BRITONS don’t save enough. The fact that we don’t put enough money aside for a rainy day, for our retirement or to finance long-term care, is one of our great weaknesses. There was a time when the UK was able to boast that we had the best pensions system in Europe; those days are long gone.
The old structure was killed off by a series of blows: first came increasing life expectancy, and the belated realisation that final salary promises were turning out to be more expensive than originally thought. Real pay in the 1950s, 60s and 70s was actually dramatically higher than anybody realised at the time; some lucky families are still enjoying the fruits today.
Unfortunately, this also meant that many older firms became unviable in the 1990s and 2000s; in many cases, shrinking businesses were devoured by their giant pension funds, and became primarily focused on topping them up rather than growing. Such legacy pension issues were one contributor to the demise of swathes of UK manufacturing; it also helps explain depressed levels of investment.
But it was not just actuarial miscalculations that did for UK pensions. Regulatory and tax blunders were also hugely important. At one point, when the pension system appeared in surplus, the authorities encouraged companies to put less money in. The accounting rules were changed repeatedly; the introduction of mark to market accounting injected extreme volatility into corporate results and thus accelerated the demise of final salary schemes. The regulatory push to get funds to stock up on debt and shun equities was another disaster.
Gordon Brown’s tax raid on pension funds in the 1997 Budget ended up costing them tens of billions of pounds in net present value terms by slashing the dividend stream they relied on. It was a catastrophe, one of Brown’s many appalling decisions. Since then, pension tax relief rules have been changed repeatedly, slashing the amount that can be put aside and capping the size of pots. The constant tweaks to the rules helped fuel uncertainty and made pensions savings less attractive.
The good news is that after years of political vandalism policy is finally improving. The first big change was the launch of auto-enrolment, masterminded by Labour but continued by the coalition: so far, almost nine tenths of those already eligible have decided to take part, which is a huge success. By 2018, workers will pay in 4 per cent of their qualifying earnings, with employers adding in 3 per cent (this will be passed on to employees in the form of lower wages) and the government 1 per cent. This is a great first step; eventually, almost all workers will need to save 15-20 per cent of their earnings throughout their professional lives.
The second major breakthrough was George Osborne’s brilliant decision to abolish the crazed requirement for individuals to convert their pots to annuities, or else face a punitive tax hit. The money is now properly the savers’, to spend as they wish. To date, this has been Osborne’s most inspired move.
By contrast, the latest idea from Steve Webb, the pensions minister, to allow for the creation of Dutch-style collective pensions as an additional, optional choice, is a largely meaningless distraction. It won’t do too much damage but only because it won’t generate much enthusiasm: those who take part will own pension rights that depend on investment performance, rather than actual pots of money. As two Dutch writers explain on p16, the system is facing growing opposition in the Netherlands. The rules were fudged during the crisis, triggering a row, and the youth wings of three leading political parties have called for major reforms to be introduced. Why are we seeking to adopt a system that is being rejected by those who have tried it?
Apart from that, however, the news on the pensions front is uncharacteristically good. Let’s hope it lasts.