As the pensions industry goes through the details of chancellor George Osborne’s historic pensions changes introduced in last week’s Budget the more radical they appear to be.
Unless there are little traps hidden away in the fine print, his changes to annuities will in time be seen as being as transformative as Bismarck’s introduction of state pensions – it is that big.
Already the naysayers are preaching that there are moral hazards to allowing ordinary people to get their hands on their life savings, conveniently forgetting that pensions are deferred pay, not a handout.
However, the full dimensions of chancellor George Osborne’s radical reforms have not yet been fully digested. If we were to reflect on the number of Pensions Acts and Welfare Reform Acts which had significant pensions elements, it will be obvious that we were going nowhere fast. And when we see how prime ministers have reshuffled pensions ministers since 1997, it makes a merry-go-round look as if it is standing still.
One great fear is that Mr Osborne’s Budget proposals have spelt the death knell for annuities and, as an unintended consequence, the policy change may even take down some traditional life offices with it. That is nonsense. The good life offices are no doubt hard at work on new long-term savings vehicles to replace lifetime annuities. We only have to look at our cousins the other side of the pond to see how the Americans have created a long menu of variable annuities.
What is really industry-changing about the chancellor’s Budget is not only the bold decision to take the annuity hand cuffs off those maturing pensioners, but the abolition of the false demarcation between cash and stocks and shares Isas.
Now people can save in long-term vehicles, be they pensions or Isas, and, who knows, at some convenient point the two may even merge.
We only have to look at our cousins the other side of the pond to see how the Americans have created a long menu of variable annuitiesNow that would be really transformative, with an element of compulsory saving and with access at key entry points – births, marriages, home purchases, university fees and deaths – based on the Singaporean Central Provident Fund.
One fear is that people will splash out on buy-to-lets. But with good advice they will no doubt diversify their sources of income.
In any case, in Singapore home owner-occupation is over 90 per cent and if we were to consider that Singapore got its independence in 1965 and at the time even Malaysia thought it was not worth fighting over. Now, it is the diamond in the developing world, a shining example of the very best of development economics.
To suggest, therefore, that the nation that gave the world the industrial revolution is incapable, or psychologically too exhausted, to outperform Singapore is a poor show.
That it has taken one of our youngest chancellors to revolutionise the pensions landscape is nothing short of remarkable. Some people may remember Tony Blair, just before coming to power in 1997, preaching about the Confucian model.
To complete the circle all we need now is to make families take more responsibility for their elderly rather than depending on the state and the Blair promise would be with us at last.
And, at a stroke, the moral hazard question that some critics claim the chancellor has introduced by giving savers more access to their pensions would be fully answered. The real moral hazard is to compel people with very small pension pots to annuitise only to benefit from very small annual incomes, not the fear of wasting their savings.
The argument about squandering their pension pot is one often used by the nanny state, that despite improvements in our education and basic common sense only a self-select group of ‘experts’ know how best to spend our money.
Of course, it will be wrong to encourage hard-pressed pensioners to take 25 per cent of an already small pot as tax-free then enter a drawdown arrangement with a provider with a likelihood of paying a massive 55 per cent higher rate of tax on their drawdown.
Critics often forget that one key democratic value is the right to make mistakes and government can overcome this moral hazard by devising a safety net fund for those who have overspent their savings.
For a minimum contribution people will know that at least in their old age they are likely to receive a given income and that is it. In fact, we may even see the return of a 21st century Poor Law for the seriously destitute.
In any case, annuity providers invest in the equity markets, there is no rational reason why individuals, with solid professional advice, cannot do the same for themselves.
The final step the chancellor must now take is to make pensions, or long term savings, compulsory. Auto-enrolment is just a first step.
The reality is that in policymaking we must factor in that a large number of people – up to 10m? – will always be dependent on the state for a variety of reasons: physical and mental illness, those for a number of other reasons who were taken out of the contributory and auto-enrolment systems, etc.
The elephant in the room of all this is auto-enrolment, the demographics of its likely members, those who opt out and their retirement provisions.
What we do know already about the Nest, NOW and B&CE auto-enrolment vehicles is that opt-outs are far fewer than we had anticipated, but the people who are opting out are the older people, the very ones staring pensioner poverty in the face.
On the other hand, the young and not so young, those who we all expected to opt out from the schemes in order to spend their money on Friday nights and hard-pressed parents with young children seem to be the ones who, with great reluctance, are sticking with the schemes.
Hal Austin is editor of Financial Adviser
