How pensions got throttled

The need for a savings culture.

In mid-2011, Robert Chote, the chairman of the Office for Budget Responsibility (OBR), declared the UK’s economic outlook to be “unsustainable”.  He was referring to the UK’s public sector debt, expected to rise indefinitely in the longer term.  The primary cause is our ageing population, driving sharp increases in the costs of health care, state pensions and long-term care, combined with a contracting tax base relative to total population size.

In addition, Britain is under a competitive assault from globalisation, particularly from countries with younger, more dynamic, populations.  Furthermore, some have little concern for the niceties of a true democracy (no need for planning permission for a new dam or railway in China); this gives them a competitive edge.  Without radical policy changes, we can expect our deteriorating public finances to lead the UK into a vicious circle of slower growth and higher interest rates.

This grim outlook could be accompanied by inter-generational strife.  Today’s Generation Y (broadly, those in their twenties and thirties) could be the first generation to experience a lower quality of life than that enjoyed by their parents.  Over the last five years, the UK’s standard of living has declined by 4.8 per cent and, given the outlook for national debt, there is the potential for considerable further decline.

Only now are politicians beginning to contemplate the pressures facing future governments, and how to avert what the data suggests is heading our way.  They are, however, seriously compromised by facing a 50 year problem alongside a five year electoral cycle.  The blue corner of the Coalition has, however, proffered a suggestion to head off the crisis-in-waiting, encompassed in its prevailing political ethos of “personal responsibility”.  This is thinly veiled code for “you’re on your own, folks”, essentially an attempt to catalyse a cultural shift away from being a nation of borrowers to one of savers, particularly (given our ageing population) retirement saving.

This is important to individuals.… and critical to the nation.  Savings fuel investment, which drives increased productivity and economic growth; without that, our quality of life will certainly deteriorate.  Unfortunately, this means engaging with an under-performing financial services industry which is widely, and justifiably, distrusted.  Indeed, some of it is dysfunctional.  In addition, successive governments (irrespective of political hue) have exhibited a lack a common purpose.  The Department of Work and Pensions (DWP) wants people to save, whereas the Treasury favours consumption, not least to bolster VAT receipts.  This pushmi-pullyu position manifests itself as contradictory policies and ambiguous communication, which does nothing to stimulate a savings culture.

The industry knows that it has to radically change its behaviour, not least because some within it have finally realised that the pursuit of their own self-interest, at the expense of their customers, may ultimately prove to be the industry’s nemesis.  Furthermore, change would be more lasting if it were driven by the industry itself, rather than through state intervention.  But the industry is in the Last Chance Saloon of public opinion.  Many believe that there is no prospect of it challenging its own, deeply entrenched, vested interests.  Ordinarily this would not be of great import, but financial services are an exception.  Not only does the industry directly benefit from an annual subsidy of over £30 bn (via tax relief), but the Treasury fields the consequences of industry failure, via welfare payments, made manifest by an under-saving nation. 

Consequently, the industry is risking muscular state intervention to “shove” (not “nudge”) it into putting the customer at its centre.  Once the new National Employment Savings Trust (NEST) has “bedded down”, the Government could, for example, dramatically enhance NEST’s capabilities (including removing the contributions cap and the subscription charge), thereby exerting considerably more competitive pressure on the industry. 

In the meantime, the majority of the population lack the financial wherewithal (and, in many cases, the will) to make their own retirement saving arrangements.  Certainly, 90 per cent+ of the population has no need for complex, expensive savings products.  Mass mutualisation of their pension pots would be of great service to them.  A small number of large, collective, DC schemes would enable people to pool their longevity risk and harness enormous economies of scale to drive costs down.  Retirement incomes would then be larger, reducing pensioner poverty and the demand for state benefits, and the underlying pools of assets could, in effect, become akin to our sovereign wealth fund.

But, with the economy weak, the Government is not currently pushing to catalyse a savings culture.  There is a brief opportunity (between now and 2017, when NEST is reviewed) for the industry to resuscitate its reputation by exhibiting leadership (and discovering some humility).  It should implement a range of initiatives that put the customer at the centre of everything it does.  This would require the industry to confront its own short-termism, and start delivering value for money to its customers, whilst bearing in mind that customers want to feel in control of their savings.  It would also have to overcome its fear of simplification, standardisation and transparency, and discard the deleterious practices that are enshrined in the principal-agent problem.

A leap of faith is required by the industry, because whilst profits may diminish in the short term, the long-term outcome could be a rejuvenated reputation.…and business growth.  Finally, and crucially, trustees need to start behaving as the principals they really are, helping to drive the reshaping of the industry.  Indeed, trustees ought to be the catalysts for change.

Michael is a Research Fellow at the Centre for Policy Studies (CPS).  He is the author of “Put the saver first” (CPS, July 2012).

Pensioners need to be prioritised. Photograph: Getty Images
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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