The wise men of the Treasury select committee are to conduct an inquiry into how to restore confidence in long-term savings and whether the Association of British Insurers' claim of a £27bn savings gap stands up to scrutiny.
The obvious answer to restoring confidence is to have a different approach to regulation because, to date, the existing system of fines and disciplinary proceedings has totally failed to prevent even one disaster.
The misselling of pensions and endowments has undoubtedly done the long-term savings industry a huge amount of damage in terms of public confidence – and the collapse of Equitable Life dealt it a mortal blow.
This was a company that sold to professionals – accountants, solicitors, barristers, doctors – on the back of its reputation for reliability and security. It will take many years of faultless conduct of business by the savings institutions before these middle-class savers will feel sufficiently confident again to entrust their life savings to an insurance company.
The problem is that the financial stability of many insurers is still pretty rocky and there is no guarantee that there will not be more firms falling by the wayside. In addition, industry measures to ensure that misselling is a thing of the past are ineffective. Fines clearly do not work.
Only last week, St James' Place Wealth Management Group was fined £250,000 for “serious monitoring and record-keeping inadequacies”. This is not the first time the company has been fined.
The old regulator, the PIA, had twice before pointed out irregularities and in 1994, Lautro had disciplined the company for a similar offence. Needless to say, the offence was that age-old one of “churning” – persuading a client to surrender one product and take out another. Fines will never work so long as they are paid by the company. The only way to control misselling – and any other misdemeanour for that matter – is to fine the directors or threaten them with the sack. If trustees of pension funds are personally liable for the security of the funds under their care, why not the directors of financial institutions?
Middle-class professionals will continue to save – although they will undoubtedly be more careful where they put their money in future. They know that the state will not provide in retirement. It is the £27bn savings gap, the half of the population which has no pensions savings at all, on which McFall should turn his searchlight.
These people fail to save for the very obvious reason that most of them do not have any surplus income. Reducing taxation would certainly make these people better off but whether they would save any of this extra cash is debatable.
Even where they do have surplus cash to save, they do not understand the benefits of tax relief. It is about time the Government realised this and revamped tax incentives to make them more attractive to the man in the street.
Recent research from Virgin Money backs up what some of us have been saying for years – tax relief, as an incentive to save for a pension is a turn-off for the low-paid, because the vast majority of individuals do not understand what it means in cash terms.
A massive 71 per cent of those interviewed by Virgin say they would save more for retirement if their contributions were matched pound for pound by the Government. This is, in effect, 50 per cent tax relief on pension contributions regardless of the rate of tax paid, and only marginally higher than the tax relief already granted.
It is perfectly possible to devise a savings incentive that costs no more, and possibly even less, than existing tax breaks, but is more attractive to the ordinary saver.
They could be tempted with a matching £1 for every £3 saved, paid in cash, say, every five years after starting a pensions policy, and added to the investment. To make it attractive, policyholders could, perhaps, withdraw the bonus in cash. But they would still retain the rest of their savings in pension.
Under the existing regime, 25 per cent is taken as a tax-free cash withdrawal at retirement anyway, so it would be perfectly possible to devise such a scheme on a revenue-neutral basis.