Howard Davies: Will the big pension shake-up boost retirement saving?

The MT Diary: Some 50% of savers consistently underestimate the amount they need to save for retirement. Will the pension reforms go far enough?

by Howard Davies
Last Updated: 28 Apr 2014

It has been an exciting few weeks in the dull, staid world of life insurance. Too exciting for some of us. In the normal way, while banking problems can emerge overnight out of a blue sky if depositors lose confidence, life insurance problems develop at a glacial pace.

If life expectancy improves more than expected, your actuaries redo the numbers and find that there is a chance you may run out of money in 2060.

So the government's spring offensive against the sector came as a shock. First, the chancellor landed his right fist on the annuity business, removing the requirement to use your pension pot to buy one.

Second, the pensions minister, Steve Webb - after advising pensioners to buy a Lamborghini with their savings rather than handing it to insurance companies in return for a regular income - imposed a tight cap on charges for company pension business.

Then the FCA landed a low blow in the solar plexus by telling the Daily Telegraph it planned to review 30 million past policies for evidence that policy holders had been 'ripped off'. (When not busy trying to make the planes run on time, I also chair the insurer Phoenix.)

There was blood all over the share registers at the end of this three-pronged assault. The FCA seemed to have broken its own rules on handling price-sensitive information. So the third punch did not please the chancellor.

Playing the role of video ref, he piled in with a cross missive to the chairman of the FCA, which is one for the connoisseur of poison pen letters. It was full of references to 'disciplinary action'. A succinct summary might read: 'Dear John. You screwed up. Fire some people. Best, George.' We await the response with bated breath. Let's hope it emerges before 2060.

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It would be good to think that there was a strategy to encourage the right kind of saving struggling to emerge from these announcements. Over the past two decades, the pensions and savings landscape has changed out of all recognition. Defined benefit schemes are all but extinct in the private sector. With-profits policies are also rare. Now annuities look likely to go the same way. These were the three big pension pillars.

On the distribution side, direct sales forces have been disbanded, and the ranks of independent financial advisers are much reduced, following the regulator's decision to outlaw commission-based selling. The numbers of small savers willing to pay an upfront fee are small, so independent advice now tends to be available only for the better-off.

Government attempts to re-engineer products have had mixed success. Labour's CAT-marked products turned out to be dogs. Stakeholder pensions have not set the world alight. ISAs are well established, now with more generous tax relief attached, but so were PEPs, then they were rebranded for no obvious reason.

It is too early to say whether the NEST (National Employment Savings Trust) automatic enrolment pension scheme will take off, though the early signs are modestly promising.

This churning does not seem to have touched the underlying problem: that, according to surveys, more than 50% of savers consistently underestimate the amount they need to save to guarantee a given proportion of this income.

The savings rate has risen since the recession. It could hardly have fallen, as it reached approximately zero in 2007. But it is still only around 5% (compared with China at more than 40%). The Office for National Statistics is planning to change the treatment of defined benefit schemes, which will make the reported ratio look higher, but nothing will have changed in reality.

It is difficult to see how the recent announcements will do anything to boost retirement saving. If fewer savers take out annuities, that amounts to a transfer of longevity risk from the life insurance industry to the state.

A quick survey suggests that only a quarter of retirees plan to buy an annuity. So there will be more consumer spending, which will boost the economy in the short term, but when the Lamborghini's big end goes, who pays? There will also be greater pressure on the benefit system, as pensioners without annuity income will be poorer, though probably the effects will not be seen for a parliament or two.

That last consideration was, of course, far from the chancellor's mind.

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It is not so clear that the economy needs a shot in the arm in the short term. It is chugging ahead quite nicely. Rising house prices, especially in London and the south-east, are doing Dr Feelgood's work for him.

The surveys suggest that even business investment, which has so far been the slow student at the back of the class, may be about to recover.

From my regular seat on the London to Paris Eurostar, this boom-time mood in England is puzzling, while the French remain in the slough of despond. Their latest unemployment figures were dire and the local election results forced Hollande to change his government, now led by the energetic Manuel Valls, a Spaniard, in fact, who has made his name being tough on immigration. (Manuel jokes have little resonance yet in Paris, but give him time).

Unusually, there has been what we now term a 'conscious uncoupling' of Britain and France. That has been true for centuries in political terms, of course, but the economic channel has never seemed so wide. Vive la difference, as the French rarely say.

Howard Davies is the chairman of the Airports Commission. Follow him on Twitter at: @howardjdavies.

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