This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
We need a more extensive private pension system, and we need more trust in pensions generally. So the shortfall of some £50m in the Wilko pension fund, following the collapse of the company in the summer, is of course worrying news for its pensioners, but more than that, it damages faith in the entire occupational pension system.
The Wilko story is a sad one. It was a family business that was gradually overtaken by better-managed rivals, running up losses until its former owner Lisa Wilkinson acknowledged it was unable to find adequate funding and the money ran out.
There is the specific issue as to whether it was right for shareholders to extract substantial dividends when the company was making losses. Kevin Hollinrake, the business minister, has told MPs there had been no evidence discovered of director misconduct, but said the case is still being looked at. While the £50m pension shortfall may look small against total debts of more than £600m, pensioners’ rights come top of the list to be protected. Someone else has to stump up.
That someone is the Pension Protection Fund (PPF). This was set up in 2005 to look after the interests of members of pension schemes when their employer was unable to fund them. It covers so-called defined benefit schemes, where the payment is linked to a person’s salary, usually their final salary, rather than defined contribution ones, where the pension depends on how much has been put into the pot by employee and employer, and how successfully the money has been invested.
It is funded by a levy on other company schemes. That means that successful firms have to help cover the pension losses of those that, like Wilko, go under. For example, when car company MG Rover folded, they had to take over the MG Rover scheme. That sounds like rough justice, but it is a bit like the way the Association of British Travel Agents guarantees travel payments – provided not too many companies collapse, the system works.
So will Wilko pensioners be all right? The answer is yes, and no. Yes, for someone already drawing a defined benefit pension, for the PPF will cover that, but no for people who were working for the company when it collapsed. It is expected that they will see cuts of around 10 per cent in their pensions as and when they come to draw them. Since the defined benefit scheme was closed to new entrants in 2013, other newer employees will simply have whatever pot they had accumulated and it should be possible to transfer that to a new employer or use it as a base for a self-invested pension plan, or SIPP.
As you can see, this is complicated, confusing, and for some people, unfair. There is no reason to suppose that a company that is good, say, at designing software, is also equipped to successfully run a pension scheme.
Most people change jobs several times in a career, and unless they do something about it, end up with lots of small pots to fund their pension rather a single provider. The Chancellor said in the Autumn Statement that the Treasury was seeking to change this so that people do have one retirement account with a known sum in it. But given the way in which previous pension legislation keeps changing, his plan may make things more complicated, not less.
No wonder people’s minds glaze over when they hear the word “pension” crop up. Yet somehow we have to persuade everybody to save more in a pension if they are to have an acceptable lifestyle when they retire.
So, what’s to be done? One starting point is to look at how other countries manage things. One idea is to look at the United States, where workers can build up an Individual Retirement Arrangement. That system is complicated too, as there are several types of plans depending on who is putting the money in (you or your employer), whether the tax advantage is taken when you pay in or take out, and so on. But at least you can see a single number of how much you have saved and what sort of pension that might provide.
Another idea is to look at Australia. Mr Hunt is doing just that. On Monday he told a financial conference: “It is very, very painful, as many of you will understand, for any Brit to have to point to something the Aussies do better. But when it comes to pension fund reform, they have actually been on a journey that we are now starting on, which has led, at least when it comes to the big Australian pension funds, to improved returns.”
It is bit silly to say it is painful, but he is right that we can learn from Australia. We can also learn from the Netherlands, for the Dutch pension system is regarded as one of the best in the world. It has three elements. There is a general pension that the state funds. There are occupational pensions that almost all employees and employers have to pay into. And on top of this people can get tax breaks to build up their own private pension pot as well.
The basic point is this: people should be encouraged to save for their old age. They should know their savings are sensibly invested and be secure. And they should have an idea of how much they have managed to set aside and what that might pay them in a pension. The sorry saga of Wilko pensions is one more example of a creaky, battered system having to patch things up. We need to do better.
The fact that the UK needs to find ways of investing more savings in British industry, and the need to boost pensions more generally, gives a neat synergy to the plans being mooted by the Chancellor and outlined this week to simplify pensions.
But I worry. Even good ideas get chewed up by verbiage. Try this: the Government will “introduce the multiple default consolidator model” to enable schemes to consolidate pension pots of less than £1,000. Yes, it is nuts to have lots of pension pots of less than £1,000, but do you need a multiple default consolidator model to do that?
Next, I’m concerned that money will get channelled into weak UK companies when there are better opportunities abroad. The London market accounted for about 5 per cent of global equities the last time I did the sums. Given that the expenses of a British pensioner will probably be in sterling, there is a reasonable case for having some bias towards holding shares in sterling-based enterprises. But they should not be artificially favoured.
Third, costs are too high. Costs of financial services in general are dear, with pensioners typically paying an annual charge of up to 2 per cent. If your return, allowing for inflation, is 4 per cent, half has gone into costs. The pot grows much more slowly.
Fourth, it is still all too complicated. I do like the clarity of the Dutch system sketched above and I do cut our own government some slack for starting auto-enrolment. But we have not made pensions fun… all right, they are not meant to be fun, but I know how nice it is for Americans to know exactly how much they have in their IRA at the click of a mouse.
Finally, we have totally failed to get over to young people the link between savings and investment. Where does the money that is used to buy Bitcoin go? What supermarket is built? What new factory exists that would not have existed before? What research into a new drug does it fund?
This is not to be a killjoy but rather to point out that if the living standards of the next generation are to rise, we have to invest more now. Actually, most other developed economies don’t invest enough either. Someone has to fund that investment. That is what markets are for. So there is a moral argument for wise investment, as well as a financial one.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
visit website
