Pensions

A bit off the urban planning track, but I know far too much about pensions. I’m on the management committee of a housing association in Scotland and the whole sector is having to make some very difficult decisions around pensions now because of the Scottish Housing Associations Pension Scheme (SHAPS). The Scottish Housing Regulator is all over this as it could actually bring down the whole housing association movement in Scotland.

What being heavily involved in this has meant is I now know an awful lot about what pensions mean to individuals and to employers, and I’ve ruminated quite a lot on the social and policy side of pensions. Therefore, Gideon’s announcement on pensions in this week’s budget very much worries me, as it does lots of other people.

Essentially a pension collectivises the risk of not being being able to earn an income due to old age. If it’s a state-pension that collective risk is borne by future tax-payers. If it’s a defined benefit scheme then that risk is collectivised among members of the scheme – alas SHAPS has collectivised too much. If it’s defined contribution then the annuity you should buy collectivises that risk among the private customers of an insurance company. As most people are highlighting, the danger is that people will not buy an annuity and will be left in penury during their retirement. Oddly enough, in the committee of the housing association, a couple of current pensioners talked about how you used to be able to cash in DB superanns and going on shopping sprees, leaving their pot now a lot more reduced. Also, the risk of old age will no longer be pooled among the annuities held which could mean that the annuity market will collapse, or operate much less efficiently. Essentially this is individualising the risk of old age.

My experience of pensions really made me realise what an utter mess UK policy is. In particular, we have not had an open debate about how much income people should have in older age and how that should be distributed. In particular, whether the pensions system should be redistributive. One thing that really angers me is the statement often made that DB schemes are unaffordable because of increasing life expectancy. This utterly fails to recognise health inequalities. Someone on a low income will enjoy their meagre retirement income for a few years after retirement. In fact, with the increasing retirement age, they’re likely to die on the job. People on very high incomes are likely to live a very long time into their retirement, drawing down an enormous income. This is what is not affordable. This is why, much as I’m very glad I’m in a final salary scheme, the inequities they produce are shocking. They essentially put existing income inequalities into a photocopier that travels through time – magnifying existing inequalities far into the future.

Gideon’s changes make this worse for DC schemes as essentially your DC pot for the very wealthy will just become extremely tax-efficient savings scheme and people will be able to cash it in on retirement (removing a chunk of funding from the collective pool) and live off their saved bankers’ bonuses etc.

This is why, what really angers me about the pensions announcement is it’s individualisation of the risk of old age. Looking after people should be a collective effort. We are a very rich country and we can afford to give everybody a good income in their retirement that reflects their earnings. However, if we fully collectivised provision (through a proper state pension) then we could start asking questions such as: should lower income people pay in relatively less reflecting their lower life expectancy? Should higher income people pay in relatively more to reflect their higher life expectancy?

As a start, I think everyone who joins a pension scheme should have to have a one-day training session from an actuary on their pension paid for by the provider. When I joined by DB scheme I just knew it was good. I did not know what I was actually getting at all. I’ve had ample training and now know some of this. A pension is the largest, most important financial product anyone ever buys and generally as consumers we know nothing about it.