Pension pottiness?

There’s an old joke: how do you tell if you are talking to an extravert actuary? He looks at your shoes rather than his own when he is talking with you.

Actuaries of course are the talent in insurance and financial institutions (not the sales people, or financial advisers as they prefer to be called, as they would have you believe). The actuaries are the ones who carefully, strategically, commercially and scientifically calculate the chances (and therefore the cost, budgets etc) surrounding the financial products sold and managed by their institutions. These products include, of course, pensions.

On Wednesday, the Chancellor of the Exchequer announced a change in regulations surrounding pensions. No longer would people be compelled to put their pension ‘pot’ into an annuity scheme of some kind, they could instead (as the pensions minister has suggested) blow the lot on a Lamborghini. This budget announcement has been variously described as bold, reckless and huge. It is probably all three.

Now, I am no expert on pensions and I would draw your attention to this blog (Osborne’s pensions catastrophe) which has been referenced several times by politicians and commentators. You will note that the comments below the article are universally disparaging. Osborne’s pension change looks to be a very popular move, especially for people coming up to retirement. Pensions are a hugely emotive topic because a well-resourced one can make all the difference in older age, and a bad one...

There is no getting away from the fact that statements that talk about ‘giving power and choice to the people on how to spend their saved pension pot’ are enormously attractive. And suggestions that people should not have this choice are variously described as leftist / statist / condescending etc.

This is a story that will run and run, for sure, because it strikes at some very core principles that (appear to) divide the Left from the Right. I say ‘appear to’ because I am not sure the differences are so great.

For example, I think that we all agree that what marks out a society as being more civilised is the creation and sustaining of collective institutions that liberate people from having to provide their own (for example) policing, health care, roads, street lighting and so on… In other words civilisation is based upon sharing responsibility and risk. We give up some of our resources and indeed freedoms for the common good. (Yes there are a few libertarian fundamentalists who just want to live out their lives in ‘idyllic’ cabins with a supply of baked beans and bullets – but such people are in the very small minority.) And there are probably a few more people who believe, as one tweeter put it to me last night: @DVATW “Great, let's stop thieving from hard working people ..oh, hang on, that is the essence of leftism”.

But I assume that nobody wants to make taxes optional? Taxes are the price we pay to live in a civil society where collective resources help to sustain us all, allowing us to live out our lives in relative safety, health etc.

“But annuities are not taxes!”, I hear you say. True. But ask any actuary (yes we are back to them again) and she will tell you that in essence what they do is spread their bets. When person A comes to convert their pension pot into a pension using annuities, the actuaries calculate the life expectation of that person, the likely growth in the pension pot and with a bit of mathematical jiggery pokery they calculate the pension. If the person dies a day later, they are quids in. If that person lives to well beyond expected years, they lose money. It is a gamble (a bit like bingo, which the government seems awfully keen on too, or at least Grant Shapps is). If the company was only providing a pension to just one person, this would be a very risky business. However, as they provide pensions to many, many people they can spread the bet (in a way that is similar to the provision of the NHS or fire & rescue services etc)

(By the way, I am mostly writing this to get my head around the arguments involved, and if you have stayed with me up to here, thanks!)

So a pension company is a private, commercial but collective institution. We have them so that bets can be spread around and risks can be shared. Certainly they may well have been milking the system a little too much in recent years but the answer to that need not have been the change announced in the budget.

So let’s examine what could be the consequences of this liberation of pension pots:

• Some pension companies will go bust due to reduced profits, loss of a whole dollop of equity and cash flow difficulties (etc.) Those receiving pensions from these companies may well be left floundering. (But I do not know what exactly would happen - do you?)
• Due to large numbers of people cashing in their pensions pots on fast flashy cars, the cost of annuities rise and people’s pensions (who still want to have them) go down. This could have dramatic consequences for the state if we (because we are the state) have to pick up the tab for social care, rents etc.
• A big proportion of pension-pot-liquidators go off to buy houses as investments which stokes up the housing market, prices rises and even fewer younger people are able to afford to buy.
• Given that people coming up to retirement are intelligent people and will want to use their pension pot wisely, they will want to access a whole new legion of financial advisers. Are there enough of these people around? Will people end up being sold products that might seem like good investments into their old age but actually won’t be? (After all, there has never been any dodgy selling in the financial services market has there…?)
• Given that not all of us are blessed with actuarial acuity and rationality about our forthcoming retirement, how likely is it that some people might make some very bad decisions? And that would be fine if only they suffered the consequences. But they probably won’t since their families, neighbours, and the wider state (not least all the lawyers who will be getting new business from people suing their legal advisers) may well get involved as well. Who pays for all this?
• A decision made at 65 may look very different when that same person is 85. Do any of us know what we will need 20 years from now?
• And who knows what this change will do for marriages, divorces, family arrangements etc? (“Dad, I know you are coming up to retirement, so will you invest in my business and I will pay you your pension out of the profits… and don't worry about my little brother, he is low achiever anyway...”)

I could go on. I hope I have persuaded you that this move brings in a massive dollop of uncertainty into individual and collective lives. Boiling this change down into whether you believe people should have power over their savings or not, is frankly crass! It is way more complicated than that.

Anyway, as I say, this is a subject that will be much talked about in coming days and weeks, I predict. Writing this has begun to help me get my head around the arguments. It may have helped you too – if only to know that you disagree with me. Feel free to add comments below (but posts with embedded adverts for financial advice, search engine optimisation or really, really good ways to make money by doing nothing – will not be published!)

What do you think?

UPDATE: Just spotted this excellent blog by Tom Watson (Under 45? You’re being screwed) who is saying very similar things to me and more. Read it!