Stability in policymaking is a pre-requisite of a successful long-term savings system. Individuals can hardly be expected to make long-term plans if the rules keep changing, while providers cannot be expected to invest in new technology and systems if the regulatory framework is unstable (the sale of Axa Wealth being the latest example).
Yet the legislative merry-go-round continues. At the beginning of this year, there were no fewer than 10 ongoing Government consultations impinging on defined contribution pensions alone.
So, why the endless churn? The usual culprit is politicians – or, more accurately, politics and the way it now interacts with the insatiable demands of 24-hour news networks and social media. Woe betide the politician who, in response to a news story, says the cure is worse than the disease. Something – anything – must be done. The “losers” from any policy decision have instant access to a millions strong echo chamber, whether that be Facebook, Twitter et al, and subsequently the 24-hour news networks for whom social media now sets so much of the agenda.
Campaigns can be organised and amplified overnight at little cost. Under this relentless pressure politicians’ “long-term” decisions soon collapse into short-term fixes: the infamous u-turn.
But beyond the exigencies of politicians there is a more fundamental reason why, in long-term savings, the only constant is change. Globally, three macro trends are interacting to destabilise pensions provision across the UK and the developed world: demographic change, fiscal pressures and the demands of individual citizens to have more control over the deployment of their assets.
I recently examined the pensions systems of seven nations – the UK, Australia, Canada, Germany, Holland, Sweden and Poland. Each is confronted by demographic changes and increasing fiscal pressures (the two are related).
Across the world, the number of people aged over 60 is projected to rise from one in 10 to one in five by 2050. By this date, there will be more over-60s than under-24s. The ageing process is particularly acute in developed nations (although China’s demographic challenge is significant too – a long-term effect, partly, of its one-child policy), where declining fertility rates, inexorably rising longevity and popular opposition to immigration interact to push dependency ratios higher. The result, in pay-as-you-go systems that feature as part of most nations’ pensions mix, is fewer workers to pay the pensions of more retirees.
Demography is not destiny. Demographers are increasingly alert to the capacity of policymakers to influence future trends: for example, Germany’s acceptance of around one million Syrian refugees promises a dramatic improvement in the nation’s (rapidly deteriorating) dependency ratio over time. But the fiscal pressures exerted by demographic change are real.
Add to this the dynamics of competition (which encourage developed world economies to redirect public spending towards investment in innovation and upskilling, demand support for entrepreneurialism often via lower taxes and taxpayer funded support, and exert downward pressure on corporate tax revenues as they seek to attract multinationals) and the global trend away from state and employer organised collective provision is explicable.
The placing of a greater responsibility on the individual to provide for their own retirement is the consequence. A phenomenon, in turn, reinforced by cultural change in terms of the growing demand of individuals for greater autonomy over their own lives, as the rising tide of individualisation (and distrust of institutions) sweeps across the developed world.
The UK has, of course, taken steps to reduce the cost of its retirement system. The new state pension is not more generous in total, as the last government repeatedly implied. In fact, the cost of the state pensions comes down in the long term as additional state pension payments are first indexed less generously, before working their way out of the system completely. It is why the Treasury agreed to the policy. There are more losers than winners. To similar effect, the Chancellor has accelerated planned increases in state pension age – an acceleration which, he boasted, had saved the Government more money with less protest than any other policy (at least before the Waspi campaigners). But in the teeth of the global headwinds outlined above, one wonders whether it will be enough.
So the next time our politicians reform the pensions system, spare a thought: they are likely at the mercy of demographic and fiscal pressures common the developed world over.
Gregg McClymont is head of retirement savings at Aberdeen Asset Management