June 2, 2014 by Paul Goldsmith
The government have widely trailed an initiative they are intending to put in Wednesday’s Queen’s Speech – to allow workers to contribute to collective pensions as opposed to individual ones. This pooling of funds also means risks are pooled, charges are lower as management charges are for the pooled fund not for each individual, and the result could be higher pension incomes on retirement.
The Government’s pensions minister – Steve Webb – has suggested that there could be up to 33% higher pensions income, and the RSA, which has been campaigning for over three years for this policy, suggest that the difference could be as high as 50% – if the Dutch experience with collective pensions are anything to go by. The aim for this blog is not to assess collective pensions per se – there is also evidence against them and apparently some Dutch political parties are calling for a return to individual pensions. What I think is important is an explanation as to why pensions are so important – and how they affect you and I – whatever our age.
Whether we like it or not, we as a population are getting older. We are living longer, particularly past retirement, and there are less of us to pay for the income of those of us unable to work due to old age (an important positive of the arrival of young immigrants to work here). Therefore it is vital that we all take responsibility to provide for ourselves in old age. We should be encouraged to save for a time many years from now when we don’t have the chance to alter our life opportunities but we still need money.
The government are scrapping the mandatory purchasing of annuities (which were when you had to use your pension fund to buy an income for the rest of your life but very often got a very low income and could lose it all if you died quickly). That is helpful. But they need to look at other ways to increase pension income – and collective pensions are one of them. The importance of this is that if someone reaches old age in poverty, they are staying in poverty. Cynics argue that old people vote so these policies are a bribe – but the truth is that someone who is 22 and hit by a policy that disadvantages could change their approach to life by re-training, or making other decisions that an old person who has to leave the workforce can’t make. It’s not 22 year-olds who are dying of the cold every winter.
Apart from the poverty issue – there is the problem of imperfect information and the cost of old age to society. Someone who is 30 who has to choose whether to save for a deposit or for their pension will choose the deposit unless they fully understand the importance of saving for their old age. Furthermore, if people are able to look after themselves in old age (when, for instance, their medical needs are much greater) that saves the country more money in NHS costs and other support needed.
So I think that every little helps on this issue. What we cannot do is nothing.