Thursday 31 October 2013

Is Steve Webb a hero?

The truth about pensions is that, partly thanks to the personal pensions ushered in by the Thatcher government in 1986, the world has changed - one of the reasons that the middle classes are shuffling off their mortal coil (see my book Broke for more about this).

The main difference is that the mixture of contributions from you, your employer and the government into defined benefit occupational pensions used to be about 22 per cent of your salary.

For personal pensions, which define your contributions but not what you get out (defined contribution), the average is only 9 per cent – even though you might be paying exactly the same amount into both schemes. Big difference.

It means that if you pay into a personal pension for forty years, you will get out 41 per cent of what you would have got from a defined benefit occupational pension. 

But then the implacable arithmetic of charges kicks in, as pensions minister Steve Webb said yesterday. For the personal pension, there are entry and exit charges. There are annual management charges and other hidden charges, some explicit, some not. 

Imagine that the annual charges are around 1.5 per cent a year. It seems like an insignificant amount, but it builds up implacably. For many people, 1.5 per cent a year over forty years will eat up almost half the contributions you make into your pension pot – a whacking £45,000 from payments of £108,000.

Then there is the cost of an annuity, which is 10 to 15 per cent higher for people in personal pensions. The terrifying conclusion is that your pension will be about a quarter of what it was if you had paid into an old-fashioned occupational pension. 

A quarter. That is a huge difference, and not one that was ever mentioned during that whole debate a generation ago.

For many of us, four years are enough anyway. Something happens, we stop paying in, the pension scheme falls dormant and our next employer starts up another one. We end up with multiple pots of money, each one leeching money in charges, unclear how to pool them, with no clear disinterested advice (I have three; Sarah has eight).

That is why Steve Webb's clampdown on charges is so important.  High charges have leached funds from savers, they encourage too much pointless activity, and unbalance the economy.  But let me ask this: how come Webb can act when so few others seem able to?

When it come to energy prices being hiked in a suspiciously similar fashion at the same time, Ed Davey's hands are bound - though there is the competition inquiry, of course.  Cameron can only mutter, like Edward VIII, that "something must be done".

When it comes to tax avoidance by Amazon and Google, you get a kind of show trial for the cameras at a select committee, and then - nothing.

But somehow Steve Webb has been able to redeem the reputation of politicians by acting against the unacknowledged scourge of the middle classes, the pensions providers.

I accept this is still only a proposal.  The consultation is only just beginning and the financial advisors are sharpening their knives, but it is at least a proposal.

It is worth thinking about why he can act when other ministers are bound and gagged and lashed to the traditional policies of successive governments, flailing around for some symbolic detail they can announce that gives the impression of action.  

Because, of all the Lib Dem actions in government, this is in some ways the most important and the bravest.  So how come it looks so effortless?

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