The law of unintended consequences says the actions of individuals and governments always have effects not foreseen by those involved. The process of consultation, while time consuming, is therefore essential in minimising the risk a policy introduced to address problem X doesn’t in fact create a new (possibly bigger) problem Y.
Some of the greatest legislative cock-ups in modern day politics have stemmed from Government ministers’ refusal to engage with industry experts before making sweeping changes.
Remember Margaret Thatcher’s infamous poll tax? Derided as one of the worst post-war policy blunders, the idea was formed by a small review team made up of junior ministers and civil servants.
Furthermore, according to the excellent book ‘The Blunders of our Governments’: “Almost every key decision in the poll tax saga was made in the immediate run-up to a party conference, by ministers anxious for something to wave from the rostrum.”
And the Conservatives’ last attempt at radical pension reform, again under the Thatcher government, was informed by a committee containing just five members – two ministers, a right-wing economist, the chairman of the Life Offices’ Association and Hambro Life managing director Mark Weinberg.
While policymakers were warned that the combination of scaling back Serps and promoting personal pensions would see ordinary savers exposed to the “hard sell” tactics of the financial services industry, Thatcher drove through the reforms regardless.
Millions of savers eventually received almost £9bn in compensation for the misselling that followed the government’s ill-fated intervention in 1988.
So, is there a risk that Chancellor George Osborne’s Budget reforms will eventually be talked of in the same breath as these debacles?
There are certainly parallels in the closed-door manner in which the policy was devised and, as Money Marketing reported last week, the cracks are beginning to show.
The Treasury has afforded savers the luxury of being able to drain their entire pension pot as quickly as they like. However, political expediency means the “guidance guarantee” designed to ensure savers don’t make bad decisions come April next year will be flimsy at best.
Furthermore the guidance is merely an option, and if behavioural economics has taught us anything it’s that people will not actively engage in a subject as dry as pensions unless they are, at the very least, nudged to do so. Without this push, savers’ will instead get their ‘impartial’ at-retirement information from their existing pension provider – if at all.
As a result, many people will strip their entire pot as soon as they can and, inevitably, pay more tax as a result. And the Treasury knows it (see graph, above).
HMRC’s own calculations suggest the reforms will boost its coffers by about £300m in 2015/16, £600m in 2016/17, £900m in 2017/18 and £1.2bn in 2018/19. In fact, the reforms are expected to continue to generate revenue for the Exchequer every year until 2030.
This is not your traditional pensions robbery – the Government is simply giving the public enough rope to hang themselves with.
The operation of the UK annuity market is, of course, flawed, with millions of savers unable or unwilling to speak to regulated advisers locking into the wrong products at the wrong time. But by stripping out the restrictions surrounding flexible drawdown – restrictions imposed by this Government in 2010 – policymakers have thrust savers into a new world of complexity and risk.
Tom Selby is head of news at Money Marketing