby business of fund management. The industry, equally predictably, wants to handle the NPSS itself.

I have a lot of sympathy with the industry's point of view, if only because civil servants do not tend to be much good at managing large sums of money. Public spending is out of control - yet again - and the management of the nearest parallel to the NPSS, National Savings & Investment, is shackled so closely that the chief executive recently jumped ship to go to the Post Office.

I fear that, whatever version of Turner is adopted, it will come nowhere near being able to deal with the intractable problem of the "can't save, won't save" army. The government is doing what it can to loosen the restrtictions on old people working, which most of them will be able to do for a good ten years beyond the 65 pension age.  And you can bet that the state pension will be taken away from anyone who shows the slightest sign of being able to live without it.

But this is tinkering at the edges. Gordon Brown, the chancellor, is getting nearer the answer with his plan to give the poor £1 for every £1 they save, paid for from the taxes of the better off. But this is just a palatable variation of the theme that I predict will be the big debate of the next 20 years: how much can those in work be persuaded to stump up for the lifestyles of the retired?

Comments

[M. Cowburn]

In the late '80s, a pint of beer in a Swedish bar or resturant was £4.
All retail licquor stores were state run and only open a short period in the day.
Equivalent prices in UK today would not be politically acceptable but pension funding would be no problem.

[eddie reader]

In a world of risk-aversion, Turner offers a risky solution.
Anyone saving in a defined contribution scheme ala Turner faces the poblem of who and how well will it be managed. There are three possible managers: the Government, the City, the Individual.
The Government already manages pension schemes. NI was originally meant to be the means by which state pensions were funded. It is now simply another tax and the pension is rapidly becoming worthless. The same would almost certainly be tue with a Brit-save pension.
The City has shown itself to be completely inept at even the basics of managing a portfolio. Endowment policies, split-capital trusts, personal pension plans have all been found very wanting whereas City bonuses have not. In addition study after study have shown that fund managers, almost without exception, are no better than someone with a pin and are paid very well to lose money.
The individual can use a SIPP, but will need both time and knowledge to manage it, Then there's the exorbitant charges levied by those who add no value at all to the process.
Consequently, the logical action would be to do nothing. The politics of mean testing ensure that it is better to have no savings.

[My voice]

I have to say, I think the NPSS is going to be a success. My understanding is that some in the industry reckon it can be run at a TER of 0.3%. This knocks shades of the 1% of stakeholder - which most of the industry said was unprofitable.

With the compounded effect of charges greatly reduced, and a sensible asset allocation, the NPSS could be a much better product than many company schemes.

The issue for company schemes goes back to one of accounting - that is that companies have to report pensions liabilities, which affects their profit figure. The simple solution for bean counters is to liability match through long dated gilts. Trouble is, because everyone's doing this, gilts are completely overbought and offering poor value. Hence more have to be bought to meet liabilties! Moreover, over long periods of time, gilts can't offer the returns of equities.

SIPPs will just be a rich persons tool - high charges, and retail funds within them will probably run at TERs of 1.5 to 2.0%.

So Turner will make pensions better for the very rich and very poor. The people who are going to be stitched (as they are in taxation also) are middle England. i.e. works hard, saves 10% each year into company pension scheme, pays all taxes etc