James Daley: First ray of light for the people whose pensions went bust
Saturday 26 February 2005
Alan Johnson, the Secretary of State for Work and Pensions, may have taken his first steps down the road to redemption this week, as he gave a new sliver of hope to the thousands who have lost their retirement savings in bust pension funds over the past few years.
Since taking the reins at the DWP five months ago, Johnson has presided over some truly toothless, indecisive policy-making, which has left most pension campaigners despairing. But his move this week to guarantee decent benefits to the pension victims who are nearest retirement had the feel of a tactical move. It could lay the groundwork for an eventual climbdown by the Government, which has so far stubbornly refused to budge in its stance on the pensions crisis.
It is well known that the £400m that has been pledged as compensation (through its Financial Assistance Scheme) is grossly inadequate to provide any meaningful aid to most of the 65,000 people who have lost their hard-earned savings. This money would, in fact, provide just 200 people with a retirement income of £12,000.
Until now, however, Johnson (and, more precisely, the man holding the purse strings, Gordon Brown) has categorically refused to put up a penny more. But Johnson's promise this week to pay 80 per cent of lost benefits to those who are within three years of retirement would strongly suggest that more money could be on the way.
His decision to announce a review of the FAS's funding, at next summer's spending review, is the first time the Government has ever even entertained the suggestion it might provide more money for the cause.
Although Brown has made it clear there is no question of any more cash for now, Johnson appears to have worked out that the majority of those who have a call on the FAS are still some way off retirement. So, by guaranteeing a decent deal for the ones who are nearest to drawing their pension, he has bought himself some time.
People may continue to moan about the inadequacy of the £400m, but, in fact, no claimant will now be paid out any less than 80 per cent of their loss, before May 2007 (when the new guarantee comes to an end).
The more cynical have already expressed concern that this may be a short-term political manoeuvre, aimed at winning back some of the lost votes of pensioners ahead of the election.
With no firm commitment to provide more money for the FAS, there is nothing to stop the Government sticking to its £400m budget and, after the election, informing the younger victims of this scandal that they are set to receive next to nothing in terms of compensation.
But those closest to Johnson believe this genuinely represents a turning point. With Tony Blair rumoured to be in favour of providing proper compensation for the victims - many of whom, let's not forget, have lost a lifetime of savings through no fault of their own - there is now a real pressure on Brown to take a more lenient view once the election is over.
I don't want to give the victims of this scandal false hope. After all, a single step in the right direction does not wipe out the catalogue of callous decisions that have preceded it.
However, with his feet now firmly under the table, Johnson has at least finally loaded the gun for a showdown with Brown. Let's hope he has the courage to go through with it.
* Lots of fuss has been made about HSBC's 8 per cent savings account, launched this week. But before you get carried away, read the small print. Savers are able to pay in a maximum of £250 a month into the account, so the most you'll make in interest over the entire year (after tax) is about £100 - that's about 3.4 per cent of the amount you will have invested. Don't get me wrong, this is by far the best rate in the market for those who are regular, modest savers, but given the small amounts of money involved, it's not an offer worth moving your bank account for (you must have your salary or pension paid into an HSBC current account every month to qualify). It sounds impressive, but when you look more closely, this is nothing more than a bit of clever marketing.
Being brave can be the better way to invest
Prudential went to a lot of trouble to boast about how well its with-profits funds are doing this week, rolling out its UK boss, Mark Wood, to explain how good they are compared with the competition.
You can hardly blame it. After all, the Pru was pretty much the only life company not to over-bonus in the good times, holding enough back to continue making generous pay-outs throughout, and beyond, the recent bear market.
A £1,000 lump sum invested in the Prudence Bond eight years ago would now be worth about £1,550, outstripping the returns on a building society savings account by a healthy margin, and thrashing its competitors.
But Pru's very own presentation reminded me exactly why with-profits is such a lousy product. One of the main reasons its investors have done so well is that the management of the underlying fund has been exemplary. But if investors had had the courage to invest directly, rather than through a with-profits fund, which artificially smoothes the ups and downs, they would have done much better. The Pru's underlying with-profits fund has returned about 75 per cent after charges over the past eight years - considerably more than its investors got.
With-profits takes advantage of the British public's fear of risk, depriving investors of returns they would have earnt simply by investing directly in a diversified portfolio. While the Pru believes in with-profits revival, I hope that the recent dive in sales is the beginning of their end.
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