Truth comes up from the bottom of a well, even though our pensions don't
CHRISTOPHER FILDES
How shocking it is to discover that pensions do not come up from a bottomless well. We may not have known much about them but we assumed they would always be there. If we dreamed of retiring early — on a full pension, of course — we had only to produce a doctor's letter and ask nicely. Now that a nasty scraping noise suggests that the bucket may, after all, have touched bottom, what should we do? Expect less, sink more bore-holes, complain to the government? Its response will be to commission reports, and this week brings no fewer than three of them. On Tuesday we heard from Ron Sandler, who would like to make pensions simpler, and on Thursday from Alan Pickering, who would like to make contributions compulsory. The City and Suburban report is full of home truths, of which the first is: Pensions cost money. They are to the economy what set-aside is to farming. One way or another, the productive sector must work harder to make up for them. But farmers, or so you might argue, do not pay for set-aside? The money comes from the government, or from the super-government in Brussels? Governments do not have any money. All they can do is to pre-empt yours and mine. They might spend it on pensions, unless they have a better idea or a more urgent claim, in which case they will rewrite the rules of their scheme. They are the worst providers of all and would be run in for mis-selling if they did not rely on compulsion. They have let the basic state pension dwindle away into a luncheon-voucher, and if you are self-employed and earn more than a quarter of the national average income, your payments will buy you no pension at all.
Pay-offs for peons
MANY people, with more confidence, have entrusted their old age to their employers, and must now suspect that there is a catch in this, too. They see pension schemes closed to new entrants. Even the regulators at the Financial Services Authority are thinking about it. Employers jib at the risks they may run. They do not want to be liable for pensions tied to final salaries many years ahead, and they are no longer sure that their pension funds will stretch to cover them. These final-salary schemes represent a flawed concept. They assume that corporations are immortal, when in fact we can expect to out live them For a loyal peon who spent his whole working life with one monolith, they might have made sense, but none for those who, as most of us do, move about. Because they work by cross-subsidy — from leavers to stayers, from juniors to seniors, from women to men — they have been abused, most of all by directors who happily put each other right for pension. No individual owns any part of them, and what is everybody's money so often turns out to be nobody's money. Their time has gone.
Owners' rights
I EXPECT that the Principal Civil Service Pension Scheme will continue to link pensions to final salaries. Its provisions are generous, and if the fund falls into deficit, the government will surely be there to underwrite it. Whose money would the government use for this purpose? Yes, you remember. Employers without such a safetynet are moving towards money-purchase schemes. With these, the size of the pension that comes out depends on the amount of money that goes in, and on how the fund fares in the meantime. Critics complain that this transfers the investment risk to the prospective pensioner. Well, it has to go somewhere and it should logically go where the reward will go — provided, that is, that ownership goes along with them.
Declare independence
THERE are only two ways of financing a pension scheme. One is to take money in with one hand and dish it out with the other. This is how the state pension is financed, though in the private sector it would be disparaged as a Ponzi scheme and its promoters would have their collars felt. Other schemes are dependent on savings — money is put aside and rewards are deferred. Our pension rights may well be
our biggest financial assets, and if they were ours in the sense that OUT houses are, we might know more about them and pay more attention to them. Indeed, a pension is only one thing, though perhaps the best thing, that we might choose to buy with our savings. Ownership and savings add up to freedom of action. Armed with them, we can declare independence — most of all, from the whims of a government which might or might not give us some of our money back.
Scare stories
RESPONSIBILITY can be alarming for those who are used to having their choices made for them. What they can see now might well scare them — companies collapsing, share prices imploding, fraud spreading like measles, investment trusts pleading insolvency. Even the life offices are looking around for new capital, and the Equitable's policyholders continue to suffer the death of a thousand cuts. Where at such times can our savings be safe? The answer can only be that life is full of hazards, and safely — in the air, on the rails, in the markets — is relative. Worse dangers lurked at the top, when the horizon was bright, buying dot.com stocks was better than working, and the premium on safety was low. It has risen since then, but we might be content to pay it. What we need now is an attack on the disincentives to saving.
The usual suspects
THE MERIT of the Sandler report is that it shows us who put the barriers there. Guess who? Quite right: the usual suspects. In safety's name, the regulators have made saving more complicated and less attractive, but more harm has been done, with the best of intentions, by Chancellors. They have let the taxes on savings grow up into such a thicket of misplaced rewards and pointless penalties that what it needs is a bulldozer. The right approach to pensions is to treat them as a product of savings. A tax structure that fostered all long-term savings but treated them all alike would be the best result of our slow realisation that pensions have to come from somewhere. Savings mean self-reliance, savings mean choice, savings mean not having to bet your old age on the government. Whatever you do, don't do that.
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