How many more dire assessments of the state of the UK pensions system are required before something is actually done about it?
We all know by now what the problems are. We’re living longer, so typically we’ll have 20 or 30 years of retirement to pay for. And yet we’re saving nowhere near enough for when the time comes.
Again, we understand the reasons why. Companies have closed defined-benefit pension schemes to new members, and the take-up of defined-contribution schemes has been pitiful. Annuity rates have fallen, and the forecasts investors were given on the income they could expect from their private pension savings have been far too optimistic.
At the end of last year, a report by the Institute for Fiscal Studies and the National Association of Pension Funds found that many over-50s are “sleepwalking” into old age, expecting to be far better off than they will actually be.
The Office for National Statistics warned in February that fewer than a third of employees in the private sector belong to a workplace pension scheme. Most alarming of all, the Centre for Policy Studies has warned that young people have lost so much faith in the pensions system that by 2050 pensions will cease to exist altogether.
Nor is the problem confined to the UK. It’s a similar story all over the world. And if something is not done soon, the global economy faces a ticking time bomb, with hundreds of millions of people destined to spend their old age in poverty, their governments unable to support them.
So, urgent action is needed. But what sort of action? Coercion - in other words, forcing people to save more for their retirement - must be part of the solution. The introduction of auto-enrolment into company pensions schemes in the UK is a step in the right direction.
Communication also has a rôle to play. As the pensions experts Hymans Robertson recommended in a recent report, investors need regular updates from trustees and employers, laying out, clearly and simply, the desired target, progress to date, the actions required to stay on track and, crucially, the consequences of not taking them.
But, on their own, coercion and communication are not enough. What’s needed, we say, is a radical change of approach, namely this... Instead of focusing entirely on making investors put more in to their retirement savings, governments should look more closely at how much the fund management industry is taking out.
As those who regularly read this blog and watch our videos know, the effect of compounding means that the impact of seemingly modest charges over the long term can be huge. The impact’s even greater in the UK, where charges are around a third higher than they are in the US.
To add insult to injury, active fund managers, on average, produce lower returns, after charges, than simple index funds that track the market at a fraction of the cost. Up to almost a half of the value of your retirement savings can be gobbled up in charges for “expertise” that all too often turns out to be anything but.
This systematic redistribution of wealth from the mass of ordinary investors to a few big fund managers is not just morally suspect; it threatens the long-term health of the economy.
To expect a largely self-regulated industry to dismantle a system that’s served it so well for so long is probably unrealistic. It’s time instead for bold, decisive, political action.
Either the fund managers should be compelled to provide better value for their customers, for example by reducing charges on active funds and pointing out the benefits of investing in low-cost passive funds instead. Or they should be taxed on the profits they make, with the proceeds returned to investors in the form of tax relief.
So, politicians, it’s over to you.
Image: 'More Toys' by Caroline/Flickr