Why George Osborne’s pension shift is a big effing deal, and what Labour should do about it.
Like most middle-aged middle class lefties, I’ve been watching Stewart Lee’s Comedy Vehicle these past few weeks. In the latest episode, Lee talks about taxation, (perhaps elliptically referring to the tax affairs of other comedians). Lee sets observations about the good fortune, social networks, value of insurance and public services that might lead a popular comedian to be making good money against a short, brutal response. ‘No, the money’s mine‘.
What makes this funny, and uncomfortable, and true, is not that this is a ludicrous, childish position (though rationally, of course it is). It’s that this is an impulse that Lee and his nice, left-leaning liberal audience can recognise in themselves.
It’s mine. My money.
Now we turn to pensions, and George Osborne’s decision to end the pensions industry as we know it by no longer requiring the purchase of an annuity with a retirees pension pot.
The arguments for are effectively that we should trust people to do wisely with their pension funds, and not force them to invest in a financial instrument they dislike, or which may not suit them individually. Further, in Australia, we don’t see evidence of pensioner extravagance or wastefulness.
The argument against is that this decision will open the pensions open up to mis-selling, to a moral hazard – if you spend, or are conned out of, or are simply unfortunate and lose your savings, and are then reliant on the state and demanding of its resources, do we really believe a future government will turn you away? Further, does the UK economy really need an injection of capital into, in all likelihood, the Housing market?
These are serious, significant policy arguments. They matter. They are important. But there is a risk, on the left that in paying attention to these significant issues, we ignore how people will feel about this.
What they’ll feel, I suspect is: It’s my money. Mine. The money’s mine.
Why on earth shouldn’t they?
I suspect right now, people in their late forties or fifties with no huge savings or assets except a modest pension pot built up are thinking, perhaps for the first time, about what they could do with it.
Maybe they would like to buy a house, maybe rent it out at first, and then let one of their grandkids live in it at a reduced rent while they save up for a house of their own. Maybe they think the annuities they have to buy can be outperformed. Maybe they’d like to sell their house, take their pension to buy a cottage to let, and go and live cheaply in a warm, growing economy, hoping good returns on the holiday home will give them a decent income.
Does a politician want to stand in the way of this? Do you want to be the person who interrupts this conversation to say. ‘Actually, No, you shouldn’t do any of that. I won’t let you.‘.
I doubt it. This is why Osborne’s move is a big effing deal, politically.
For the first time since the decision to sell off Council houses to their tenants at a discount, the left is being invited to stand between British families and their aspirations.
So what should Labour do about this?
I’d argue the council house sale offers a near-perfect model, politically.
The idea of selling council houses to occupants, and then using receipts to fund new social housing is an entirely social democratic one. People who have been helped by society, but now have a good income can use their prosperity to both create value for themselves, and create a resource that can be used to help others in need of social housing. Yes, they get a subsidy, but then they’d be getting a subsidy from living in a council house anyway, while another family is forced to stay in more expensive housing, probably at state expense.
What’s more through such a programme, you organically create the holy grail of mixed communities. It’s a great idea.
On the other hand, you could hoover up all the money you raise, spend it on tax cuts and completely shaft the next twenty years of housing policy.
There is quite a big difference between the two. It is the difference between a social democratic idea, and a bad idea.
The same goes here, in pensions.
There is an enormous difference between a pensions policy that allows people to withdraw their pension pot to use in a variety of ways, while offering security and encouraging long-term thinking, and one that opens the door to a spiv-topia of mis-selling, dodgy prospectuses, get rich quick schemes and huge commissions.
A strong pensions system would allow people to invest, but offer protections to those who invest their pension funds.
It would incentivise investing for a good annual return, perhaps by offering an advantage by doing so, and it would regulate the financial products offered to people withdrawing pensions tightly. This is more or less what the IMF is saying to Australia, to improve their model.1
So where should Labour be?
First, strong support for the principle of freedom to use your pension savings as they wish. It’s your money.
Second, an absolute conviction that financial markets which have time and again let down people with pensions, should not be ever allowed to do so again. No-one should be allowed to rip you off.
Third, an emphasis on security and long-termism. Your pensions savings should be working for you and your family for the rest of your life, not gambled with or skimmed off in charges and commissions.
This will involve creating a pensions system that both allows savers the freedom to invest and protects them from the rapacious by placing obligations on those who wish to invest that money on their behalf, while supporting those who are considering withdrawing from their pensions to invest on their own behalf. It would involve mechanisms that allow freedom to withdraw and invest, but incentivise income provision well beyond eighty.
How could such a system be designed, one that both gives savers freedoms and protections?
Why not start by asking the Labour prime minister who successfully introduced such a system to devise a model for the UK?
After all, it was Paul Keating who developed the very similar superannuation system for Australian people, and he is a consistent voice on improving the Australian system today, as people live ever longer.
Why not invite him to lead a ‘Keating Commission’ to consider how removing obligations to buy annuities can be combined with creating a system that protects savers, and builds long-term stability for both the economy and individual families?
The Labour party should never get between British people and their aspirations.
However, it should always get between them and those who would rip them off, short change them, or disguise a permanent loss with a temporary gain.
By being for both freedom to choose and freedom from exploitation, Labour can be true to our values and to those whose aspirations we exist to support.
(Oh, and one more thing. If you think about it, this reform effectively converts pension pots into just another form of future savings. So why should this one particular form of saving attract suh a huge tax benefit for higher rate taxpayers? Doesn’t this, at least theoretically, open the door to a consideration of what the appropriate tax treatment is for those saving for a pension, and the balance of advantages that currently exist. One might argue, that there should be greater encouragement for those on lower incomes to save for the future, not for the richest. Perhaps this is an issue any Keating commission could consider? It might even lead a labour government in a happy position of offering most people an extra incentive to save)
- The IMF advice is really interesting: It is
- The super system needs to have a relatively high degree of guidance and constraints (including good default systems) in order to protect people from unwise or excessively short-term actions. For example, it needs to
a) require long-term savings with restricted access prior to retirement
b) provide income in retirement
c) reduce risks during both the accumulation and retirement phases
- There needs to be access to deferred annuities – purchase of which could start in either the accumulation or draw-down stage. This will necessitate the removal of prudential supervision and tax regulatory roadblocks in order to allow the offering of deferred annuities in either the accumulation or draw-down phase.
- Incentives and default settings should be the initial approach to obtaining the desired outcomes. However, if such arrangements are not effective in producing desired outcomes then consideration may need to be given to introducing a degree of compulsion with respect to the taking of income streams in retirement. For instance, this could be achieved through the application of tax penalties with respect to taking benefits in any one of the following:
- as a lump sum;
- in the form of a non-complying income stream
- if there is non-compliance with either the minimum or maximum drawdown factor of a complying account based income stream.
It’s not at all hard to read this as advice to row back from a market-free for all to a carrot and stick approach to encourage savings retention and annual income [↩]