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What do we get if we combine the propensity in the United Kingdom to rejoice with the predictability necessary for a system to ensure the security of old age? The answer is: a waste. Over time, fragmentary solutions create new damage.
There are two separate problems with today’s retirement system.
The first is that current and future retirees are now divided into four categories: workers in the public sector, who benefit from secure pensions and protected by inflation, taxpayers’ dishes; Beneficiaries of private secure services (DB), many have now closed new contributions and new members; The youngest save in defined contribution plans (DC), which support all the risks of investment and longevity; And the poorly paid people who will eventually depend on the state pension.
These divisions are, with the exception of the latest arbitrary products in history. Why should the older sector and private sector retirement agreements be much safer than those of today’s private sector workers?
The second failure is that the pension system does not make the economy more productive. Indeed, it is both very fragmented and opposed to risk. According to Policy Institute pensions, only “18% of British retirement assets are invested in British productive assets – listed stocks, corporate bonds, investment capital and alternative”. Such an allowance will not create flourishing national companies on which national prosperity must depend.
Given the inheritance of past pension promises, a jump by something coherent (and just) is, alas, impossible. Thus, the question on the reform plans of this government is whether they will move things in a better direction. The answer is: Yes. They comply with an emerging consensus which has three main components: consolidation; productive investment; and higher savings.
I would add universality. It is false, in principle, that the risks are now so unevenly shared between sectors and generations. This cannot be changed overnight. But over time, it should be.
Two recent government articles – The final report of the review of pensions investments and work pensions: a roadmap – describe the planned management.
In the latter, Torsten Bell, Minister of Pensions, explains that the bill on pension plans will put the results of the exam. The main objective is the consolidation of diagrams, creating “a smaller number of larger, better governed and better value -investing pension providers in a wider range of productive assets”. An area of significant consolidation, created by the last government, is that of local authority regimes. Others are smaller DB and CC patterns.
This wide theme of consolidation is logical, because there are economies of scale and scope in the management of pension funds. Such consolidation will help, in particular, ensure better risk management and therefore greater investments in innovative investments. Today, according to the road map of work pensions,, 2,000 DB diagrams contain only 10 billion pounds sterling of assets between them. Again, there are currently many CC diagrams with less than 100 members.
This is linked to a controversial question: the role of pension funds in promoting economic growth. There is an opinion that there should be no biases towards investment in domestic productive assets. There is also a parallel vision that the best thing to do is to invest in indexes monitoring funds.
I have held such opinions, but I don’t do it anymore in the case of pension funds, for reasons presented on the roadmap. Thus, it stipulates: “The quality of our retirement system determines our living standards through what we all hope to be retired. But it also underlies our broader economy as one of the largest national capital swimming pools. These objectives and roles are not in tension with each other … After a decade and half of the stagion of internships and wages, there is nothing more important for British workers than employees and folds than the return services in our economy.
This should be done, although with care and caution. But it must be done. This can only be done by large plans and great funds capable of operating in a very professional manner. These reports are also right to emphasize that the emphasis on higher yields will offer better pensions to savers.
It will also be necessary to increase savings rates. The contribution rates are far, far too low. British national savings rates are also far too low. Raising the first is a necessary step to raise the second. These major problems will be part of the next stage of the pensions review, which is to focus on the adequacy of retirement income.
Transforming the irrational and inadequate retirement system of the United Kingdom into something less irrational and inadequate could be the most important economic heritage of this government. At least it takes a judicious beginning. He must continue.
martin.wolf@ft.com
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