Today Ed Balls struggled to explain why people can’t be trusted to spend their own pension savings as they see fit. So after a rapturous reception from the right-wing press, Labour shadow ministers will be worrying that if they oppose the pension reforms they will sound patronising and risk alienating the “grey vote”. But oppose them they must, for these reforms are reckless and irresponsible
Yesterday the Chancellor threw out years of painful progress in designing a secure and sustainable pension system for Britain, all for a day of good headlines and a few billion pounds of extra tax. Here are four reasons why Labour must oppose George Osborne’s annuities assassination.
1. A law that make us do the right thing: One of the good things about governments is their ability to help people smooth out spending over very long lives. This happens through tax and spending but also through regulation: the requirement to buy an annuity exists to help people spend down their pension pot in a smooth, gradual fashion over long retirements. It follows the “goldilocks” rule: not too little, not too much. Annuities stop you spending too much, too early, so you have to scrape by in late old age. This minimises the extent people have to fall back on the state, but just as importantly, it helps people lead better lives over their whole life.
Turning savings into a guaranteed monthly income also stops you sitting on your money and spending “too little”. Today this is a big problem: the evidence shows that on average people in retirement don’t ‘decumulate’ their property and financial assets at all, contrary to what economists would expect. This is partly because people are insuring themselves against the risk of dying late. Annuities pool the risk we face of being ‘lucky’ in the life expectancy lottery. Without this insurance it is prudent to under-consume throughout our retirement, just in case we live on into our late 90s.
2. Destroying choice, not creating it: The Treasury says it wants to give people the choice of whether to buy an annuity or not. But in reality they are destroying a market that needed healing not ending. There will be a downward spiral: fewer people will buy annuities and many of those who decide to will do so because they believe they will live longer than average. As a result the costs of annuities will rise; even fewer people will want one; and the costs will rise again. A risk that is currently insurable will in practice cease to be so; ironically at a time when the government is trying to create a market for people to insure themselves against the risks of long term care in old age.
It is a sledgehammer to crack a nut. The annuities market needs reform to increase competition and help people buy the right product for them. But the real problem with annuities will shortly right itself: they are bad value because interest rates are so low. But interest raises will rise over the next few years. This is a massive reform to solve what is mainly a time-limited problem.
3. Housing market mayhem: Where’s all the money that would have been spent on pensions going to go? Almost inevitably into the housing market. All those lump sums which people cash-in just after retirement will either go to pay the deposits for the first home of lucky children or into buy-to-let investments. Either way, the affordability of housing will decline further and the gap between the housing “haves” and “have-nots” will grow worse.
4. Can we have our money back, please? Scrapping the requirement to turn your savings into a pension also begs the question of why the government needs to be so generous with all that tax relief. And why should employers contribute? If a defined contribution pension is just another long-term saving plan, well fine, but why should anyone except the saver care? The government and employer subsidy is part of a tripartite deal predicated on the money being to fund a retirement income.
Before yesterday, Britain had finally achieved a half-decent pension system, based on broad cross-party consensus, thanks to the Turner Commission, auto-enrolment and the flat-rate state pension. With this announcement, it will all unravel very fast. Labour must oppose these reforms.