Time to restore faith in pensions

Personal Finance

FAR AWAY and faintly, the flapping wings of distant chickens heading for home can now be heard. When they arrive the feathers will certainly fly. The looming problem is not just the cost of state pensions for a progressively ageing population, or even the fact that most future pensioners will have truncated working lives, serious though both those problems are.

The real threat is that the current working population, which took to personal pensions with such enthusiasm six or seven years ago, is now thoroughly disillusioned with the product.

The Government had a vision of a hard-working, self-reliant, flexible labour force swapping jobs freely to promote economic efficiency, but continuing to contribute voluntarily to personal pension funds. These would be shrewdly invested by private-sector fund managers and would help to finance the growth of the UK economy. At the same time, they would be turned into substantial financial nest-eggs to provide a prosperous old age for millions of sophisticated workers wedded to the capitalist way of life. But this was always likely to be unattainable. And seven years into the new era it is all going badly wrong.

In the early years of the Government's new deal, enthusiastic salesmen with their eyes on fat up-front commissions persuaded hundreds of thousands of individuals to opt out of company pensions and sign up for personal pensions. The Government encouraged the process with one-off sweeteners and its endorsement for a vast advertising campaign.

But the switch broke the traditional link between pensions and final salaries and made personal-pension holders wholly dependent on the vagaries of the investment markets, interest rates and share prices. In most cases it also deprived them of the benefit of a contribution from their employers.

Only now are they being informed just how much of their initial contributions are used to pay sales commission.Only gradually are they realising that the high rates of projected return on their money in the 1980s assumed a consistently higher level of inflation than now seems likely. As a result, the climate for pension fund investment is now looking less rewarding.

The evidence of mis-selling on a huge scale is also undermining the appeal of personal pensions. The current wrangles between advisers, insurers and the PIA over how much compensation will be paid to clients who have suffered obvious losses as a result further erodes public confidence.

If there were any doubt about the depth of the disillusion, the past week's figures from the Association of British Insurers, showing a sharp drop in regular premium payments to life and pension policies and a 14 per cent fall in single premium investments last year, will confirm it.

No wonder the industry's spokesman, Mark Boleat, is asking the Government to provide personal tax incentives for long-term investment to match the tax advantages enjoyed by short-term savings schemes such as PEPs and Tessas.

The drawback is that pension funds already enjoy substantial tax benefits on their income, so incentives to customers would be obvious double-counting.But something does need to be done to prevent the next generation of pensioners from becoming a charge on the social security budget.

The real answer must be to create a fully funded central superannuation fund into which workers would be obliged to contribute a percentage of their earnings, in order to build up a pension over a working lifetime.

Unlike the state earnings-related scheme, the premiums paid to the superannuation fund would be assigned by the trustees on a competitive basis to the most successful private-sector fund managers.

That at least would ensure that the private sector had a fair crack of the whip.