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Programme of reforms to turn the savings tide

One of the most important pieces of advice that IFAs offer their customers is that things might not work out according to plan.

After eight years in Government, Tony Blair will know better than most the value of that advice.

He probably regrets saying in 2002 that if “the NHS is not basically fixed by the next election, then I am quite happy to suffer the consequences”.

The last thing he would have expected when entering Downing Street in May 1997 was that Britain would be facing up to a full-blown pension crisis by the end of his second term.

It is perhaps because this prospect seemed so remote that Chancellor Gordon Brown introduced a £5bn-a-year tax on pension funds in his first Budget.

At the time, the Chancellor boasted that he could get away with this because “many pension funds are in substantial surplus”. With FTSE 100 companies alone now shouldering pension deficits of £63bn, that complacency now looks misplaced.

Of course, not everything affecting pension provision is within the Government’s control but that only makes it more important that the Government gets right those things it can control. Inst-ead, Labour compounded the error of the pension tax with a decision to ext-end the benefits that pen-alise saving.

It is no wonder, then, that we are not saving enough. For the first time in at least 40 years, the proportion of household inc-ome being saved has now been below 6 per cent for three years in a row.

In his Budget forecasts, the Chancellor said it would stay below 6 per cent until after 2007. We live in a society where it is so much easier to borrow than it is to save. A key task facing a newly elected Conservative government would be to restore Britain’s saving culture.

First, by reforming state benefits, we would send out a signal that it pays to save. The Pension Commission report warned that financial advisers “will be wary of selling to people potentially affected by pension credit withdrawal for fear of future misselling allegations”.

By increasing the basic state pension in line with earnings rather than prices, a Conservative government would put the spread of means-testing into reverse.

Next, everyone agrees on the need to get more people saving. Rather than compelling people to save regardless of their circumstances and to do so in a system that can penalise thrift, I want to make saving more attractive.

For politicians and the financial services industry alike, the challenge is to support saving behaviour that goes with the grain of how people live their lives. It is easy to say how great it would be if everyone star-ted saving for a pension at the age of 20 but we cannot pretend that higher house prices and student debt will not affect patterns of saving across the lifecycle. New savings incentives should also grab people’s attention. I have proposed a lifetime savings account in which Government contributions could top up the money that people save themselves.

Finally, we need to strengthen company pensions. That means scrapping the rules which stop companies which run good schemes from promoting these schemes to their employees.

It means restoring confidence in occupational pensions by helping people who, having been told their savings were safe, lost their pension when the employer went to the wall.

It means thinking creatively about ways to help defined-benefit schemes manage their risks.

Last summer, I suggested that government bonds with payments linked to longevity could offer a way forward. I am pleased that Adair Turner’s Commission has now been asked to look into this.

We have passed the point where any politician could credibly claim that the pension crisis will disappear soon after they have had their first ride in a ministerial car.

But that does not mean we can do nothing. By reforming state benefits, improving incentives to save and strengthening company pensions, a Conservative government could start to turn the tide.

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