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Government is ignoring longevity risk with pension reform

Government is ignoring longevity risk with pension reform

The OECD has made a diplomatic intervention to critique mildly the UK government’s abolition of the annuitisation rules for pensions. One does not have to be Sherlock Holmes to spot the clues that reveal that the OECD is actually aghast at the extent of the change. This policy runs against the policy they have been steering their members towards by allowing the population to avoid the longevity insurance provided by annuities and choose instead to take cash lump sums.

You can understand why the OECD is alarmed enough to comment, something they rarely do. The biggest problem for western governments over the last two decades has been the increase in longevity that is threatening their finances. How to combat this without depriving individuals of the dignity of retirement and without crippling the ever-narrowing tax-base has been a key part of western political policy since the problem was identified in the mid-nineties.

Now the UK, one of the few countries that previously insisted upon the population taking out longevity insurance in the form of annuities, has carried out a complete U-turn. Add to that, the UK provides one of the lowest levels of state pension, meaning that the likelihood of elderly people moving into poverty once their savings have run out is dramatically increased, and you can understand the concern of the OECD. Of course they cloak it in diplomatic language, stating that they will be happy providing annuities are the default.

But it is clear from the Chancellor’s budget statement that he has no intention of promising freedom from annuities and then somehow making them the default. Such a reversal of policy would be tantamount to admitting that the government had got the overall pension’s strategy wrong, a position very few governments will put themselves in and certainly not on a flagship policy.

Now we have an intervention from Chris Daykin, who was the government actuary for 18 years up to 2007. He believes the primary driver behind the policy is the government’s desire to bring forward tax revenues as many retirees will take their money out and pay a lump sum tax to the Treasury in order to do so.

Despite the Treasury’s adamant denials, it appears the cat is out of the bag. At least this reason passes muster. There’s an old saying attributed to the Watergate scandal; when one is puzzled to work out what is happening in government one should ‘Follow the money’. The fact that the Treasury stands to benefit from this policy is a good indicator that they have designed this policy primarily for their own benefit rather than for the benefit of the retirees.

It’s time for the government to have the courage for a rethink. This policy may appear to solve short-term problems of their own finances and the difficulty of making the annuity market function correctly. But the damage it could do in the long term to those in retirement is too risky. The government ignores the longevity risk at its peril.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

What do you think about the abolition of the annuitisation rules for pensions? Let us know in the comments below!

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