Friday, February 04, 2005

Pensions fiasco

Most of us can’t bear to think about this, but Eamonn Butler insensitively reminds us (Why Bush is right to privatise pensions) of Gordon Brown's demolition job on our pension funds.

The £5 billion pa tax grab blew a hole of £100 billion in the funds’ combined balance sheet (£5 billion pa capitalised at 5%), and his compulsive tinkering with regulations and accounting standards has had company sponsors scrambling for the exit. So the jewel in Britain’s pension provision- the traditional final salary (defined benefit) company pension scheme- is now a thing of the past. More than three-quarters of employers have closed their schemes to new members, and the next step will be to close to existing members, particularly given the onerous new euro funding regulations (the EU Pensions Directive).

Gordo never intended this consequence of course, never even thought about it. Just like he never thought through the reality of his alternative- the stakeholder pension. All businesses with more than five employees were made to offer this people’s pension, to be managed by major City firms, but with charges capped at one percent pa.

Well, yes…except that those dastardly City firms reckoned that at one percent, they’d lose money. So naturally they didn’t offer them. And it turned out not many others wanted them either. Zillions of stakeholder schemes have had to be established by employers on the usual box-ticking principle, but when last sighted, 75% of them didn’t have one single active member! True, the government has now panicked and increased the charge cap to 1.5%, but don’t hold your breath.

Now, most of this is just down to the iron law of unintended consequences, but you can also make out the distant twang of Billy Bragg’s Greatest Hits. The workers must be protected from having their faces ground by the oppressive bosses, or ripped off entirely by the undeserving fat cats of the City. The stock market is a fascist casino run entirely for the benefit of global capitalism, so if pension or life insurance funds choose to play the tables, then the bosses must bear all the risk.

The trouble is…the world just ain’t like that. If you want good investment returns, then unfortunately you’ve got to take investment risk. This risk used to be shared between the workers and the bosses- sponsors provided a final salary pension promise on the basis of best endeavours, but reserved the theoretical- and admittedly unstated- right to cut payouts in extreme circumstances. Like if we ever returned to the thirties, and the markets fell so far as to turn the pension fund into a liability that threatened the company’s very existence. Risk was shared, generally to everyone's long-term advantage.

The new regime has changed this, by making the risks very explicit and attempting to load them all on to one party- the bosses. Or as we call them these days, our pensions and savings funds. And the inevitable consequence is the one we see. By trying to de-risk their lives, Gordo has in fact robbed the workers of their pensions.

Billy should write a song about it.

It’s difficult to imagine how any government could have done a better job of destroying our willingness to save and invest than this one. Besides the pensions fiasco, we’ve had the replacement of our familiar Peps and Tessas with their mystifying ISA system based on 1970s skirt lengths, their ‘name and shame’ undermining of confidence in our financial sector, particularly our life companies, and most pervasively, their business-unfriendly approach to tax and regulation which has resulted in the UK stock market substantially underperforming every single major market except bubble-stricken Japan.

No wonder we Brits have been putting all our spare cash into bricks and mortar and simultaneously borrowing up to the hilt. We may well have created a housing bubble that isn’t going to generate the long-term return we need to support our old age. But at least we get a roof over our heads- even if we won’t be able to afford to have it repaired- and real savings are never safe under socialism anyway.

So what the hell?

God knows it's difficult enough to get most people to save at all. Governments who raid the piggy-bank and constantly chop and change the rules discourage it even more. Gordo leaves us all poorer, and more dependent on the state in the years to come.

Grrr.

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