This article was originally commissioned and published in the April 2016 edition of the Investment Life & Pensions Moneyfacts publication. Following the Budget, Tom Murray argues that pensions policy needs to be taken out of the day-to-day Government cycle and treated more like a major infrastructural project.
INVESTMENT LIFE & PENSIONS MONEYFACTS: DEPOLITICISING PENSIONS
A recent piece by Tim Harford, in the FT, called for the annual budget to be abolished as it dated from an era when the country’s economic position was overwhelmingly dictated by the annual harvest, and therefore it made sense to re-plan expenditure once one knew how good a harvest it had been. In the modern era, the UK’s finances are not as directly linked to the agricultural harvest as in days of yore, and so financial planning can be carried out without the need for such sudden course corrections as would be dictated by a bad grain yield, for example.
It is certainly an interesting idea, but for the moment, the annual farce goes on. However, with so much of the financial strategy already set out in plans covering the term of the parliament, e.g. macro-economic goals, staged changes to the tax threshold etc., the budget itself tends to consist of rather trivial changes designed to be eye-catching for the news cycle rather than major changes to the government’s overall approach. Unfortunately, in recent years, the pension’s policy has been treated as one of the rabbits to be pulled out of the hat for the delectation of the audience.
DISTRACTION INSTEAD OF DIRECTION
From this need for eye-catching announcements came the surprise abolition of the need to buy annuities and the floated, but now abandoned, proposal to change the tax treatment of pensions. The fact that these policies keep taking the industry by surprise may make for entertaining politics, but they contrast unfavourably with the seriousness with which the whole issue of pensions was treated by the governments in the past. And of course, one of the reasons they catch the industry and media watchers by surprise is that they do not appear to be part of a long term strategy for pensions.
Casting one’s mind back to the beginning of the latest slew of changes, it began when the OECD countries realised that by the middle of this century, based on current longevity projections, the number of people at working age would decline dramatically compared to the number in retirement. Therefore, the burden of supporting that many dependents would be excessive by today’s standards, and so something would have to be done to increase the capability of future retirement generations to support themselves.
WHEN POLICIES COLLIDE
Hence, the idea of auto-enrolment in the UK, designed to increase the number of people that would have a lump sum saved over their working life to support them in their old age. So far so good, but the next innovation pension freedoms – abandoning the compulsion to purchase an annuity to last the rest of one’s life – directly contradicted this policy. Introducing the ability to get access to all of one’s pension savings at the point of retirement has the net effect that many people will now run out of money in retirement and have to fall back on the state, i.e. the very taxpayers that we have identified as being too few to carry the burden.
At the same time, the introduction of the retail distribution review made sense on the one hand in terms of removing product bias, but increased the risk that those with modest savings cannot afford to take financial advice when they come to retirement, increasing the likelihood of poor decisions and ultimately that more retirees will need state support in the latter part of their retirement.
CONSULTATIONS AD NAUSEAUM
This is not how it used to be. Dick Crossman’s diaries, covering his six years as a cabinet minister in the Wilson government of the 1960s still make fascinating reading when it comes to understanding how long-term policies used to be created. Re-reading them recently, what struck me was the sheer scale of the work undertaken to produce a policy for superannuation; a policy which ultimately led to the introduction of the state earnings-related pension SERPs. The fact that the actual policy was introduced in 1975 and that Crossman had begun work on it in the late 1960s is testament to the fact that the establishment of that time understood that major changes in areas of long-term policy were taken in a controlled fashion and with a huge amount of consultation of all parties involved.
The Labour government, the succeeding Conservative government and then the next Labour government all worked on the proposals, treating each other’s views seriously and finally bringing to the House a proposal that had broad support in both its aims and methods across all sectors of society. And indeed, an issue like pensions is something that should have broad support – its effects are so long term that it will require the support of many governments across its implementation timeframe, governments which will be of differing political hues from time to time.
The policies were discussed and argued out in countless meetings away from the glare of publicity and of the news cycle, so that the issues could be discussed by political opponents, trade unions, employer representatives and experts in a wide range of social fields. This ensured due consideration of the effect on the country of the changes, not just the effect on the political fortunes of the party proposing them.
QUICK FIRE MEANS QUICK MISS
The approach of that government appears in stark contrast to the current pension imbroglio, which has its roots in the use of pensions as a tool of day-to-day government rather than seeing it as a project that is so immense and long-term in its effects that it requires a huge amount of stakeholder consulting in order to make sure that it is correctly based.
The truth is that the pension’s policy needs to be taken out of the day-to-day government cycle and seen instead to be more akin to a major infrastructural project – one which requires a big investment of time and money up front but which will pay off over significant time. Other infrastructural projects would never be rushed through in this manner. Imagine if HS2 was being treated the same as the pension’s policy – where on an annual basis, the direction of the line was being changed and new stations were being added or subtracted according to the whim of the government of the day. How seriously could anyone take this approach? Wouldn’t the journalists see it as completely destabilising for business, as its ability to plan for the future would be severely compromised.
FLYING BY THE SEAT OF HIS PANTS
Similarly, compare the cavalier treatment of pensions to the saga of increased air capacity for London. The whole issue of expansion of air capacity in the southeast was started with the Roskill commission in 1968, incidentally during the same government that included Dick Crossman. Since then, there have been commissions galore who have debated the issue, held open hearings, and taken both expert and public evidence in an effort to arrive at a position that everybody could support. The long-term significance of the project has ensured that it has been examined extensively and when the final decision is taken next July, it will have been with the benefit of an enormous amount of public debate and detailed examination. While some may believe that it has taken an excessive amount of time to come to a decision, at least such an important and irreversible decision isn’t being treated as a political whim to be decided upon for short-term political advantage.
Surely the pension’s area deserves the same levels of detailed consideration. The effect of changes to the pension’s policy is only truly felt far into the future, when those who are currently joining under the new policy actually retire. Pension’s strategy should cover off how exactly the country is to cope with its future non-working pension base rather than to please people at the next election. By definition, the full and true effect of any changes to the pension’s policy will not be truly understood until a few decades hence, when a completely different government is likely to be in place.
Therefore, the decisions on the pension’s policy deserve the same kind of detailed examination and cross-party consideration that is given to major infrastructural projects. The policy of pensions should be seen as part of the financial infrastructure of the country which is being paid for now, and whose benefits will only be apparent over a long period of time.
We need an end to the kind of short-termism that sees pensions as something that can be dabbled with on a regular basis just to grab attention. The pension’s policy should be strategic and this would have a greater success with a less partisan approach.
CROSS-PARTY NOT CROSSED-FINGERS
As part of a recent survey, I was asked if I felt that there should be a pension’s minister and I have given the matter some consideration, and concluded that there probably shouldn’t be. The trouble with having a pension’s minister is that the temptation to be seen to be doing something is too great and this leads to the kind of constant changes that are completely anathema to the real purpose of the pension’s policy, which is to encourage long-term financial planning and self-sufficiency.
It is time to consider setting up a permanent cross-party committee covering the area of pensions, which could submit proposed changes to the appropriate government department or even directly to the House. Taking the partisan politics out of pensions would give successive governments the capability to move back towards the long-term planning that seems to have disappeared from modern politics with its obsession with the twenty-four hour news cycle. And it would ensure that changes would only take place when the area had been discussed at great length by a wide variety of stakeholders, ensuring a policy that would be robust and considered, one that savers could depend on.
Pensions are too serious a subject to be consistently messed about with for short-term party advantage. The approach of the last few years belies any attempt at strategic planning. If other countries are changing their systems, to better cope with declining working populations and ever-increasing amounts of dependent pensioners, the UK should follow suit by producing long-term plans to solve future problems. Instead, the pension’s policy is being seen as a short-term vote grabbing exercise. As long as this remains the case, the damage done to the long-term investment industry in the UK will be pronounced. Those who have been granted easy access to their pension pots may well be delighted now, but how will they feel in 15 years’ time when their money is running short and their capacity to earn more is severely curtailed? One cannot keep kicking the can further down the road in the Micawberish hope that something will turn up eventually to resolve the problem.
Government is about long-term planning for the future health of the country. It is about time that the political parties put the long-term financial health of the population above short-term political interests.