Private pension markets are riddled with internal contradictions and are not working

August 24th, 2014

Thatcher ended the best pension scheme the UK has ever had, and pensions have never recovered from the consequent decline as constant mis-selling scandals continue abundantly to demonstrate.   Barbara Castle’s SERPS schme in the 1970s was generous particularly to the low-paid and to women, highly popular, and provided universal protection against poverty in retirement.   Thatcher reduced its generosity by cutting the accrual rate, gave individuals an incentive to opt out of SERPS into personal pensions which turned out to be much poorer quality, broke the link between earnings and the basic State pension, and allowed individuals to opt out of occupational schemes which had previously been a key element of the social wage.   These opt-outs led to a great mis-selling scandal as commission-hunting salesman persuaded many to shift to poor defined contribution (money purchase) schemes.   The State retreated from guaranteeing earnings-related retirement income to merely providing a low means-tested safety net, and as the State basic pension steadily declined relative to earnings it inevitably led to a large rise in pensioners subject to means-tested benefits.

This broke down in the decades after the 1980s as it became clear that individuals were not responding to market signals and taking on personal responsibility for saving.   By 2012 two in three of the private sector workforce were not saving in a workplace pension.   This is partly because a third of the workforce are earning at or little above the subsistence level, and partly because at almost all income levels there is always greater pressure, given the option, for immediate spending rather than for more remote investment.   The idea that pension provision, just like everything else, was best provided by competitive markets in which private pension providers’ search for profits delivered good product for savers turned out to be a tragic illusion.

A remedy for these glaring failings, whilst still preserving the same pensions architecture, was proposed by the Pension Commission under the Labour government after 1997.   It has involved auto-enrolment and the accreditation of schemes under the so-called NEST system, with the State pension once again linked to earnings.   But this compromise is still flawed by three main failings.   Contribution levels need to be higher if poverty in retirement is to be avoided.   It requires more efficient and better-designed pension systems that are run in the interests of members, not employers or big companies providing pensions.   And third, most disturbing of all, there is still a misalignment of interests when, as in contract-based schemes, member welfare is sub-contracted to a company running the scheme, however well, to provide a return for their shareholders.   It is true that in wider trust-based schemes this problem is reduced, but it is not eliminated.   And the logic of large-scale trusts getting a good bargain for their members is that the best bargain, which is the most inclusive for all citizens, will be secured by a new upgraded universal SERPS-type scheme.   After disastrous experiments with private pensions markets, the wheel has now returned full circle.

3 Responses to “Private pension markets are riddled with internal contradictions and are not working”

  1. J.P. Craig-Weston Says:

    A decent and adequate state pension, paid for from taxation, should be enough to live on without want and with a measure of dignity.

    The basic state pension is one of the greatest achievements of socialism in this country and needs to kept in house, (not outsourced or subcontracted,) and must always be defended robustly at all costs.

    Many people, particularly the low paid, until recently; (low pay and job insecurity aside,) regarded themselves as having already paid for their basic pension through their NI contributions, (which the Tory’s would like to scrap along with every other vestige of socialism,) and were both irritated and confused at being suddenly expected to pay for it twice.

    Also the cost of all those gold plated final salary pensions, (particularly those being funded from pubic purse for too many public sector employee’s,) is also a additional problem, (but indicative of the yet another funding shortfall.)

    I must confess having read through the above at least a couple of times it just looks like more smoke and mirrors. No mention of precisely who will be running this scheme or how it will be funded, looks to me like usual suspects, (“partners,”) trying to get their hands on more revenues on yet another flimsy pretext and far too much like proposals for funding the privatized NHS, which we’ve also, (to whatever extent and regardless of the UK now being completely broke,) paid for already.

    I’d certainly need a lot more detail than is being provided above to assess this, but on the face of it looks like all those great deals on energy we’re always supposed to be able to get by shopping about between various robbing and unscrupulous utility providers, that are almost completely just figments of our MP and business leaders febrile imaginations, (any excuse not to bring the prices to consumer down in real terms.)

    But above all this seems to be yet another departure from the fundamental principle of a basic and adequate state pension for all paid for from NI.

  2. J.P. Craig-Weston Says:

    So basically what you’re saying here, (although I suspect that grubby fraud Ed Balls is behind this latest con trick,) is that in addition to Labour abandoning the disabled, the unemployed and the sick, (the principles of NHS free on the basis of need,) Labour are now quietly abandoning the NI funded state pension scheme as well, but hey, we’ll flog a shabby third rate insurance scam in lieu of it?

    Welcome to America.

  3. jeffrey davies Says:

    you forget those pesion pots governments have raided taking billions out of them foobar

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