Good news on pensions: Personal Accounts look doomed
You can take the man out of McKinsey, but you can’t take the McKinseyite out of the man. If only the UK’s Labour government had remembered this adage when it asked Adair Turner to look at pensions. Having produced an excellent diagnosis showing the vast size of the problem, he came up with a textbook example of a management consultant’s ability to use impeccable logic to reach the wrong conclusion.
His National Savings Pension Plan was immediately dubbed NATsPiSS, so Labour’s legislation that followed metamorphosed it into the meaningless Personal Account. From 2012, every employer was to put each employee into a savings scheme. Only now has the enormity of this task started to dawn. The prospect of 100,000 employers a month trying to enrol their staff has obliged the government to put back the start date for small employers, while cutting the minimum contributions to the point where they are little more than loose change.
The 3 percent from the employer and 5 percent from the employee will only be payable from 2016, a four-year delay. In the first year, employers must pay 1 percent, with corresponding cuts in employee contributions. This raises the possibility of scrapping the whole misguided venture before too much damage is done.
The Conservative opposition swiftly promised a “fast and dirty” review, although it’s not clear whether Nigel Waterson, the party spokesman, has really grasped that the whole scheme is a terrible mistake.
Individuals will be able to opt out of the Personal Account – though their employer risks committing a criminal offence if he tries to influence them. As pensions expert Ros Altmann points out, if an employee on 20,000 pounds a year is slow to opt out, he riskes having 50 pounds a month locked away until he does so. The burden on the lower-paid is worse; after yet more compulsory deductions, they will find it even harder to make their pay last to the end of the week.
Britain’s pensions industry is in desperate need of reform, but Personal Accounts are not the way to do it. At vast expense, they will give millions the illusion that they face a comfortable retirement in return for their sacrifice, when the proceeds will buy nothing of the sort, and may simply be replacing welfare benefits which will be means-tested away.
The only beneficiaries will be the usual suspects among the big institutions, who will skim their fees off the savings as they accumulate. No wonder the Association of British Insurers was howling that the delay “puts the success of the reforms at risk.” Let’s hope so.