At this rate, British savers will have to just hope the economy is booming at the point they retire...
BRITAIN'S Minister for Pensions, Steve Webb, freely admits that many people have experienced awful results from defined contribution pension schemes. Yet he is preparing the path for ten million of the country's lowest earners to be auto-enrolled into these schemes over the next few years. In the meantime those savers who have been let down by the current system have been abandoned, writes Jason Riddle of Save Our Savers.
Even before the credit crunch, the returns on pension savings were heading downwards. Britain's monetary policy has, however, now knocked for six what little credibility was left in defined contribution pension schemes.
It speaks volumes that the closest anyone in parliament has come to acknowledging any responsibility for this is the Treasury Select Committee who, after three years of low interest rates and £325 billion of quantitative easing, last month finally recommended that there should be an investigation into the effect monetary policy is having on savers and pensioners.
With an aging population, the ratio of retirees to workers is set to increase sharply over the coming decades. As less than 40% of workers in the private sector contribute to a pension scheme, there is clearly an urgency to get more people to save hence the auto-enrolment policy.
Auto-enrolment is one of the centerpieces of current pension policy. The concept is simple; companies enroll all employees into the pension scheme and, because it takes less effort to stay in than to opt out, more people ought to stay with the scheme.
In simple terms, the more savings people have when they retire, the more the country can afford an aging population. However, that will only be the case if people are better off for having saved, a premise that looks far from certain given the investment risks inherent in pension saving for individual savers.
On the whole, people are averse to sacrificing present gain for future benefit. Or, to put it another way, if you give people a choice between having £5 now and £10 in the future they may prefer to take the £5 now. In an uncertain world, why take such a risk?
Pensions require people to tie their money up for decades, on an understanding that the money will be safe and that they will have amassed a reasonable pension at the end to show for it. For people to do this, it is vital that they have confidence in the pension system. Ultimately this rests on one thing, getting a reasonable return. Potential new savers can see that this is not happening and that the current retirees are suffering for it.
The Minister for Pensions understands this and, at a recent conference, stressed the need for more certainty in the pensions system. Of course, the one certainty most people want is to know what size pension they will get in return for the money they put in. But the government is only prepared to offer that level of certainty to the public sector.
Instead Mr. Webb is seeking another level of certainty, which he hopes will be embraced by the UK's employers, called a defined ambition. These schemes he describes as less than a defined benefit but more than a defined contribution. Businesses with defined benefit schemes have been closing or modifying the schemes to reduce their liabilities for years. Mr. Webb has just provided them with a government policy with which to justify their plans.
Defined contribution pensions are a different matter, defined ambition would require employers to contribute more. But bearing in mind that, under auto-enrolment, the majority of businesses in the UK will be offering pensions to all of their staff for the first time, it is extremely unlikely that they will begin by offering much more than a basic contribution.
The crux of the matter is that the key to a good pension system is one in which people have a degree of certainty on their returns. For this you need economies of scale and some form of intertemporal risk sharing. Without this, the average saver will just have to hope that the economy will be booming when they come to retire.
Alternatively, if they want some certainty over their pension, they could always seek a job in Mr. Webb's department. It will be very busy for many years to come.
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