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The Actuary The magazine of the Institute & Faculty of Actuaries

Stakeholder pensions – another missing link

James Kehoe’s suggestion in the April issue for a bit of meaningful tinkering with the pension system would be bold and interesting, but I wonder if I could suggest something even bolder.

Pension provision seems to fall into three parts. No one can be allowed to starve to death, so basic subsistence provision is inescapably the concern of the state, and the state protects itself with the compulsory arrangements we all know about. Higher-paid workers and self-employed people have to make their own provision for the maintenance of their lifestyles. But, in between, there seems to be a general recognition that everyone should be encouraged and helped to make some additional provision over and above the state’s subsistence levels, and here there could be merit in extending the public/private partnership even further, not just at retirement, but throughout the working lifetime.

A large number of moderately paid workers, and particularly self-employed workers, desperately need to make additional pension provision now, while they are still earning, and they have little if any idea how to begin. Nor do they have any reason to trust a financial system which has just proved its inferiority to a sock under the bed. The investment vehicle they need is, as it has always been, one which will outperform their earnings growth by a sufficient margin to make the overall contribution arithmetic manageable. But, at the same time, it must be one which can be trusted to be secure in a way that equity investment can no longer be.

An option at any time to buy government backed ‘pension bonds’, for want of a better name, within limits, of course, either directly from the Treasury or through the private fund-management sector, would be really meaningful tinkering. The money invested would be guaranteed by the state to keep pace with national average earnings, and to earn more on top. In dealing with the state, one must be hesitant as to how much more on top might be realistic, but how much more on top could be an interesting national debate. There would be a complete capital guarantee in really real terms; the money would be locked away until a suitable age; and the whole thing would be completely transparent.

The present state pension schemes could be recast in terms of the bonds. Indeed, in an obfuscated sort of way, the state schemes already follow that pattern, albeit very much without the transparency, and with a sneaking preference for RPI rather than NAE at times.

The politicians wouldn’t like such bonds, and we are not likely to get them. But whether the politicians agree to the bonds or not, very many people still need them, and we now know that there is no other agency which can provide anything comparable with any degree of certainty, although that seems to be taking a while to sink in in some areas.

Pension provision through such bonds would be manageable if the margin over NAE were adequate. Without them, we appear to be contemplating something approaching the north face of the Eiger. Manageable and meaningful provision needs an investment return noticeably in excess of national earnings, and it needs to be secure. We have thought for a long time that we could perform that trick with equities, and perhaps we can in the long term. But who would like to bet this retirement income on it today? There seems to be a similarity with the chancellor’s budgets; he can only make things add up if he prophesies a carefully calculated amount of jam tomorrow. But not even he bets his retirement income on it.

Unfortunately, one must add a footnote. How can we expect either pension bonds or any other approach to succeed, particularly in the most relevant areas, until we have dealt with the viciously regressive tax effects of a means-tested benefits system, which is itself unsustainable in the long term?