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A new solution for pensions?

It is the simple ideas that can often prove the best, so for this reason alone AITC director general Daniel Godfrey&#39s masterplan for solving the pension crisis should not be overlooked.

Godfrey suggests the Government should meet the challenge of meeting the retirement income needs of the swelling ranks of third-agers by taking out a massive loan.

This would be used to make modest contributions to every worker&#39s choice of stakeholder, which would prevent them depending on the state when they reach retirement age.

The theory goes, as the Government-stakeholdered individuals hit retirement age, Government spending falls and these savings can be used to pay off the debt.

The clincher is that once this loan debt is paid off the Government can consider the golden goose of vote-winning – lowering taxes.

Unsurprisingly, the viability of Godfrey&#39s theory is debatable. Virgin Direct head of corporate affairs Martin Campbell says: “It is good to have some creative thinking in this area, but, while it sounds like a good idea, it won&#39t work on a number of levels.”

Campbell says it would require not a one-off slug of cash from one loan but rolling money and considerable costs. Also, the chances are the stockmarket growth required to pay off the debt would not be met.

However, fresh thinking about the pension crisis outside of the compulsion box is welcomed by some pension thinkers.

While not convinced of the finer workings of Godfrey&#39s model, Skandia head of pension marketing Peter Jordan believes compulsion is unlikely to work. It would, he says, simply be a case of individuals already saving for retirement switching from one investment vehicle to another.

He says: “While many stakeholder providers are calling out for compulsion effectively to do their distribution for them, it is questionable whether compulsion will solve anything. What it might end up doing is encourage those low-earners putting aside £10 a month into the building society to put £10 into a stakeholder. This achieves nothing.”

The Government&#39s current great hopes for the great unpensioned include stakeholder, the scantily detailed pension credit, plus combined benefit statements.

Scottish Equitable pensions development director Stewart Ritchie believes combined benefit statements will be a significant plank in getting ranks of low-earners to start saving by showing them exactly how much they will have to put aside to maintain the same standard of living they currently enjoy.

Further solutions to combat the longevity timebomb also include raising the state retirement age. But this, like compulsion, presents yet another nettle for any populist Government to grasp.

Raising the state retirement age is a vote loser in waiting and therefore requires either shelving or at least a softly, softly approach.

Many pension experts argue the only sound platform for solving the pension crisis is education and awareness of the grim realities of an impoverished retirement.

Scottish Life head of communications Alasdair Buchanan says: “This is not just an academic or political issue, this is a human issue, it effects our parents and it will effect us and we need to deal with this as a country. The message needs to be communicated that all the solutions require more people to save more money earlier. The other alternative is promoting euthanasia.”

But returning to Godfrey&#39s new model, some experts, including Ritchie, argue that Godfrey&#39s idea is resonant of a similar idea which died a death years before Godfrey&#39s attempt.

Ritchie says: “This sounds like something put forward in the mid-90s which was a different shape of long-dated gilt. It involved a time shift where the Government borrows today to get money back when people retire.”

So why was it shelved? “It ran into problems with an accounting principle at the Treasury. But accounting principles should be the servant not the master.”

Generally speaking, it seems unlikely that the current Chancellor – who does not include the pension liability on the national books and who has wiped more off the national debt than any other Chancellor – would be prepared to take out a massive loan and start issuing long-term gilts in any significant numbers.

So, for the time being, compulsion looks set to continue its domination of the debate. But compulsion is unlikely to appear top of any party&#39s glossy manifesto unless, as some exp-erts argue, it is made tax-neutral for employers.

Legal & General pensions marketing manager Andy Agar says: “It is too early to judge if stakeholder has succeeded or not – this needs more than a year to tell. Clearly, compulsion is on the agenda.

“I would favour the US model where the employer achieves tax advantages depending on how successful they are in promoting 401k to their staff. Contributions must be able to be offset by tax breaks, such as a reduction in corporation tax.”

The ultimate challenge now, as always, is that guaranteeing the quality of life for an ever ageing population is a long-term problem but political parties are chasing favour to get them through the short term.

Campbell says: “Outside of the practical reasons, the single biggest show-stopper to Daniel&#39s idea would be the chances of a consistent approach as Governments change.”

In an ideal world the pension timebomb would be removed from the party political arena, which would free up minds to consider wider solutions.

Until this happens, the industry, savers and IFAs ought to welcome those freshening up the well-worn compulsion debate and challenging accepted wisdom in the search for new solutions.


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