As the problems of guaranteed annuities mount, the disaster threatens to demolish the Government's entire strategy on pensions and long-term savings. Royal & Sun Alliance is the latest life company to admit that its guaranteed annuity liabilities are threatening to make the company insolvent. If another life company effectively goes to the wall, what will this do for investors' confidence in stakeholder pensions?
Who will want to invest in any form of pension when the Government cannot guarantee that these savings will not be reduced dramatically at the whim of the life company's management or that they will have any meaningful effect on individuals' standard of living in retirement?
The Government cannot even guarantee to protect investors' savings from incompetent, if not negligent, management and regulators.
The recent Treasury announcement of an inquiry into the Equitable Life debacle is too little too late and is nothing more than a cynical exercise in heading off an investigation by the Parliamentary Ombudsman. The Treasury feared that an investigation by the ombudsman would have come to the conclusion that the regulators, including the Department of Trade and Industry, the Treasury and the FSA, have been guilty of maladministration, if not downright incompetence in regulating the life offices.
The ombudsman has the power to order compensation where a Government department is found wanting, as he did with the investigation into the collapse of IFA Barlow Clowes in the 1980s, which cost the Government several hundred million pounds in compensation. The Treasury has said, whatever the findings of the independent inquiry into Equitable Life, there will be no Government compensation.
Those who remember the collapse of Barlow Clowes will know that the DTI, which also regulated life companies at the time, was warned many times of irregularities at Barlow Clowes, yet failed to act to protect savers' interests.
The same situation applies to the Equitable Life affair. The DTI was warned many times of the huge liabilities that Equitable and other life companies were building up with guaranteed annuities, yet it took until December 1998 for the DTI to take any action whatsoever. Very late in the day, it issued guidelines to life offices on how to value guaranteed annuity liabilities.
If the market knew there was a problem, how come the regulators knew nothing? Isn't the Government Actuary supposed to be an expert in this sort of thing? The effect of the guaranteed annuity disaster, coupled with the pension misselling scandal, has totally undermined the public's confidence in pension schemes as a vehicle for long-term saving.
Combine this with the collapse in annuity rates and the Government's refusal to remove the age 75 deadline for purchasing an annuity and it is easy to see why only 49,505 stakeholder schemes have been set up. According to the ABI, only 88,394 of the 400,000 employers targeted for stakeholder have designated a scheme and a large proportion of these are “empty”.
But even if the disillusion fades and employees are eventually persuaded to invest in stakeholder, the Government is building up long-term problems for itself by insisting that investors do not need advice.
The first warning shots of disasters to come were fired last month by pension consultant William M Mercer, which said: “Members of defined-contribution plans could face significant shortfalls in their retirement benefits from the impact of falling investment returns, lower annuity rates and increased life expectancy. In some cases, pension levels could be less than half the amount members are anticipating.”
Who will be held to blame when investors cash in their stakeholders? The Government, which encouraged us all to save for retirement because we would be better off than if we simply relied on the state to provide. For the average person on average wages, this stakeholder promise looks thinner and thinner by the day.