INSIDE OUT

INSIDE OUT - The following statements are both true: British people must save tens of billions of pounds more each year, in order to ward off an old age of penury and hardship; it would be an economic disaster if consumers suddenly and dramatically increa

by ROBERT PESTON, editorial director of Quest, www.csquest.com;e-mail: rpeston@csquest.com
Last Updated: 31 Aug 2010

The following statements are both true: British people must save tens of billions of pounds more each year, in order to ward off an old age of penury and hardship; it would be an economic disaster if consumers suddenly and dramatically increased the rate at which they save.

In other words, it's not just you and me who would rather shop till we drop than put money aside for retirement. Even the Chancellor is forced to acknowledge that only our spendthrift habits have kept the UK out of recession over the past six months.

Indeed, Britain has just enjoyed the fastest growth among the Group of Seven leading industrial countries. Who should get the medal? Lean, mean manufacturers? Our creative industries? Our world-class drugs companies? The City? No. The heroes of the economy are the purchasers of DVD players and digital cameras, and M&S's new range of Per Una women's clothing. Yet if we don't start saving a lot more soon, our retirements will be far less comfortable than we feel we deserve.

Statistics on the so-called savings gap are troubling. A report commissioned by the Association of British Insurers from consultants Oliver, Wyman & Co suggests we should save an additional pounds 27 billion every year (we currently put aside just pounds 50 billion).

And the problem may be even worse, because one of the engines of the UK savings system - so called 'defined benefit' company pension schemes - is beginning to clank. These glorious products, which guaranteed a proper retirement income to millions of members of the schemes, are costly for employers. One reason is the lamentable performance of stock markets over the past two years. This has wiped out investment surpluses on most of them, and companies will have to pump in more cash.

They are loath to do this now, when their businesses are under pressure They are increasingly refusing to let new employees join the schemes. And if stock markets continue to slide, this trend will accelerate.

Gordon Brown may also come to regret one of his earliest fund-raising wheezes: the abolition in 1997 of the tax credit on dividends. This wiped billions off the annual income of pension funds.

So what is to be done? Well, battalions of bankers, insurers, regulators, politicians and civil servants are working on possible solutions. There's the Treasury's review of long-term savings being conducted by Ron Sandler, the former chief executive of Lloyd's of London; there's the cross-party review of pensions led by Frank Field, the maverick Labour MP, and David 'Two Brains' Willetts, the Tory social security expert; and there's a vast amount of work going on inside industry lobby groups and Whitehall.

Important themes are emerging. One is that the savings gap could be reduced if people were more sensible about where they placed their money. Oliver Wyman believes it would shrink by pounds 12 billion if people used spare cash to pay off expensive debt, or chose tax-efficient pension products, or picked equities rather than cash deposits, among other things.

Another point is that there is still not enough competition in the long-term savings market. Products are hard to understand; there are big barriers to new entrants; consumers lack the knowledge and skills to shop around.

Third, there's a strong correlation between how much an individual saves and whether they have taken professional advice. The more advice they take, the more and better they save. But the regulatory costs of advisory businesses deter financial advisers from providing a service to those who need it most: those on lowest incomes.

Fourth, the savings gap will never be closed sufficiently by the operation of the marketplace alone, however much assorted anomalies and inefficiencies are eliminated. We will save enough only if the government forces us to.

And in respect of that last and most politically sensitive of points, we should hope Willetts and Field get a fair wind. Their basic idea, that we all make contributions to some kind of national pension fund, but that those on lowest incomes have their contributions topped up by government, seems right. This is redistribution at the contribution stage, rather than when we get to retirement.

There are huge technical difficulties in making this work. Whether the City could actually absorb the massive influx of funds generated is just one. Another is whether government should underwrite some of the investment risks. And then there is the fear among both Labour and Tories that backing such a plan would be seen as supporting a covert increase in taxation (horror of horrors).

We can't leave this problem to be batted around by politicians in the normal puerile manner. If Willetts and Field can work together, their respective party leaders can surely begin to build a cross-party consensus on this most important (if least sexy) of challenges. We might feel more secure about our old age - and our political system might regain a little credibility.

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