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18 March 2015updated 02 Sep 2021 5:00pm

Budget 2015: Government pension changes risk destroying the whole system

Far from giving pensioners more freedom, changes to the pension scheme risk leaving the elderly with nothing.

By Andrew Harrop

Today, under the guise of grey-vote populism, George Osborne led an onslaught against the future prosperity of British pensioners. In the Budget he will extend last year’s pension ‘freedoms’ from new retirees to all those who have a pension in payment. He will offer millions of people who today have a secure, guaranteed income for life the chance to spin the wheel of fate. Many will take up his offer, even though huge numbers will end up worse off. And the whole pension system could end up permanently scuttled: the future of all our retirements is at stake.

The chancellor’s retort is that he is creating choice and freedom. He says his critics are patronising when they suggest that people can’t be trusted with their own money. But no one is suggesting that large numbers will be wilfully irresponsible. Financial decision making is a tough business, and constraints and defaults often serve us well.  

Indeed this is the government’s view when it comes to building up a pension. The same should apply to how we spend it. Without some clear structure to help us spread money over our retirements we may spend too much too early – but equally many will end up hoarding more than they need to.

And Osborne ignores the most important point about pensions – that they protect us from risk. None of us know the day we will die, so we can try to be responsible and still end up making the wrong decision. Pensions protects us from this fate by pooling risks.

As individuals, we share with each other the financial misfortune of leading a long and happy life. People who die earlier than expected end up paying for those who live late, preventing late old age being blighted by poverty.

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And collectively, we place a bet with the insurance industry. Insurers provide guaranteed incomes based on how long they think each generation will live: if their calculations turn out to be too pessimistic, as has been the case in the past, it is they who are out of pocket, not pensioners themselves.

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All that will go if Osborne succeeds in turning pension pots into giant ISAs. They will just be personal savings accounts, with none of the pooled benefits of a pension. In the name of freedom, it will mark another example of the individualisation of risks we cannot mitigate – of decisions too uncertain to make alone. This is not the march of progress: our lives do not need to be so complex and insecure.

Supporters of the policy suggest that the risk averse will still be able to buy a pension annuity. But the evidence from other jurisdictions suggests this will not happen much in practice, even though a guaranteed income is likely to be in most people’s interests. It is not responsible choice to reject insurance against longevity, it is market failure.

Osborne is also doing a disservice to future generations of pensioners. In his decision to turn guaranteed lifetime incomes into savings accounts he has undermined what makes pensions pensions. Over time this will place the consensus on pension saving at grave risk. If pensions are just ISAs people will soon as why should employers contribute? why should the taxpayer? why should low paid workers be automatically enrolled to the detriment of their take-home pay? This slippery slope will lead over time to less pensions saving and lower retirement living standards.

Politicians must show that a different way is possible. It may not make sense for everyone to buy a compulsory annuity in their early or mid-60s, when people often have many years left to carry on saving and enjoying the possible benefits of rising capital markets. Investment-style pension products make sense in this context. 

But almost everyone should have a guaranteed income in late old age, from 75 or 80 onwards. Otherwise it’s not a pension. Changes are needed, but they will take time to get right. So, for now, the new government should pause the Osborne reforms because they will end up doing great harm to the people they are intended to serve. Then an impartial, evidence-driven pensions’ commission is needed, to save our pension system from politicians on the hunt for votes.

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