Outlook: Sandler report goes as far as it can, short of compulsion

The Government set out its policy objectives on pensions in a Green Paper, "Partnership in Pensions", published in December 1998. "By 2050", it said, "the proportion of pensioner incomes coming from the state, now 60 per cent, will have fallen to 40 per cent, and the proportion coming from private provision will have increased from 40 per cent to 60 per cent." The year 2050 is a long way off, but it scarcely needs saying that there is virtually no chance of that objective being met.

Yesterday's government-sponsored review of the UK savings market by the former Lloyds of London chief executive, Ron Sandler, "Medium and Long-Term Retail Savings in the UK", examines the state of the market in impressive detail and finds it wanting across a number of fronts. It also puts forward some worthwhile and important recommendations for reform, of which more later.

Taken in conjunction with tomorrow's comprehensive review of the pensions market by Alan Pickering, a former head of the National Association of Pension Funds, the Government promises the biggest shake-up of the savings market in a generation. Will it make a blind bit of difference?

Public confidence in the savings industry is at rock bottom, and anything that helps bolster it by pushing the industry towards giving better value for money has got to be a good thing. But whether any of these measures will significantly help bridge Britain's £27bn-a-year savings gap is much more questionable.

Admittedly, we live in curious times, but as things stand, macroeconomic policy is a much bigger deterrent to higher levels of savings than any structural failings in the market itself. Taxes are rising and interest rates are the lowest in more than 30 years. In such circumstances, people save less, because incomes are being squeezed and returns are poor, and they borrow more because spending has never been so affordable. As a consequence, the amount the population is saving from income is close to its all-time low and the so-called savings gap – the difference between what's being saved and what needs to be saved to finance retirement – is getting bigger by the year.

The Government says it wants everyone, particularly the less well off, to save more, but actually it doesn't want this at all. The only thing that prevents the economy sinking into outright recession is the buoyant housing market and high levels of consumer spending. The very worst thing that could happen to the economy right now is for people collectively to decide they need to save a lot more.

This particular set of macroeconomic circumstances may be less exceptional than generally thought. Historically low interest rates have been with us for an awfully long time already and show no sign of going away anytime soon. If the stock market is going nowhere, it's hard to persuade people to save more, however benign, easy to understand, transparent and competitive you make the investment landscape.

None the less, Mr Sandler is right in his diagnosis of the problem. The market is cursed by an extraordinary proliferation of products and charging structures, there is virtually no correlation between charges and performance, the industry is riddled with inefficiencies, many of them imposed from the outside by unduly onerous levels of regulation, and the commission led nature of most selling can lead to exceptionally poor value for money. Mr Sandler is also right in his central prescription – which is to encourage the industry to create a suite of stakeholder products, with low-cost product regulation substituting for high-cost point of sale regulation.

Admittedly, the test run of stakeholder pensions doesn't provide much encouragement. Stakeholder pensions have sold reasonably well, but generally not to the less well heeled, which they were meant to be targeting. The savings industry has found them too low margin to be worth putting capital and promotion behind. However, even stakeholder pensions as they stand require quite a bit of point of sale regulation. The quid pro quo for low charges and low exit penalties that Mr Sandler proposes is that by defining the product in every particular, regulation can thereby be reduced to a bare minimum, substantially reducing sales costs. Better to have the occasional mis-selling problem, he rightly argues, than have no one saving at all because of oppressive, high cost regulation.

Some industry leaders have been attempting to move in this direction already; Sandler will push them further in that direction, making them eventually more akin to public service utilities than private sector dynamos. Smaller inefficient players will wither and die, but that may be no bad thing if poor value for money is allowed to shelter behind the industry's present complexities and obfuscations. Even so, it would be wrong to think these failings all the industry's fault. High compliance costs, themselves a response to repeated savings industry scandals, are as much a part of the problem as rip-off salesmen and inefficient management. The complexities of the tax system makes matters worse still, Mr Sandler argues. In other words, government is as much to blame as the industry.

The pickering report later this week makes more specific proposals relating to the pensions industry. He wants to bring back the rule that allows companies to require their employees to contribute to a pension scheme. The dismantling of this rule in 1988 helped stoke the pensions mis-selling scandal by allowing unscrupulous salesmen to persuade the ignorant to opt out of their gilt-edged public sector and company pension schemes. In an attempt to revive the ever shrinking number of final salary schemes, Mr Pickering also wants companies to be able substantially to reduce the minimum benefit they have to underwrite.

Mr Pickering is expected to go further than Mr Sandler in making the case for compulsion in the savings market. For obvious reasons, compulsion is what the big players really want, even if it results in complete commoditisation of the savings market. There are countries that have or are in the process of going this route – Singapore, Chile, Poland, Australia – but there are key drawbacks. For some, the whole idea of compelling workers to take on investment risk is repugnant. How, for instance, do you explain, in falling markets, that this really is a sensible use of hard-earned cash? Labour purists would meanwhile argue that there is already a welfare state funded out of National Insurance and general taxation. It would be wholly wrong to hypothecate a separate payroll tax for private sector pension provision.

Perhaps more pertinent still, it may be in the long-term interests of the hard working taxpayer to be rid of the pensions timebomb, but it is certainly not in the best interests of the present generation of taxpayers, who would in effect be forced to pay twice – once through general taxes for current pensioners and then all over again to fund their own retirement. As can readily be seen, there are no easy solutions. Mr Sandler has arguably gone about as far as possible in addressing the savings gap, short of compulsion itself. This he wisely ducked yesterday. That's for governments to lose elections over, he might have said.

jeremy.warner@independent.co.uk