Julian Knight: A 'defined ambition' is worthless if it turns into shattered dreams
Sunday 15 April 2012
Steve Webb, the pensions minister, is a clever man; a professor no less. But sometimes academics can theorise too much, isolating themselves from the real world. Prime example of this is Professor Webb's "defined ambition" pension proposal.
The minister would like to see a new type of pension available to British workers, where returns aren't entirely subject to the ups and all-too-often downs of the stock market, but instead have a degree of performance guarantee, with the provider being given far more flexibility in how they pay for this. For example, the pension scheme might choose to pay a guaranteed pension but could alter the date of payment either forwards or backwards according to how the scheme's investments perform.
The idea came to the minister from the Netherlands, but having spoken to pension experts over there, I can reveal that the flexibility, if it apes the Dutch system, could go further than Department for Work and Pensions officials have owned up to.
Under the Dutch model, some schemes can adjust the pensions of those actually in retirement. This is crucial and disturbing. Think of it this way: you retire on an income of £10,000 a year but then the stock market crashes – as it has done three times in the past 25 years. The scheme then decides that in order to keep itself on an even keel your pension will have to be cut by, say, £2,000. That's two grand you're short which you have budgeted for getting, and your only choices will be to suck it up, use your savings or go back to work.
Whatever the ways in which defined ambition schemes choose to balance their books, the idea in essence amounts to one thing: the conversion of workplace pensions into giant with-profits funds. Now with-profits as a concept has been a busted flush for a decade – the legendary smoothing of returns so often doesn't happen – and here we have the pensions minister recommending we port over this concept for workplace schemes.
The world has also moved on. Having spent the past decade closing final salary schemes, how are employers going to be persuaded to enter an even more complex arrangement? What's more, the Government's new Nest scheme offers them a much simpler, lower-cost way to provide a pension, one which I anticipate they will move current employees to in droves, cutting benefits in the process. The minister's idea may have had a fighting chance circa 2002 but not now, I'm afraid.
Energy 'new deal' ignoresthe real issue
We had an early entry for PR Spin of the Year last week with Nick Clegg's claim to have slashed our energy bills by on average £100 a year. Hooray for not-so-calamity Clegg; at this rate even the nation's students may be persuaded to forgive the leader of the Lib Dems and Deputy Prime Minister.
But then the reality of Clegg's deal with the big six energy providers becomes apparent. The £100 figure was plucked from the air because all that has been agreed is that the providers will in future write to their customers and tell them if there is a cheaper tariff available. This, of course, will be used to market payment by direct debit – which is cheaper per unit but can lead to a whole world of pain for the customer, with companies overestimating, overcharging and then, holding on to the cash.
Clegg's new deal is nothing more than window dressing and doesn't go anywhere near the heart of the issue, which is that our market is a six-way monopoly with the providers strongly suspected of massive price collusion. Last week's "great breakthrough" for consumers was all style and no substance, like Mr Clegg himself.
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