Second thoughts on pensions reform are emerging
Today the House of Commons has its first debate on the Taxation of Pensions Bill. This implements those parts of the Chancellor’s pensions changes for which the Treasury has responsibility.
The TUC was one of the few critics of the changes that were announced in the Budget (or at least one of the few prepared to say so in public). But many more people now seem to be prepared to be critical of at least aspects of the changes.
We were critical for two reasons.
First, in recent years we have made changes to pensions policy through consultation, gathering evidence and consensus building. We have based policy on how people, employers and companies behave rather than how models or ideology say they ought to behave. Policy has not been rushed – indeed it has been glacially slow at times – but at least people have had the chance to prepare for change.
The budget proposals and today’s Bill fundamentally break from this approach. This is certainly not the first Chancellor springing a Budget day surprise that gets good headlines the next day. But while many fade away under close scrutiny, few will have such an impact on so many people for such a long time as the pensions changes in this budget.
But the desire to get some good headlines and wrongfoot the Opposition is not the only explanation for the changes. After all the Chancellor could have got headlines just as positive by setting up a genuine review process into how pension pots are turned into post retirement income. No-one – not even the Chancellor’s fiercest critics – think that there is no need for some big changes.
If the Budget proposals had been broadly correct and workable, then the lack of consultation would be less of a problem. But they are neither. This is the second and more important reason to object to the changes.
The consensus built in recent years has changed the way we save for pensions. The Pensions Commission was set up because it was widely recognised that the UK’s pensions system was broken. For decades it had been left to individuals to make economically rational decisions about saving for their retirement and to buy pensions in a supposedly competitive market that acted in consumer interests. There were two problems with this approach. People were not saving, and as the huge fines for mis-selling pensions showed – and as the OFT confirmed recently – markets in complex financial products simply do not work.
The Pensions Commission made two key recommendations about pensions savings. First, to overcome the inability of most of us to make good decisions about the future, they recommended auto-enrolment to get people saving backed by an employer contribution. Secondly, to remedy market failure, they wanted government to set up a publicly sponsored not-for-profit pension scheme (what has become NEST).
Yet the Chancellor’s proposals hark back to the pre-Pensions Commission approach to pensions – the era when even many Conservatives concede that a Thatcherite approach to pensions failed. You can see that in the speeches in today’s Commons debates. The Press Association reports the Treasury’s Financial Secretary David Gauke saying:
Those who have saved the money over a lifetime should be trusted to make their own decisions on how best to use the money to provide themselves with an income in retirement.”
and Treasury Minister Priti Patel said:
the new system would incentivise pensions providers to come up with good products.”
Here we have it – the new system will depend on consumers acting responsibily in a self-correcting consumer friendly market. What could possibly go wrong?
The government are aware of this potential criticism. This is why they have introduced the guidance guarantee due to start next April.
But while the Citizens’ Advice Bureaux and the Pensions Advisory Service – chosen by government – are as well placed as anyone to make this work, more and more people doubt that it will really be functioning properly by next April. The only way it can succeed will be by failing, as if all the people who need advice ask for it, then the service will be overwhelmed and fall over.
The bigger issue is what exactly should those providing guidance say. So far we know very little about the “good products” that the industry will provide. What we do know is that the Budget changes have made annuities an even worse deal – even though good guidance will lead most people to think that something very like an annuity – a way of providing regular income until you die is exactly what they want their pension savings to deliver.
The worries about people getting ripped off or making wrong decisions are also growing. Even cheerleaders for the Budget changes are now talking of a second line of defence needed to protect consumers.
Yet this goes to the heart of the Budget changes. They are based on informed consumers acting in a competitive market. We do not need a second line of defence when we go to the local supermarket.
The predicted £1.6 billion tax windfall from people taking cash from their pension pot is another indication that many people will not make sensible decisions as many will not understand the tax implications of pensions withdrawals.
If the government had acted in line with the Pensions Commission analysis to sort out retirment – they would have started with the same two insights. Firstly people find it hard to make rational decisions and often get them wrong. Secondly systemic market failure needs a radical public policy intervention.
That would mean starting with developing rational defaults that most would adopt through inertia, and secondly recognising that market innovation will not deliver optimum outcomes and that trust based institutions acting in the interests of retirees are as necessary as those looking after the interests of savers.