Buy one pension, get one free
Neil Collins offers a simple alternative to the
government’s latest retirement savings scheme
Imagine, for a moment, that you have a pension pot worth £100,000 in government securities, and its value goes up by £10,000. Are you better off or worse off? Well, ask a silly question, and you’ll get a stupid answer, especially if you ask an actuary. He will say you’re worse off, and here’s why. The assets you’ve got in your pot produce income, and when their price goes up the return you can get by reinvesting the income goes down, so the projected pension is lower.
This, in essence, is why there is a pensions ‘crisis’, and why companies like British Airways have had to scrap their dividends to plug the holes the actuaries can see in their pension funds. Welcome to the weird logic of the eggheads. As the man in the hot-air balloon said, when he shouted ‘Where am I?’ at a man below him, and got the answer, ‘You’re in a wicker basket suspended under a bag of hot gases’: ‘You must be an actuary.’ ‘How did you know?’ ‘Because the answer you’ve given me is meticulously accurate and absolutely useless.’ A few months ago the chairman of a public company with a £1 billion pension fund asked the actuaries to work out the cash flow into and out of the fund. It is a typical fund, closed to new entrants, with a mixture of contributors, deferred members (those who have left but have yet to retire) and existing pensioners. The actuaries calculated that cash will continue to flow in faster than it goes out for the next decade. Indeed, not until 2037 will any of today’s capital be needed to meet pension payments. Yet they concluded that the fund was £400 million in deficit. When you consider that in 32 years’ time the fund’s beneficiaries will be dying off, you can see that this number is absurd, but the company is now under pressure to pour real money into this virtual hole. Never mind that the company will be weaker, and thus less likely to survive; provided the actuaries are happy, the accountants can say it complies with the latest rules. No wonder companies are scrambling to escape from such ‘final salary’ pension schemes.
How on earth have we got into this mess? The cause is an unholy, and accidental, alliance between the government and those who strive to impose uniformity on accounting practices. Gordon Brown started the rot with his raid on pension funds in 1997. The removal of those tax privileges was not unprovoked, since pension fund managers had been abusing them for some years, but it has cost over £50 billion in lost income in the last nine years.
Meanwhile, the failure of a few pension schemes has spawned new laws, which have proved once again that there is no situation so dire that government interference cannot make it worse. Legislation has raised pension obligations from a promise to look after longstanding employees after they retire to a status akin to a debt owed by the company and the level of that debt is now controlled by the Pensions Regulator, a new body with draconian powers to veto corporate reorganisation and, in extreme cases, even to take control of businesses in the name of pension protection. The Financial Assistance Scheme, set up at the same time to help those caught in failed pension schemes, has so far given just £24,000 to 39 people, at a cost of £1.9 million in administration.
This shambles explains why two thirds of Britain’s largest 100 companies have stopped new employees joining schemes which link pension rights to salary. The Royal Bank of Scotland, our second largest bank, is the latest to do so. Those with schemes still open are mostly companies with few British employees, or for whom wages are a small part of total costs, so a rapidly rising proportion of people employed in the productive part of the economy must now bear the risks of investing for their old age.
Last week saw the government’s latest stab at the problem, with the publication of its response to the Turner report. His National Pension Savings Scheme — inevitably dubbed NatsPiSS by the trade — proposes that every employer contributes a minimum of 3 per cent of the employee’s salary to the scheme unless the employee specifically tells him not to.
The NPSS has misery written all over it. Companies which now pay more than 3 per cent into ‘defined contribution’ schemes where the pension depends on the value of the pot at retirement — will be tempted to cut back, while small companies with no scheme risk seeing another 3 per cent added to their labour costs. Worse, employees will be lulled into thinking that it will be enough to provide comfort in old age, which it won’t.
Worse still, the NPSS is to be centrally administered, even though we should have learnt by now that competition, not diktat, keeps down costs. The providers who want to administer this monster fund complain that the Turner target of annual expenses of 0.3 per cent of assets is too low to be worth their while, yet Alliance Trust of Dundee, now Britain’s largest investment trust, makes a decent living on 0.32 per cent. The NPSS fund itself is supposedly independent of government, but it will soon get so big that the politicians will be leaning on it to take the broader view, consider the national interest, etc., etc. In short, it is no solution at all to getting us to do something about our retirement.
So what is? There is a simple solution, but it involves all the things that Gordon Brown hates most — personal choice, simplicity, freedom from means-testing and a reward for thrift. Worst of all, the Tories almost adopted it before the last election. It is the Bogof pension. Buy One, Get One Free: for every £1 you save into an approved account from your posttax income, the government adds another £1, up to an annual limit determined by the chancellor of the day in the Budget. If you don’t use this savings opportunity, you lose it; you can’t make extra contributions in future years.
You can take the money out whenever you want, but for every £1 you withdraw before the age of 70, the government gets £1 back too. If you die before getting there, the total passes to your estate. Once you get to 70, the capital becomes a normal maturing pension plan. Essentially you get an actual asset which you control in the same way as you would a selfinvested pension plan (SIPP) under the rules that came into force in April. Simple, isn’t it? It is also fairer than the present system, which gives higher-rate taxpayers more relief than those on standard rate.
It’s expensive for the Exchequer, but can be paid for by removing all the tax breaks now associated with pension contributions. Membership of final salary schemes would be allowed, but would be taxed as a benefit in kind. Those public-sector workers whose union bosses are fighting so hard to keep their privileges would see for the first time how valuable an index-linked pension from the state really is.
Many employees in such schemes might prefer to take the money and make their own Bogof arrangements, thus escaping from being state supplicants and becoming minicapitalists. Alas, under this control-freak administration, let alone whatever Brown terror may follow, they will not have that chance. That £100,000 pension pot of your very own will remain possible, but for the few, not the many.
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