Harlots in the city?

By Peter Barnard

I started to take a serious look at pensions provision, both public sector and private sector, in 2004, when Adair (as he then was) Turner started work as head of The Pensions Commission. Deservedly so, he was made a Lord (sitting on the cross benches) in 2005.

I became convinced that the most effective way to provide for pensions in the future was on the European model, with a “living pension” provided by Pay As You Go, with a fixed proportion of GDP (say 9-10%) being collected by general taxation to pay for pensions. This fixed proportion would be protected by statute and would, more or less, double the basic state retirement pension to (rounded) £195 per week for a single person and to £312 per week for a married couple, if it were in application as I write.

In normal circumstances, GDP can be expected to grow at 2.5% per annum, and pensioners by 1.% per annum between now and 2033 (after the second wave of “baby boomers” arrives), so it is economically feasible, with real increases each year for pensioners of around 1.4% per annum, to allocate a fixed proportion of GDP for state retirement pensions.

My convictions were reinforced over the weekend as I read about the Daily Telegraph’s article that said some private pensions providers may be taking up to 50% of the accumulated “pension pot” in fees and other charges. The most shameful example given was that of HSBC: value of pot before charges – £497,000 ; charges – £249,000 ; left to saver – £248,000. Even the “ethical” Co-op did not escape unscathed, with charges of up to 47% of the pot.

Some regulars on LL may have read one of my comments on the article “Burnham’s Battle Bus” in which I quoted from J K Galbraith’s “The Great Crash 1929” :

“Wall Street …. is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot.”

J K Galbraith was, in this particular context, writing about Wall Street’s attitude to margin trading in 1929: Wall Street could not openly state the true purpose of margin trading (to accommodate the speculator and facilitate speculation). Rather:

“it encourages the extra trading which changes a thin and anaemic market into a thick and healthy one.”

It appears that we have “harlots” of our own kind here in the United Kingdom – same genus, different species, as it were.

During my studies of pensions in 2004, I came across the report MQ5, published by ONS and learnt that, in 2004, long-term funds operated by the insurance companies paid out an estimated £4.9 billion in commission, had employee compensation of £1.3 billion and “other management expenses” (all those ladies in dark veils floating across your television screens) of £5.5 billion, for a total of £11.7 billion.

By contrast, the administration charges for the NI Fund in 2004/05 were just £1.5 billion on receipts of £63 billion from 29 million employees and payments of £59 billion, including £50 billion to more than eleven million pensioners.

In order to head off the charge “Gordon Brown’s tax grab” on pensions, let me place on record Stephen Yeo’s comments about this in the FT a few years ago and on Radio 4, along the lines that Mr Brown’s tax grab was “not in the first three reasons” for the sorry state of private sector pensions.

Mr Yeo is a partner at Watson Wyatt (pensions advisers) and used to be a pensions adviser to the Conservative Party. Perhaps, with comments like that, the Conservative Party decided that Mr Yeo was “not one of them” and a parting of the ways appeared to have been judged desirable.

Final salary based pensions are no longer tenable (if they ever were), both in the public and private sector, and Labour leaders need to be grasping this.

If any of the five candidates currently running for the leadership wants to take up “a cause”, I suggest that he, or she, takes a look at pensions provision and comes up with something truly radical.

Will they – or are they still running scared of “Middle England” and Daily Mail headlines? Not to mention harlots in the City of London ….