Sixty Seconds on Compulsory Pensions

Is compulsion in pensions the last refuge of a marketing scoundrel, or the only way forward if we are to ensure Britain’s pension system remains fit for purpose for the next fifty years, as it has by-and-large been for the last fifty? Overwhelmingly the latter, if our succinct contributors here are to be believed.
If you disagree, write and let us know. In the meantime, read and reflect on our panel’s comments. As you will see, even in the procompulsion camp, there are still plenty of opposing views!
The involvement problem
Financial products, especially pensions, are highly technical, but are “low involvement” products. That is why on TV you get great ratings for shows like Top Gear (highly technical and high involvement) or House Doctor (low technically but high involvement), but you can’t even find a decent personal finance programme. So why should we expect, now that it’s suddenly evident to every politician who can operate a calculator that if no action were to be taken we are going to be in a fine pensions mess in thirty years, that all of the Crown’s subjects will start to save like squirrels for the winter?
We can’t. People think about house prices, school fees, paying off credit cards or, as one student put it, “where’s the nearest cash point”. It is clear to me that we need compulsion for funded systems, not only in the UK but all over Europe, in whatever shape, as pay-as-you-go systems start to be phased out or are reduced to provide a minimum pension. If you don’t have compulsion, workers on lower incomes and people with “compulsive shopping disorder” won’t save, and either all tax-payers will have to pick up the bill via means-testing, or we won’t care about millions not having heating in the winter. The issues in the proposed National Pensions Savings Scheme (NPSS), designed by Lord Turner’s committee, are not about compulsion (except the complete nonsense of opting out entirely), but about the way it is supposed to be administered.
The financial services community has already expressed great concerns about low fee levels, bureaucracy and liquidity swamping the UK stock market. I agree with most of these comments. This new scheme needs two things:
1. Flexibility of choice, so that we don’t create gigantic tracker funds, distorting equity markets.
2. Advice – in my opinion, not only should savings be compulsory but also individual advice, either
by a company chosen by the employer or an individual’s IFA.
If, then, fee structures are such that the industry receives quality revenue for quality products and advice, this scheme might actually work.
To read the full article, please download the PDF above.