The pensions industry must act to avert the looming UK capital crisis

 
Michael Johnson
OVER the next few decades, the UK’s public finances face being crushed by the costs of preserving our pensioner population. In parallel, our domestic supplies of capital will likely be depleted, exacerbated by a shrinking savings pool. Japan’s once legendarily high savings rate is expected to turn negative this year, as pensioners spend their savings. The UK is perhaps 20 to 30 years behind (subject to immigration policy). Given that other developed nations will likely experience a similar phenomenon, albeit over different timeframes, a battle for capital is coming.

This will most likely be accompanied by inter-generational strife. Today’s Generation Y (those in their twenties and thirties) could be the first to experience a lower quality of life than their parents. Over the last five years, the UK’s standard of living has declined by 4.8 per cent and, given the national debt outlook, there is potential for further decline.

The government is struggling with how to avert what the data suggests is coming. It is compromised by facing a long-term problem alongside a five year electoral cycle. The Conservatives have proffered a suggestion to head off the crisis-in-waiting, encompassed in David Cameron’s personal responsibility mantra. Our next generation of pensioners should interpret this as a euphemism for “you’re on your own.”

But while the Department for Work and Pensions wants people to save, the Treasury favours consumption. This position manifests itself in contradictory policies and ambiguous communication, doing nothing to stimulate a savings culture. Further, the government has a vested interest in real interest rates remaining negative. This facilitates bank recapitalisation and erodes debt, benefitting the two most indebted sectors of the economy – banks and the government – to the detriment of savers. Thus, the government can’t legitimately encourage most people to save. But its message should be “consider reducing your credit debts as a form of saving.”

Individuals must save more for a purely selfish reason: to provide themselves with an adequate income in retirement. Financial self-sufficiency will likely become a prerequisite for an enjoyable retirement. It would also mean that pensioners are less reliant on taxpayers, helping to preserve inter-generational harmony. Further, an enlarged savings pool is critical to the nation; savings fuel investment, driving increased productivity and growth. Without this, our quality of life will certainly deteriorate.

But today, the necessary culture is absent from most of the adult population. One reason is that it requires engagement with the financial services industry, which is widely distrusted.

Only the industry can redeem its reputation and head off the risk of state intervention. It must confront its own vested interests and become more efficient, delivering transformational, not incremental, cultural change, including cutting pay, substantially.

My paper, Put the saver first, details some of the initiatives that the industry could take. It should deliver to customers what they want: simplicity (including less choice), low costs (passive, not active, fund management) and absolute transparency. It should also provide what politicians want, or risk losing at least some of the subsidy provided via pensions tax relief (over £30bn, annually). The industry should construct an industry-wide defined contribution pension pot consolidation service, with a bridge across to the National Employment Savings Trust (Nest), the new state-facilitated workplace-based retirement savings scheme. It should also establish an annuities clearing house, in which all annuity providers are required to participate, thereby leading to fairer pricing.

A leap of faith is required by the industry. While profits may diminish in the short term, the long-term outcome could be a rejuvenated reputation and business growth. The industry appears to have forgotten that customers are providing the scarce resource upon which the whole of the savings industry relies: their savings capital. It should put the customer at the centre of everything it does. And so should the banks.

Michael Johnson is a research fellow at the Centre for Policy Studies. His new paper, Put the Saver First, can be found at www.cps.org.uk
Twitter: @Johnson1Michael