Until his recent bizarre comments about people using their pensions to pay for Lamborghinis, Steve Webb was rightly regarded as one of the finest pensions ministers Britain has ever had, and one of the unsung heroes of the coalition government. I have no doubt only a tiny minority of the electorate know who he is, but his personal vision for UK pensions policy is stamped all over the Queen’s Speech, which heralds the government’s support for “collective defined contribution” (CDC) pensions.
The problem is that Webb’s luck has already run out. In the budget earlier this year chancellor George Osborne announced the newly retired will no longer be forced to turn their pension pot into an “annuity” – a lifelong, regular income stream, purchased from an insurance company. This policy, due to start next year, makes the task of implementing CDC incredibly difficult.
In CDC schemes, members invest in one big saving pot on a risk-sharing basis, which makes investing cheaper and more efficient. There are major question marks about how such a scheme would be governed, an issue Webb has persistently underestimated.
Yet the most common criticism of CDC, that it permits intergenerational unfairness because some may end up with smaller pensions than others despite investing the same amounts, has been hugely exaggerated. The current system of pure defined contribution schemes is already horrendously unfair in intergenerational terms (as Nigel Stanley and I have argued elsewhere ), because people saving the same amounts can end up with very different retirement incomes based on the health of the annuities market when they retire. Of course, this is an inequality which flows invisibly through the whole economy rather than through the accounts of a single pension scheme.
The other major criticism of CDC is that it is too restrictive. The CDC business model depends, fundamentally, on retirees’ pensions being paid directly out of the scheme’s funds, rather than via an externally-held annuity. This means cash can remain invested in high-return assets right until the very moment it is needed to be used to make monthly pension payments. It also means members must be required to take their pension from the scheme rather than “shopping around”.
The contradicting coalition
And herein lies the contradiction between the two pieces of legislation now being proposed by the coalition. The success of Webb’s plan depends absolutely on such restrictions; Osborne’s plan outlaws them. The political economy of this contradiction should come as no surprise: more affluent savers are most likely to benefit from having their savings “liberated” to invest as they see fit, quite possibly in buy-to-let housing (according to Chris Huhne). Low to medium earners benefit the most from collective pensions, because by pooling together they strengthen their bargaining position in relation to the private pensions industry.
Even if most CDC members would keep their cash within the scheme voluntarily, the existence of the risk that a large number could choose to take their money and run would make the business model unworkable on the kind of scale needed to make a difference. Some very savvy (and probably wealthy) savers may be able to combine the new annuity freedoms with bespoke collective investment vehicles to create a retirement income, but a mass market will be impossible.
This is a bizarre state of affairs, epitomising the crumbling edifice that is the Conservative/Liberal Democrat coalition much more so than recent stage-managed spats over free schools and immigration caps. The Conservatives’ sudden acquiescence to Webb’s plan for CDC owes a great deal to Labour’s recent embrace of this type of scheme – they are clearly mindful of the kind of (legitimate) claims that Labour would have been able to make, at the next general election, about how much their approach would have improved individuals’ retirement incomes.
Of course, to clarify, CDC is completely undeliverable in the 11 months before the general election – especially when providers have this complex contradiction to deal with – so cannot be considered a “coalition” policy in any meaningful sense.
This is the latest in a series of pensions ruses by the coalition government: in the last couple of years, they have fixed the auto-enrolment eligibility threshold to the income tax personal allowance, to squeeze out the lowest earners; flip-flopped on the issue of pension scheme charges; and radically slashed the promised starting rate for the new “single tier” state pension (as well as bringing forward its introduction purely to allow the Treasury to artificially manipulate its revenue forecasts). The era of pensions consensus is well and truly over.