Before the 2014 Budget, it was hard to think of anything less exciting than pensions. They were a guaranteed income in retirement until you died – predictable and very dull.
But the system in place was failing. Consumers who could not fund a minimum level of income in retirement were compelled to purchase insurance to provide a guaranteed income. They were getting poor deals as many defaulted into inferior rates offered by their ceding providers – which recognised that few would shop around for the best deal despite significant differences between the best and worst rates.
Now the radical political solution to this problem – where pensioners are free to spend their savings as they wish – has transformed the pensions debate into a battleground between those who support ‘freedom’ and those who would deny pensioners choice, representing the forces of ‘paternalism’.
Laying the foundation of this new policy, the Chancellor said “individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings”. This is popular – but is it coherent?
If it is so important for people to be free to manage the ‘decumulation’ stage of their pensions, why should the Government retain the paternalism implicit in expanding auto-enrolment at the outset of the accumulation phase? Certainly, the process of imposing obligations on employers and nudging people through a series of defaults into making the correct accumulation decisions has been successful; yet this runs contrary to the political philosophy underpinning the freedoms.
Arguably, if you had to choose which part of the process was to be freed and which was to be subjected to paternalism, you might go for greater controls on decumulation. As the Pensions Policy Institute has highlighted, decisions about accessing DC pensions are difficult to make “as they often require understanding of complex and uncertain concepts such as inflation, investment and market risks and longevity risk”. It has ranked this hardest compared to other financial decisions, such as accessing non-pensions income savings and buying a house.
Also, if you consider that the Government does not wish to extend the opportunities provided by a second-hand annuity market and the new freedoms to people already on benefits, this suggests that pensions freedom from a political perspective should apply only to wealthier elderly voters.
However, the real problem inherent in this muddled political philosophy is the impact that it will have on pensioner outcomes and pensions savings for the young. Pensions are already very complex. The new freedoms have added complexity and, as identified by the PPI, confusion, difficulty and intimidation lead to inertia when people engage with the pensions process.
Add to this the risk of political uncertainty as each major political party appears to be feeding on the dismantling of private pensions to fund key pre-election promises, whether it is the ability for the wealthiest to inherit family homes up to £1m without tax, subsidising care for the young or reducing tuition fees. And many may now question the decision of engaging with a system that may change dramatically over the course of their life.
Few can doubt that future chancellors may look to pensions or savings vehicles for pensions to service the UK’s spiralling debt. George Osborne’s proposed reduction of the pensions lifetime limit to £1m is a classic example.
The Government’s self-styled freedoms, which offer “the most radical changes to pensions in almost 100 years”, serve to highlight a new unpredictability for pensions driven by politicians who have short time horizons. This, in part, may have driven a renewed interest in the development of a Pensions Commission; to offer a balance between the competing interests of elderly voters and the disengaged young, who may have to underwrite any poor pension outcomes. Alternatively, we could look to follow the Australian Murray Review’s recommendation for a long-standing, coherent, political narrative.
It is easy to forget that underpinning the pensions freedoms is an opportunity to make poor choices – even if a pensioner could buy a Lamborghini. Chillingly, this opportunity may translate into years of later-life poverty as pensioners, who regularly under-estimate their longevity, prioritise short-term needs at the expense of their longer-term requirements.
Maybe then the language of politics will be different and, instead of paternalism, many will demand the new rhetoric and outcomes of prudence.