Final salary pensions: RIP
The news that final salary pensions schemes have virtually ceased to exist, at least to potential new entrants is a reminder of the importance of pensions policy. It may be that the savings rate is now higher in the UK than for many years but most of us continue to save far too little to have any chance of the retirement income to which we aspire.
In a move which received little coverage outside the specialist press, Labour used the Pre-Budget Report to slow down the introduction of the Personal Accounts System including the element of matched savings through which employee contributions are matched by employers. Yet ministers and civil servants privately agree that even this system will only make a difference if the target savings levels are rapidly increased, as, for example, they have in Australia. Meanwhile the Conservative policy on pensions – arguably one of the most pressing policy issues we face – remains opaque.
The RSA addressed some of these issues with our Tomorrow’s Investor project last year and I am keen that we continue to work in this field. I have argued in the past that to close the ‘social aspiration gap’ more people need to be more self reliant. The truth is that we want to live longer but we don’t want to accept the consequences of this advance: to whit, saving more and working longer. In part, the collapse of final salary schemes (which were generally well managed and with low fees) came from an unwillingness by employees’ representatives to renegotiate the benefits of these schemes even as the evidence of their non affordability to the business and unacceptability to shareholders grew.
The result is that most of us are implicitly relying on the state or our grandchildren to keep us comfortable in old age (and this applies as much to the middle classes as the poor). Sorry to start the New Year with gloom, but this is a text book example of a combination of a lack of public realism and political courage conspiring to store up huge future problems.
The Tories steal a march …
On my way to Manchester for the RSA event at the Conservative Party Conference. The Conservatives have made an impressive start to the week; party strategists knew their key vulnerability was the charge of lack of substance to Tory plans. With their welfare to work plan and pensions reform, they have effectively buried this weakness, whilst also looking more credible than Labour in relation to reining in public spending.
Meanwhile, Labour’s plans to impose a pay freeze on well paid public servants look more like a political ploy which is, incidentally, highly centralising in its implications.
On pensions, I hope we can persuade the Conservatives to link the raising of the retirement age to the reforms set out in our Tomorrow’s Investor report. The new Pensions Policy Framework, set to be introduced in 2012, is basically right but without the reforms proposed by the RSA, the package will not work and could even be counter-productive.
PS: One of the blog posts I most enjoyed writing was – strangely enough – when West Brom lost in the play-offs. Having written yesterday about how I wish we used football to instil good character as well as physical fitness, it was great last night to see another example of football at its best. When Richard Dunne scored for Aston Villa against his old club, Manchester City, not only did the Villa fans celebrate, but also the City fans cheered the achievements of their former hero. It was a rare moment of generosity. We West Brom fans like to think of ourselves as the best in the country, with our capacity for humour and self-deprecation, but as far as I’m concerned, Manchester City take the crown – for the time being at least.
Responding to the Myners’ strike
Thanks to Duncan, Steve, Michael and Colin for their advice ahead of my gig last night at the Corporate Governance Circle. I was responding to a forthright speech to the always engaging and direct Lord Myners (who, gratifyingly, had also read the post and comments). I knew less about the subject – ‘Institutional Investors – are they the weakest link’ – than anyone else in the room but I think I just about got away with it.
My key point was to link the debate about corporate governance and stewardship to the emergence in 2012 of Personal Accounts. If these succeed – and the RSA has proposals which we think would help to ensure they do – they will create a huge source of regulated funds with the scope to impact directly on how British business is managed and indirectly on the behaviours of other institutional investors.
Although he expressed it in the most positive of terms, Lord Myners’ basic point was dispiriting for those seeking to improve the quality of corporate governance. He told the assembled investors that they already had the power to influence the companies in which they are invested. In typically robust style, he suggested that if company annual general meetings didn’t exist, someone would now be calling for them as the solution to all our problems: ’Hey, why don’t we have meeting every year where the whole board has to attend and at which shareholders can ask any question they want and table resolutions over key aspects of governance?’ ‘You have the power’ said the Lord ‘but the reality is that you choose not to use it’.
I had gone into the meeting thinking the big difficulty in this policy area was the principal – agent problem but I came to see that it is actually a collective action issue. The diffusion of ownership in almost all large funds – driven by modern portfolio theory – means that typically no fund owns more than one or two percent of a company. Why then should they be the ones to take on the onerous and risky business of holding companies to account? Interestingly, no one in the room denied Lord Myners description of the problem or offered a solution.
This morning David Pitt-Watson (who leads on our Tomorrow’s Investor project) and I met with Tory Work and Pensions spokesperson Theresa May to discuss our project and hear her views on personal accounts. She said some very interesting things to which I will return in a later post. But on the way back to John Adam Street I quizzed David on the issues of investor influence. The RSA proposal is for a low cost pension fund delivered through personal accounts but we also claim this fund could have a benign impact on corporate governance and stewardship, helping for example , deliver George Osborne’s vision (elucidated in a speech yesterday) of a more long term investment culture. ‘But how can we be both cheap and influential?’ I asked.
David assures me he has an answer and that it is in the forthcoming Tomorrow’s Investor report. I am looking forward to reading it
Me, Vince Cable, and the Child Trust Fund
Filed under: Credit crunch, Politics, Public policy, The RSA
For some unknown reason I find myself this afternoon on a panel at the National Housing Federation’s Leaders Forum. It’s not hard to see why they chose the other panellists: Lord Falconer, former housing minister and now Chair of a major housing association, Professor Christine Whitehead, housing expert from the London School of Economics and none other than Vince ‘Oracle’ Cable. But why me?
Fortunately it’s a Question Time format. I’ll just have to hope I don’t have to answer first until the joke question at the end: ‘assuming the recession reduces us all to penury what is the one possession you would want to take with you to the poorhouse?’. The answer, of course, would be my socialist-realist painting of ‘Comrade Sister’ Harriet Harman triumphantly leading the post election Labour Party into the wilderness.
I might try to persuade Vince that the LibDems are wrong to want to abolish the Child Trust Fund (only partly because it’s the one genuinely important and useful thing I have ever contributed to). So far, four million accounts have been opened up, many of them by families who would never have previously thought they had the ability or the reason to save. I would have thought if any party stood for the principles of the Trust Fund – inclusion, equity and family thrift – it would have been the LibDems. Latest statistics show that families are increasing their top up into the Trust Fund despite the recession, which reinforces the argument that the CTF encourages the saving habit.
Families with Trust Fund accounts can choose a safer or two more risky options for investment and, with the stock market tanking, the ones who chose the former will be thanking their lucky stars. This will include the lazy and disorganised, as those who fail to open an account themselves have one opened for them by the Treasury. Having said which, the first Trust Funds don’t mature until 2020 by which time even this downturn should be history.
As the equivalent on this afternoon’s panel of the ‘celebrity’ guest on Question Time who is allowed to be idiosyncratic (or simply idiotic), I feel liberated to speculate wildly. It seems to me that one of the effects of the recession is to destroy all the gains made on asset values (on stocks, shares and property) over the last decade. Yesterday the US stock market returned to its 1997 level wiping out the full effects of the last cycle.
The lesson I take from all this is that we should make it a policy objective that average economy wide increases in asset values stay broadly in line with GDP growth. Because GDP rises faster than inflation this still means there are reasons to invest and save, quite apart from the need for us to put money aside for rainy days and our retirement. As the RSA Tomorrow’s Investor project has shown simple indexation of saving could reduce pension fund fees significantly and make saving safer. And as behavioural economists have shown, speculators – whether private individuals or city whizz kids – rarely perform consistently better then the market as a whole.
If policy explicitly aimed at indexing assets to the overall growth of the economy, and if policies like the CTF and the new pension system increased the proportion of us holding assets, we would all benefit from the country’s prosperity and suffer together when we failed. This sounds good for the economy and good for social solidarity.
From St James’ Palace to the launch of the RSA Tomorrow’s Investor Report
Just back from St James’s Palace and the opening session of a conference of the Prince of Wales’ Accounting for Sustainability Forum. The day started with a powerful speech from HRH in which he argued that the factors that had led to the credit crunch – debt fuelled over consumption, complacency about risk and regulation and rampant short-termism – were precisely those which had to be overcome if a new model of capitalism is to confront the ‘climate crunch’. Sadly, the Prince’s challenge was not fully met by the rather bland and complacent offering from some of the big business bigwigs who followed HRH to the podium. It’s not that they said anything one could disagree with, more that they failed to confront the question of how the hard wiring of modern capitalism has to be reengineered.
Perhaps, I should send Prince Charles the RSA Tomorrow’s Investor report: published today, and reported in the Times. As the report makes clear, the incentives placed on fund managers to make quick wins drives short-termism and increases volatility in the market. In other words, it places relative performance ahead of absolute performance. Companies go up and down, increasing the risk of a crash, but no real value is added to the economy.
The way the fund management industry operates reduces returns for investors in another way. Every time fund mangers buy and sell on our behalf, or the funds in which they invest buy and sell on their behalf, fees are generated. These fees eat into our funds and are one of the reasons someone who saves for a pension throughout their working life ends up paying about 40% of their savings in fees. The fees are good news for the financial sector. They are the basis for the bonuses and lavish lifestyles the sector had come to see as its birth right. But there is no evidence over the long run that any of this leads to better returns, as Warren Buffett has pointed out repeatedly. The cost of trading wipes out the benefit of the exchange, as Paul Lee points out in his Tomorrow’s Investor paper.
Investing over the long term not only reduces fees but also provides incentives for fund managers to be more active in scrutinising company performance: exercising what Albert Hirschman calls “voice”. It can thus be a more effective driver of sustainable efficiency and real accountability.
We need many solutions to avoid a recurrence of the credit crunch. The kind of pension funds advocated in the Tomorrows’ Investor report is one of them.
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