Jeremy Warner's Outlook: Government trapped in savings quagmire

Click to follow
The Independent Online

The Treasury seems to have ignored the warnings of its own advisers, the accountancy firm Deloitte, in the price caps it announced yesterday for stakeholder savings products. The proposed 1.5 per cent annual charging cap, falling to 1 per cent after 10 years, represents an advance for the industry on the flat 1 per cent rate originally proposed, but is still a long way short of what providers think they'll need to give the stakeholder suite of products adequate marketing support.

Deloitte quite plainly agreed. In advice to the Government published for the first time yesterday, Deloitte said that such a cap would be "very attractive to consumers, but very unattractive to distributors and providers, producing low sales, few providers and few distributors".

By contrast, what the industry had been asking for ­ which was an annual charge of 1 per cent supplemented by a 5 per cent upfront fee ­ is described by Deloitte as "likely to generate the most substantial market, with the most effective reach to low-income consumers". Ruth Kelly, Financial Secretary to the Treasury, calls the new caps a "fair compromise" between the needs of providers and savers, yet there is little point in achieving a balance of interest if nobody is going to bother to sell it.

The Government hopes that by forcing the savings industry to provide a suite of cheap, cheerful and low-risk products it will begin the process of restoring public trust in long-term savings after a spate of scandals, thereby helping to close what is at the moment an ever-widening savings gap. Yet the truth is that most of this is just fiddling while Rome burns. For most low-income earners, there's no point in saving, even into these new, low-cost stakeholder products, for by doing so they only deprive themselves of the pensions credits they would otherwise be entitled to.

The Government wants the stakeholder products to be so commoditised that only very limited advice is required as to suitability in selling them. Costs can thereby be reduced, making them better value to consumers. If only it was as simple as that. In fact, a large proportion of stakeholder pensions are highly likely to be mis-sold, for it doesn't matter how good value they are if for every pound you save into them you deprive yourself of a pound of benefit. For the low paid, the target market, it's just money down the drain. They'd be much better off saving nothing.

The system of benefit has been made so complex that not even Ruth Kelly seems fully to understand this basic truth. Yesterday she insisted that pension credits had been deliberately constructed so as to incentivise the low paid to save. Strangely, it's hard to find anyone in the industry who agrees with her analysis.

What, for instance, about the millions of women who are not entitled to the basic state pension because they haven't worked for long enough? It needs a quite hefty annuity before such people can start to take advantage of the pension tax credit. Many of them would be better advised to fall back on the state's minimum income guarantee (MIG) than to save to bridge the gap. Even for those entitled to the full basic pension, it is arguable whether its worth building the size of pension pot required to raise income significantly above the MIG.

The root cause of the Government's discomfort over pension provision dates back to the early 1980s, when the Thatcher government quietly introduced a series of reforms designed to reduce the cost of state pensions. The result is that Britain has an affordable state pensions system, unlike many of our European counterparts, where a fiscal timebomb is ticking away. Even with an ageing population, the percentage of tax income spent on pensions is forecast to fall over the next 50 years. The flip-side of the coin is that the system is also a miserly one in the extreme which fails to provide a living wage. Even the US takes better care of its elderly in terms of benefit entitlements than we do.

The upshot is that fiscally Britain is much better placed to cope with the problem of an ageing population than most developed countries. Yet as the Institute for Fiscal Studies observed in a recent research paper, the apparently benign outlook for the UK assumes that the current policy regarding the future generosity of the state pension system is sustainable. I very much doubt it is. Nor do I think it at all likely that the present confusion of public policy ­ from pension credits to prescriptive, low cost savings products ­ will substantially help close the gap. To get people to save voluntarily, you have to provide them with the incentive to do so. The present system provides reasonable incentives for the better off, but virtually none for the low paid. This is, of course, precisely the reverse of what it should be.

Ms Kelly reckons the Government has put in place most of the basic building blocks necessary to improve the savings rate. Voluntarism can work, she insists, yet it is hard to see how on the present hotch-potch of on-the-hoof policy initiatives. Making the industry subject to price controls is no more likely to provide a long-term fix than pension credits. Having removed the incentive to buy, the Government now seems to be removing the incentive to sell. Ministers are only succeeding in making a bad situation worse.

Sadly, there's only one fail-safe way of persuading people to save more for their old age, and that's compulsion. Yet no Government will go that route without a high degree of political consensus. The time for boldness is at the start of an administration, not at the end of it, which is why even if the Pensions Commission under the former CBI director-general Adair Turner recommends such an approach, the present incumbents will think twice before implementing it.


Has Viscount Rothermere missed the chance of a lifetime by withdrawing from the bidding for The Daily Telegraph, or is he wise to be so cautious? Price, rather than regulatory risk, was what eventually determined the Daily Mail & General Trust to quit the auction. As the weeks passed, the Daily Mail became increasingly confident of regulatory clearance.

The competition issues were certainly daunting, but it was hard to see how regulators could disallow a takeover that would still leave the Mail group trailing Rupert Murdoch's News International. Recent media legislation has introduced a further public interest test for newspaper mergers, yet again it would have been difficult for ministers credibly to say no, anti-Government though both titles are. It would have looked too political.

Yet as the price rose ever further into the stratosphere, there was a collective loss of nerve. Richard Desmond, the only other British-based trade buyer to have thrown his hat in the ring, withdrew when the price went through £500m. Lord Rothermere's pain threshold was £600m. If even the trade buyers, with all the synergies they are capable of generating, cannot see value at the price The Daily Telegraph has been bid up to, you have to wonder how the remaining two bidders plan to make their return.

Having decided some while back that the Telegraph had become too expensive to go it alone, Lord Rothermere instead threw his lot in with one of the private equity bidders. As a minority investor, he could limit his downside while keeping his options open for the future. But as the auction soared towards £700m, the heat became too much for both of them. Daily Mail & General Trust may be a FTSE 100 company, but it is also still family controlled. That makes in naturally cautious. Still in his early 30s, Viscount Rothermere is determined not to go down in history as the man who squandered the family fortune.

I've long thought the Barclay brothers the most likely to win. They desperately want the titles and they've got pockets deep enough to indulge their desires. It's hard to see how the commercially driven offer put forward by a 3i-led consortium can beat them. The Barclays will no doubt hugely enjoy their new toy, but they'll struggle to make it yield a decent return.