Arguments in favour of collectivism versus individualism tend to swing on a pendulum. The rule of thumb, broadly, is that whichever model you currently have is inferior to the one you could have.
Take the current debate around the delivery of pension incomes in the UK. At the moment, private sector insurance companies sit front and centre of our market, providing savings vehicles and annuity products to millions of people. The market is supplemented by Nest, a pension scheme set up by the Government for automatic enrolment, and each individual is responsible for ensuring his or her retirement prosperity.
For those who agitate for reform the status quo cannot be tolerated. Competition simply does not work in pensions, they argue, and the market should instead be consolidated into a few very large-scale pension schemes that will pay everyone more money and charge everyone much less.
London Business School executive fellow in finance David Pitt-Watson, one of the loudest voices calling for reform, says collective pensions would provide UK savers with 33 per cent more retirement income versus individual pensions.
But let’s suppose, for the sake of argument, the Government decides large collective schemes should replace insurance companies as the fulcrum of UK pensions. So in 2040 we have, say, five very large pension schemes providing pensions to everyone and offering an almost identical service.
Now look at that market through the goggles of a pensions minister – we have a few, large firms dominating a market (perhaps charging very similar prices) with very little incentive to compete.
All of a sudden, the lexicon has changed – newspaper headlines describe these schemes as “inefficient monsters” that “rip off” savers, while industry commentators are crying out for the market to be broken up and reinvigorated through competition.
I am being slightly facetious but you get my point.
This is not to say there is no place for collectivism in the UK, and pensions minister Steve Webb is right to address rules that prevent employers offering CDC schemes in this country.
But beyond this, policymakers should focus their energies on improving the system we have (and will continue to have).
Trivial commutation, in particular, appears ripe for reform. It cannot be right that rules aimed at allowing people with tiny pension pots to take the lot as cash are arguably the most complex in the industry.
Shopping around at retirement must also finally be addressed. While making this the default by law may be the ultimate destination, there are simple changes that can be made to engage ordinary savers.
In Sweden, for example, people receive an orange envelope every year telling them how much pension they have built up and what it will provide in old age. Why can’t this be done in the UK?
Practical reforms like this could hugely strengthen the demand side of the pensions market.
Furthermore, the FCA needs to intervene so insurers are in no doubt that consistently selling annuities at well below the market rate or failing to ask customers even basic lifestyle questions is simply not on.
For all its perceived flaws, insurers are delivering pension schemes at an average charge of around 0.5 per cent and providing people with choice when they want to turn their savings into an income.
Furthermore the annuity, when sold by an insurer that is competitive in the open market, can and does provide good value protection against people outliving their savings (see graph from Legal & General at the bottom of this article).
By nudging people into engaging with their pension, we could yet build a system that is the envy of countries around the world.
Tom Selby is deputy head of news at Money Marketing