The last three weeks have seen more new policy initiatives hitting the private sector pensions industry than at any time over the life of the coalition government.
From the viewpoint of savers these initiatives demonstrate the government is capable of both truly great economic reform, and of trivial stupidity.
George Osborne’s Budget announcement that Britain’s hard pressed savers will, from 2015, be able to access and use the cash in their pension pots as they see fit should be transformational for long term savers.
By unceremoniously booting annuities into touch as the mainstay of retirement income planning, he has allowed those with smaller pension pots to use the funds to pay off expensive debt when entering retirement rather than compelling them to purchase trivial and poor value annuities.
Ending the cult of annuities will also mean that those with larger pension savings will feel under less pressure to immediately purchase an annuity.
Many will leave some of their pension pot invested in assets that have the potential to produce inflation-beating returns, whilst using the rest to fund a near term income. Many savers have purchased annuities far too early in their retirement and could benefit from this “drawdown” approach which politicians had previously reserved for the affluent.
By trusting savers to manage their pension pots the Chancellor, at a stroke, made pensions more attractive as a flexible vehicle for long term savings. The share prices of many annuity focused insurance companies fell sharply as the City realised that savers would win out at the expense of shareholders.
No such share price tumult followed Thursday’s announcement by Steve Webb of a 0.75 per cent cap on the charges that insurance companies levy on workplace pensions used for auto enrolment. Webb claims that the price cap means the coalition has a tight grip on charges. City economists and the Office of Fair Trading are sceptical.
Price controls sound like tough action but make no difference to the underlying economics of the market. In practice, price capping will mean lower pension pots for savers in the long term, and perversely higher charges than necessary for many.
Many larger pension schemes are already charging below 0.75 per cent and should expect further reductions in their charges as auto enrolment expands pension saving and competition drives prices down.
But now the big shareholder owned insurance companies will use 0.75 per cent as a floor to protect their margins in a market where charges have been falling. No surprise that some of them lobbied Mr Webb so hard to introduce a cap.
Smaller employers will find insurance companies less willing to provide them with quality pension products at a 0.75 per cent charge than at the current 1 per cent typical charge for smaller schemes. So they will migrate to lower quality schemes with poorer or less proven investment performance or that levy charges from the contributions made by savers, penalising those who leave the scheme early.
The tax payer supported National Employment Savings Trust will be forced to pick up any reduction in the supply of pensions from private sector insurance companies. This places more pressure on the public finances and lumbers the taxpayer with more of the costs for fulfilling the Chancellor’s pledge that retiring savers will enjoy impartial face to face advice paid for by the pensions sector.
The pension charge cap may seem like good politics but it is poor economics. The next UK government would do well to quietly bin the idea and focus on making insurance companies compete more intensely for our hard earned savings.
Phil Loney is chief executive of Royal London