Once upon a time, pensions were simple. Most full-time employees were members of a good occupational scheme and bosses had schemes that were up to 10 times as good.
During the past 40 years, all forms of pension have become far more complicated. The state has reneged on its commitments, especially the level of the state pension in relation to average earnings and S2P top-ups. For many years it didn’t pay anyone on low earnings to save for retirement because they lost more in state benefits than they gained.
Meanwhile, companies played fast and loose with employees’ pensions. Companies paid too little into their schemes and took contribution holidays, aggravating deficits that have persisted for a decade or more at many supposedly ‘world-class’ FTSE 100 companies.
But the separate bosses’ schemes – which have steadily got better while employees’ have got worse – never put them at any personal risk.
Insurance companies hard-sold high-charging personal pension plans to people who didn’t have a clue about restrictions on access and penalties if you stopped contributing. The majority of those plans – probably three-quarters of them – have lapsed.
You do not have to think long to realise all this was morally and socially toxic. It fostered a correct perception that the system was unfair and biased towards a lucky few. The insurance companies got away with murder. So did the politicians and the business bosses.
Every attempt to improve things has made them worse. A-day was a disaster, generating a mountain of documentary gobbledegook. Lord Turner’s blueprint for ‘radical’ pension reform – only now becoming reality a decade after being proposed – was in fact just a messy compromise that bought political support from everyone at the price of complexity and incomprehensibility.
Why should anyone be surprised that enthusiasm for retirement savings has dwindled to negligible levels? The only people with any interest in pensions are the fat cats who milk the system, their advisers and an army of consultants who add nothing to what ordinary pension scheme members get.
There is no reason why ordinary people should want to spend their time doing something as daft as trying to plan for a retirement that is 40 years away. So they won’t. It is only if it is done for them on a collective basis, either by the state or paternalist employers, that you can expect people to accept an element of forced savings. It has to be forced savings because without compulsion, there will always be free riders, and the higher the contributions the more of them there will be.
The fiction that auto-enrolment is working is laughable – wait until contribution levels are the necessary 10 per cent and see what drop-out rates rise to. I guess it will be 15 to 20 per cent, and on that basis the scheme will be a disaster.
Plans and proposals that simply repeat the errors of the past or tinker with elements of the failed system are rightly deemed to be insane.
Only radical reform will make a difference – and by radical I mean change on the scale of Beveridge, or Lloyd George’s introduction of the state pension.
Instead, the Government tries to pump up the housing market, which will simply foster the illusion that ‘my house is my pension’ and make the problem harder to solve.
Chris Gilchrist is director of Fiveways Financial Planning, the author of the Taxbriefs adviser guide The Process of Financial Planning and edits The IRS Report