A lesson in how grand government schemes almost invariably fail to produce the desired results may once again have to be painfully learned. That's the conclusion of a new report by Ned Cazalet, an independent life assurance analyst, with, according to the FT, "a record of correctly forecasting industry trends".
Mr Cazalet argues that the new system of personal retirement accounts proposed by the Pensions Commission and due to come into force in 2012, into which employees will be automatically enrolled, is a "mis-selling scandal in the making". His report says that for many lower paid workers the overall potential returns on contributions could be "hugely negative", largely because of the impact of means-testing. As the FT article states:
"His calculations of the potential return on contributions made under personal accounts take into account all the cashflows being paid into a pension pot prior to retirement, and all the income coming out in pension payments post-retirement.
The income in retirement would be secured by buying an annuity, a contract that promises to pay owners an income until they die.
“Sticking your money in a teapot, for many people is going to produce more,” said Mr Cazalet. According to his calculations, taking into account charges, but excluding means testing, total returns on contributions into personal accounts range from less than 5 per cent to minus 20 per cent.
Including means-testing the returns under most scenarios are negative, “strongly suggesting that there must be a better use to which employees’ and employers’ funds and tax relief could be put”, the report will say.
Returns on just the contributions made by employees, which have the benefit of tax relief and the employer’s contribution, excluding means-testing, range from 8 per cent to minus 8 per cent. Including means-testing many employees will lose out.
Many would be “a lot better off if they put their own money (forgoing employer contributions and tax relief on their own savings) into almost any other medium-to-low-risk savings vehicle”, the report will say."
Mr Cazalet concludes:
“If I was Cazalet Life Assurance Limited, if I was allowed to launch [a product like this] by my compliance officer, I would expect to face a massive fine for mis-selling and probably be put out of business.”
This is massively important, more so since it also refers to current forms of pension saving, and so the conclusion is worth stating again: In 21st century Britain, it is more rational for many people on lower incomes to put their money under the mattress than to save in a pension.
Now, there is a form of savings that is very popular with lower income people - ISAs. There is currently over £200 billion invested in ISAs, almost 10 million ISA accounts were subscribed to in 2007-08, and in 2004-05 (the latest year for which HMRC provides data) people earning less than £20,000 a year subscribed to over 7 million ISAs, out of a total of 11.6 million ISAs subscribed to.
Surely it would make more sense to go with the grain of ordinary people's thinking and expand the ISA regime, perhaps by increasing the annual contribution limits as a step towards reducing or eliminating tax on all savings interest. Politicians should have known better than to sign up to the latest grand white elephant - but what would you expect...