The Coalition is currently reviewing the approach to pension reform kicked off by the previous government, in particular the personal accounts (NEST) programme. However, there is no sign that anyone directly in power is looking at the fundamental principles involved or how the flaw in the concept is going to undermine any chance of success.
The idea of semi-compulsory saving is that the risks associated with the support of pensioners would be transferred to the pensioners themselves. However, pensioners are a very vocal group and also tend to vote. So the government is trying to ensure that the result of their saving will be sufficient to enjoy a comfortable retirement.
Enter NEST, the state devised, but not operated, savings trust. NEST is designed to provide pensioners with a future income by using a combination of employer and government contributions to swell the workers own contributions and by having restricted charges to prevent too much leaking away. But the monies saved will still be invested in the usual funds, an area where the government itself forces suppliers to provide warnings that ‘investments can go down as well as up’.
And therein sits the fundamental flaw. The government is trying to ensure income for future pensioners, and thereby reduce their own commitments, by forcing workers to invest in what are essentially risky products. No amount of regulation can prevent pension pots being wiped out by stock market falls. Supposed solutions such as ‘life styling’ type investment approaches can be extremely damaging to long term value by locking in losses just as often as they are successful in preventing precipitate falls.
Ultimately, no government can guarantee anything to pensioners by exposing them to an essentially risky environment and NEST’s investments are no more likely to be successful than the ones made by private investment firms. In fact, given that he/she will be responsible to a quango, rather than to shareholders, the NEST investment manager is less likely to be under pressure to perform than the managers of private funds.
Only a truly guaranteed system can prevent pensioner poverty. Ros Altman, the noted pension’s campaigner, has called for a decent universal state pension for all individuals as part of her submission to the current review. This would be a good start but it needs to be accompanied by a statement that no further additional support would be given to pensioners under any circumstances.
This will bring home to workers that further improvements in their lifestyle in retirement will have to be self-funded. Only this strong message can incentivise workers to start saving for their own future and it will allow the government to precisely quantify its future obligations and budget accordingly.
The government should restrict itself to regulating the financial market and ensuring quality of information for purchasers. It is ironic that the Tories in particular, who believe government should not be in the airline, energy or telecommunications marketplaces, are now creating a quasi-nationalised investment company and distorting the financial market completely.
As currently proposed, NEST is bound to fail in its objectives. It will enforce savings in risky funds for people who would be better off keeping their money in safer investments or even under their mattress. This will ultimately result in future taxpayers having to step in to assist pensioners who are below the poverty line.
The NEST review is a start but concentrating on how to overcome its problems is not the answer, as no adjustments can eradicate the flaws. A fundamental rethink of the objectives of pensions, the role of the state in providing them and the responsibility of individuals in ensuring their own future is what is required and is long overdue.