The UK pension industry
appears to be heading fast into yet another crisis if the panel of experts at a Friends Provident breakfast briefing can be
believed. Or is this just an extension of the crises that the industry has actually always been in (at least for the last
15 years) and it is just moving into another phase?
Dr. Ros Altman is
a veteran campaigner for changes in the pensions industry with an impressive CV and record for providing good advice to Governments
(although they now seem to have become deaf to the experts) and has been an advocate of progressive and aggressive attitudes
which are necessary to urgently produce solutions, before pensions fall into a chasm of pensions shortfall and under funding,
that may require dire and dramatic tax increases to top up the coffers for an ageing workforce, all seeking early retirement.
With the lack of urgency displayed by the government, it appears they are more confident than the pensions providers that
the looming drain on financial resources can be seen through.
There have been government
solutions presented that mainly cause the retirement age to be increased with the offer of extended employment beyond retirement
age to become a right, but these are not going to alter the long term problem, just slow it down. In any case it’s dubious
that employers are going to put into practice the offer of extended employment, at least on the scale required. It’s
not a great sale to people that have paid into a pension scheme with the expectation of early or on time retirement only to
find the government moving the goal posts.
Dr. Ros Altman has
researched the pension problem and offers practical solutions that require changes to government policies, around state pensions
and the relationship with pensions in the private sector. She maintains that the population has lost confidence in pensions
and long term savings and this has created an immediate and long term problem, which will hit the country hard, but the old
and the weak even harder. This scenario can hardly be argued with. As a champion of the common man Dr. Altman has highlighted
problems that successive Government Ministers refuse to heed, as they concentrate on short term gains measured in votes. It
was ever thus with politicians!
This short-termism
has been the fault of many governments going back decades and exasperated by the almost villainous attack on the pensions
industry by Gordon Brown. Little hope that his act of pension theft will be corrected now he holds the house keys.
The panel debate
centred on a solution, which started with the question of compulsion and ended with, the solution of making it compulsory
for the entire population, to enter into some pension scheme or another. This
compulsory approach to pensions has been successful in the past, when membership of a pension scheme was a condition of employment
at many companies, and the hope is that it will be so in the future. However, it could smack of going backwards rather than
developing a forward motion to provide the population with choice. The compulsory pension would certainly have the support
of all the pension providers (assuming compulsion is into the private sector –it could equally be compulsion via higher
NI contributions, for example, which will not necessarily benefit providers) and there is no doubt it will quickly fill the
coffers, ready for the draw down of the baby boomer generation. But in the short and long term compulsory pensions and long
term saving plans might have a dire economic effect if it dramatically draws away disposable income. The economic balance
could sway too far and plunge the country into an economic crisis similar to that occurred in the sixties and seventies. Surely
the solution needs to be more subtle!
Friends Provident
is one of the country’s top pension providers and they are concerned that Personal Accounts will fail largely because
too many people will opt-out. They therefore floated the idea that compulsory
pensions may be the only answer. However, they also support the
drive to educate the public into the real value of pension provision and savings. This is clearly a long term solution but
one worthy of quickly establishing. !
If there could be
an industry project to educate the public straight from school of the importance and value of saving, it could encourage enough
take up to begin reversing the current trend of over half the country not saving anything. This point was made by Friends
Provident Group CEO, Philip Moore at a recent conference he said “Youngsters need to leave school knowing the importance
of budgeting, of saving and financial planning. I believe there is growing recognition of this. The school curriculum is beginning
to embrace financial awareness. The treasury has issued a consultative white paper on the government’s long term approach
to financial capability but in the meantime a huge tranch of the population do not know what they need to know about retirement
planning. It has to start in the schools”
Pension planning
is all about long term planning and making good decisions early and this is best achieved by educating the young and giving
them the necessary knowledge to make good decisions. We could then at least have a strategy where the long-term problem of
pensions has a positive end date to work towards. The decision making on the solution for the immediate problem might than
be a little easier to find and make!
By this approach
it will begin to address the negative publicity that is currently making pension planning and saving so unappealing for the
population into a positive. After all it’s almost impossible for anyone to sell a negative, as the buyer has already
been put in a mindset by adverse publicity and has been misinformed, or more likely not informed at all about the importance
of saving in his life style.
Some views at the
breakfast briefing were that there should be a push by the pensions industry to drive the 35 to 40 year olds into saving.
This is surely too late as the culture of not saving or investing has already been deeply established and it is much harder
to change attitude or opinion. The time for the industry to attack the apathy of the population towards saving is at the beginning
of their working adult life.
If there was the
addition of personal finance on the school curriculum in the last year at school that has an exam after it, we would be producing
generations of financially well educated individuals that would already be aware of the basic needs to live and retire in
financial health. If it was compulsory for these same individuals to choose any pension scheme from any provider that lasts
for say ten years, we will have created a generation of young employees with whom the pension provider can build long term
relationships and extended business advice for their long term life objectives.
After the ten year
compulsory entry into a pension scheme they can then choose to opt out for the rest of their life. The difficult decision
then is to opt out rather than now where it is to elect in. This hybrid solution achieves the desire of education, begins
to tackle long term pension shortfall, builds relationships and maintains the individuals long term right of choice.
It is clear that
there is no short term solution to this long term problem. The Government has chosen to interfere in what was once a healthy
position that the UK enjoyed. We are now veering towards the same pension problems of other countries in the EU and one must
wonder if this has been a deliberately managed outcome by Gordon Brown?
The pensions providers
and all in the supply chain must motivate themselves to begin the attack on the uneducated by utilising the various trade
associations to produce training and examination material for the population at large. At least this could be via a simple
website for distant learning and hopefully also by classroom. The teaching should be at a basic and easy to understand level
with the absence of jargon unless it can be defined. The teaching material should be made available at all schools and hopefully
the Government Education Minister would see the benefit and support it. The training should culminate in an exam and the results
measured to form the basis of collateral for things like bank account opening.
Each pension provider
and other financial institutions with a business in savings or investing should form part of the sponsorship. They will also
be able to market their services to the pupils ready to join adult working life.
If the savings industry
was smart it would tie in financial planning services for students in further education to assist them in managing their debt.
It cannot be a healthy country, if all our most educated and brightest hopes join the adult world saddled with high debt.
These people will not be best pleased to receive approaches about pensions if they are already struggling with debt.
The immediate future
looks bleak and there is going to be a massive pensions problem in the next ten years. The Government could get lucky and
the stock market and housing booms continue, but the likelihood is that at least one deep crash is going to hit soon. The
country has no more defences to fight a deep depression than it had to fight the floods this summer.
A long term solution to flooding is called for with the construction of dikes and better channels to divert
water from inhabited flood plains. The same with pensions and savings, planning must begin now to prevent a future disaster!
The Government is
unlikely to be of much help in this term or any Government in future terms and it is up to the Pension, Savings and Investment
industry to take charge.
The initial investment
might be modest compared to the end return on investment, but can the industry come together?
Waiting for the Government looks
like an open ended arrangement with no guarantees. Can politicians be trusted, based on the recent pension’s industry
problems and the lack of solutions that looks doubtful? Would the politicians follow aggressive and progressive solutions
brought by the industry, possibly if it gets them off the hook, although they will certainly claim credit someway down the
line?
By Gary Wright
