As a nation, we are not investing enough to provide decent pensions. The reasons for the pension gap are lack of affordability, a collapse in consumer confidence following frightening stockmarket volatility and a litany of scandals which have left a legacy of mistrust in the insurance industry.
With its new-found social conscience, the ABI has been lobbying fiercely, claiming, without foundation, that the 1 per cent price cap on stakeholder pensions stops insurers selling pensions to consumers. The speculation is that charges may be effectively doubled (either through a flat rate 2 per cent or through a combination of 5 per cent front-end charges and low persistency rates).
This posturing is offensive coming from an industry which seems pathologically programmed to missell. The industry has never been interested in lowerto mediumincome consumers.
It sold rip-off products which meant that it took consumers on average around 10 years to break even – even when the stockmarkets were booming. Millions of people lost billions of pounds on personal pensions and mortgage endowments due to exorbitant charges – especially the poor. The CA is determined that this will not happen again.
Raising the price cap would be an act of economic illiteracy and the most vulnerable would suffer the most. It does not take a genius to realise that if it is raised, industry would understandably maximise revenue from profitable consumers, not serve low-medium income consumers. The CA's analysis shows that firms would have to treble charges to profit from consumers who can afford to invest £50 to £70 a month – clearly not viable for the industry or consumers.
Doubling charges reduces incentives for those who can afford to invest and prices others out of the market. Simple logic highlights the flaw -a 2 per cent charge means consumers might receive a return of 4-4.5 per cent a year after charges (based on current assumptions about future investment returns), not much more than the best savings accounts which pay 4 per cent a year. Why would consumers tie money up for 30-40 years in volatile stockmarket-based pensions for an extra 0.5 per cent a year, with firms responsible for huge mis-selling?
A massive hike in charges is the last thing that consumers need if they are to find money for pensions, pay off record debts and make up endowment shortfalls to ensure the mortgage is paid off. Reducing pension values through higher charges means many consumers would be no better off than if they had relied on state pensions and benefits. In some cases, 30 years of contributions could be wasted as a result.
Sales might increase in the short term if the industry was able to mis-sell stakeholders by downplaying risks and exaggerating returns but we think it is more likely that there will be a buyers' strike among consumers.
The industry is keen on the FSA's proposals for guided self-help, not because it would cut the time required to sell a pension but because much of the risk and liability for mis-selling would be transferred to the consumer. Once consumers realise the implications of this, they will be even more reluctant to buy pensions. No one should underestimate the collapse in confidence among the Government's target market.
The brutal reality is that this inefficient industry cannot deliver pensions and the necessary financial advice on commercial terms which suit its shareholders and consumers. There are 2,000 retail funds which invest in UK shares, yet there are only 800 shares in the All Share index – crazy enough during the boom times but unsustainable in a low-return environment.
There are simply too many funds, providers and highly paid underperforming fund managers doing the same job who need a 2 per cent price cap to support their grossly inefficient business models. No wonder the City squeals about 1 per cent price caps.
Can we solve the pension crisis? First, the CA believes that the case for compulsion shared between employers and employees is overwhelming. It is a difficult political issue and it would have to be phased in because of personal debt. But ultimately, compulsion is the most cost-effective and fairest solution.
It is in the national economic interest to harness the power of the global capital markets to increase the size of the national pension pot. But what is the best way of making the City work for society?
The only solution is the collective approach – huge pension schemes with real consumer representation and economies of scale to reduce costs. In the US, Holland and already in the UK, collective industrywide schemes mean consumers pay 0.35 per cent to 0.65 per cent a year. For consumers who do not have access through the workplace, the best way to make the economics work would be for the Government to use competitive tendering to license a small number of approved retail stakeholder providers.
Raising the price cap would be protectionism at its worst as consumers and taxpayers would be forced to crosssubsidise an industry which needs to be rationalised beyond recognition.
Mick McAteer is senior policy adviser at the Consumers' Association