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Prove personal accounts are not the devil’s pension

For those mere mortals who have heard Ned Cazalet give a talk, brains hurting as they strain to follow his ideas, it would be quite possible to believe he is a words and ideas man. He is that, of course, but don’t forget that his reputation and influence rely on his ability with numbers.

Now he is using his remarkable skills of numeracy to challenge personal accounts.

In the past, Cazalet has used his ability with numbers to challenge the serried ranks of actuaries employed by the UK’s life scctor. He was instrumental in exposing their addiction to being overweight in equities at just the wrong time or indeed for quite a long period of the wrong time just as the TMT bubble burst. The Old School Standard Life rebutted his arguments for more than a year before accepting with a little FSA prompting that they needed to recapitalise as a plc.

He also revealed other life offices’ unfortunate legacy of increasingly unaffordable guaranteed annuities dating from overzealous marketing from decades before. This unaffordability eventually introduced the British public and the adviser community to the rather mixed blessing of huge closed funds most spectacularly with the sale and eventual closure of the life funds such as NPI and Royal & SunAlliance.

So now it is the Government’s turn. Cazalet’s calculations assume an investment return of 7 per cent and an annuity rate of 7.2 per cent and taking charges on contributions into account suggest returns will range between 4.6 and minus 20 per cent. Means-testing, he says, means the effects are atrocious. Cazalet suggests, with his usual acerbic wit, that people would be better off putting their money in a teapot.

The Tories even comment to the extent that if the Government cannot come up with something to resolve means-testing then it may be a deal breaker although many would rather they say they would rip things up and start again.

I’m not, at this stage about to comment on the calculations. But I do think a few things should be pointed out. First, Cazalet has been very good at commenting after the horse has bolted the stable from no fault of his own.
He was either too young or in the case of the some life offices – they were not phoning him up to disclose their rather poor efforts at asset allocation in their with-profits funds. He wasn’t able to work the stuff out until they lost half their policyholders’ money.

But in a couple of cases, he helped stop insurers who should probably not have been in the market – at least as independent mutuals – from staying in the market – think about those squirrels for example. It also probably allowed some insurers to accept their mistakes and cut their loses although that depends on your view of Standard Life and whether it might have got away with riding the stock market back up or not.

But in the case of personal accounts, he is making the warning well before the set up of this new system.

Pensions reform is always going to be difficult but if he’s correct this is going to be something more akin to the devil’s pension than a welcome reform.
It is a pension in the wrong place at the wrong time.

It might at best set up a system akin to the old industrial branch and other high charging contracts which at least locked up the money for people to access later in life even if it didn’t get the money to work and often returned less than they had put in.

After the obsession with charges there is quite an irony in that. Anyway let’s not say we’ve reached that stage yet. But the voices of dissent are growing. It is no longer just Steve Bee out trying to demonstrate why it is such a bad idea or Stewart Ritchie fretting over means testing.
Campaigner Ros Altmann is opposed and now Cazalet is in the ultra sceptic camp too.

When editing Money Marketing several years ago, life offices would sometimes protest and attempt to undermine Cazalet’s arguments. At that time we asked them to do one thing, which, in most cases they singularly failed to do. That was to prove him wrong. Can I suggest that the personal accounts delivery authority, the Department for Work and Pensions and the Government overall urgently need to do just that. Prove him wrong. Indeed prove them all wrong or personal accounts may do the opposite of what they are intended to do and that is to make people worse off.

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