The establishment keeps contradicting itself over the entire pensions’ area because they won’t face up to the basic fact that investment is a ‘risk’ business and people who take risks sometimes lose out.
The starting point for the government is that the taxpayer can’t afford to pay for people in retirement in the future, as the bill is growing too big. Therefore, a flat amount should be given, which is controllable, and people then encouraged to save in order to top up that amount. As a nudge towards this saving, auto-enrolment is being introduced in order to get people in to saving and make them make a conscious choice to stop.
The flaw in this process comes from the next step. No one is prepared to be honest with the new generation of savers and tell them that they are taking a risk and it may not pay off. This is self-evident to those in the know because any investment by its nature is risky but for all the talk about the need for clear communication, the politicians, experts, and the industry providers are all shying away from telling people the cold truth: Investments can go down as well as up and you may end up with less money than you put in once inflation is taken into account.
As a result of this lack of honesty, the powers that be are resorting to higher levels of regulation of the industry thereby causing a lot of people to become even more wary of giving their money to the financial services sector. After all, if the financial services sector is a safe and secure place to put your money, why does it need such constant regulation, investigation, and intervention?
The fact that nobody can admit that pension investors can lose is causing the powers that be to make convoluted twists and turns as they try to justify what they are doing. Having realised that everybody can’t be educated to understand the products, and having decreased the amount of advice available to help consumers by first blaming and the reducing the distribution industry, they are now turning on the providers of the products themselves.
The latest output from the Pensions Institute – Caveat Venditor – has recommended turning away from the Caveat Emptor (Buyer Beware) approach that has been the cornerstone of consumer law for so long. They recommend a Caveat Venditor (let the seller beware), putting the onus on the seller to make sure that the right decisions are made in terms of investment for each individual.
This essentially puts the provider in the place where the IFA used to be, except the provider will not have the personal relationship with, or level of detail about, the consumer that the IFA always had. As with so many solutions in the pensions’ world, it superficially appears to do something positive but actually seeks to give responsibility for the risk to the providers when the fundamental point of individual pensions is to transfer the risk to the pension saver. This central contradiction dooms this approach to failure. When will the politicians wake up to the fact that the starting point for fixing the pensions system is to be completely honest with the public?
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