A warning from pensions

A warning from pensions

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Recent UK pensions policy initiatives were partly spawned by frustration with providers’ reluctance to embrace simplification and transparency, i.e. to put the saver first. The advent of “freedom and choice” last April, ending the requirement to annuitise pension pots at the age of 55, heralded profound consequences for the private pensions industry.

Indeed, it resonates with Michael Caine’s refrain in The Italian Job: "You were only supposed to blow the bloody doors off!" Then, in this year’s Budget, the Chancellor announced the introduction of a Lifetime ISA, which offers tax-free access to both the savings and a 25% bonus, for the specific purpose of purchasing the first home. It will compete with private pensions products.

Fund managers are in the spotlight too. Tolerance of so-called closet tracker funds masquerading as actively-managed funds is wearing thin; the FCA recently identified five such funds, out of a sample of only 23.

The Treasury is aware that it is fund managers’ largest client, having provided over £350bn in pensions tax relief since 2001. Invested, this is generating an annuity stream of fees; effectively a state-subsidy of what some may consider to be an over-paid, under-performing industry.

Higher rate tax relief, at the very least, could soon disappear. Nearly 70% of it goes to the top 15% of earners, many of whom would save anyway. Treasury funds would be better deployed by funding Lifetime ISA bonuses.

If tax relief is curtailed when the Lifetime ISA is introduced in April 2017, fund managers’ client demographic could shift to many more, but smaller, investors. Demand for simple, low cost, passive funds could rise – at a time of growing focus on whether active funds deliver value. 

A rising number of public sector funds, notably within the Local Government Pension Scheme, are concluding that they do not. Increasingly, their view of listed assets is that costs are controllable, whereas performance, by and large, is not.

Fund managers face challenging times, with flat or negative real returns from fixed income, sclerotic returns elsewhere and low developed world growth. 

But bear in mind that this year the UK’s household savings ratio is expected to be 3.9%, in stark contrast to that for France (14.6%) and Germany (9.4%). As the UK population ages, increasingly consuming savings, our reliance on imported capital makes us vulnerable to macroeconomic shocks. 

The government therefore has a driving imperative to catalyse a broad-based, deep-rooted saving culture. Thus, the nation’s interest is aligned with that of fund managers’ desire to increase assets under management.

Michael Johnson is a research fellow at the Centre for Policy Studies (CPS)



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