In a mere seven years, Gordon Brown has managed to destroy Britain's pensions system. And things will get worse before they get better, says Simon Nixon.
How bad is the savings crisis?
It seems to be worse than anyone previously imagined. The Government says that pension saving is rising, albeit slowly. But Adair Turner, the chairman of the Pensions Commission, is expected to report next month that much of this money is simply being pumped into final salary schemes to keep them solvent. As a result, pension provision among the rest of the population is falling, not rising, and today's employees will retire on smaller pensions than today's retirees. The number of 16 to 35-year-olds paying into personal pension fell by 12% last year alone.
Why aren't people saving?
There are a number of good economic reasons why people have stopped saving over the last few years. The long bear market in shares knocked confidence in the stockmarket. According to HSBC, the typical pension fund has fallen 1.3% over the last five years. And while interest rates have been so low, many people concluded, reasonably enough, that they were better off putting money into property. Many people simply don't earn enough to have spare cash to invest. Nonetheless, millions of others are likely to have been put off saving by the actions of the savings industry and government.
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Why have they lost faith in the savings industry?
Because it has a shameful history of absusing its customers, selling massively overpriced and often unsuitable products on the back of inflated claims about their performance, usually with the connivance of commission-hungry financial advisers. Over the last 20 years, the litany of scandals includes the pensions mis-selling scandal in the 1980s, the endowment mis-selling and split capital investment trust scandals of the past few years, the Equitable Life debacle and the woeful performance of safe' with-life funds. "Consumers have been treated as dupes by the savings industry, taken for a very expensive ride and left to sort out the mess as best they can," Pauline Skypala recently wrote in the FT, reflecting on 25 years as a personal finance journalist. "An industry that is allowed to mistreat its customers in such a way is one that deserves to lose them."
Does the industry continue to mistreat customers?
Yes. The savings industry continues to charge outrageous fees in order to meet the financial services industry's inflated wage expectations. Most funds charge a 5% initial fee and 1.5% annual management fees. The Government tried to force down fund management charges by encouraging the industry to introduce stakeholder pensions, with fees capped at 1% (they are due to rise to 1.5%), butthe industry has helped to sabotage stakeholder schemes by restricting access to the best-performing funds. During the stockmarket boom of the 1980s and 1990s, the industry could get away with these high charges since investors could afford to lose 2% of a fund growing at 8%. But in today's era of low inflation and low returns, high charges often strip out all the growth in an investment. As a result, the only thing many savings products have going for them these days is the tax breaks.
What tax breaks?
Quite. Thanks to a generous system of tax breaks, Britain used to have a pensions system that was the envy of the world. It has taken Gordon Brown just seven years to destroy that. If his decision to abolish PEPs and Tessas, and replace them with markedly inferior Isas was merely short-sighted and crass, his decision to abolish the dividend tax credit in his first budget was a catastrophic misjudgement, the consequences of which we will be dealing with for generations to come. At a stroke, Brown removed £5bn a year from the nation's pension funds, forcing many companies to close their final salary schemes. The number of companies offering such schemes has fallen from 67% to 33% since Labour took office. To the extent that companies now offer any pension benefits at all, they tend to offer only defined contribution schemes, which cost the company much less and provide lower benefits.
What else has Brown done?
Gordon Brown's second major act of vandalism on Britain's savings industry was his decision to hold the value of the state pension down at what The Economist calls "pocket money levels", while paying adequate retirement benefits only to those with no savings of their own. The price of Brown's obsession with forcing elderly people to beg for their benefits is that most people no longer have any incentive to save. Independent financial advisers agree there is now no point anybody earning less than £25,000 saving for a pension since for every £1 they get in income from their own savings, they will lose between 40p and 91p in foregone benefits.
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