Christopher Fildes

Who will look after us in our old age? We’ll have to look after ourselves

Who will look after us in our old age? We’ll have to look after ourselves

Text settings

An actuary’s life is more fun than it looks. You can make everyone’s flesh creep. Tell them all that their pensions are about to disappear into a black hole. Only the other day some financial astronomers measured the hole at a negative £130 billion and caused a most satisfactory flap. Could our pension funds really be short of so much money? Where has it gone? One answer, of course, is that it has disappeared into the Exchequer and been lost to sight. An incoming Chancellor, eight years ago, identified the pension funds as a soft target for taxation, and since then he has helped himself to their money so freely that they would need to raise another £100 billion to repair the damage. Put like that, without his intervention, they would only be £30 billion short today and we could all calm down. It is not as if they needed the money to write the cheques now. Their liabilities stretch out into the distance, and the century will be well advanced before anybody knows how right or wrong the actuaries were. Even so, these funds have become a first charge on any employer well-meaning enough to provide one. You want to cut a deal? Make sure that the trustees are squared first. Paying a dividend can be too difficult, as British Airways found out, so the airline wants to bring its pension contributions down to earth. Next, solvent schemes will be made to bail insolvent schemes out, and schemes that might just have got by will be tipped over the edge. No wonder that companies with any choice are getting out of the business of pension provision as if they were making a dash for the fire escape.

Square the circle

They could always remain in their seats and wait for Adair Turner to come up with the McKinsey solution. This cerebral consultant who used to run the CBI was commissioned by the government to square the pension circle, and has sensibly collected his life peerage in advance. We shall hear from him shortly, but we already know that he thinks pensions are too difficult for ordinary mortals. They cannot or will not provide for themselves so, he says, they will have to be prodded or prompted. You might wonder how they have the sense to come in out of the rain, let alone to buy and finance their houses. By now the roof over their heads will stand them in for more than their pension expectations. There is a moral in that, though the Turner report is unlikely to draw it.

White holes

An alternative report (mine, for instance) would say that paying people not to work is bound to be expensive. The trouble began when it seemed to be cheap or cost-free. Pension funds, in those days, ran to surpluses — white holes? — and the money had to be spent. Otherwise the taxman would complain or, worse still, some bidder would line the fund up as a hidden target. So employers would excuse themselves from paying contributions, and there would still be plenty in hand for directors who wanted to retire early on full pension. There might even be enough for a predatory chancellor. Then the cycle turned, in the stock market and, more slowly, in the demographics of pension provision. This has come as a shock, most of all to ministers who had come to believe that pensions grew on trees and need someone to blame for the crop failure. What must worry them most is the prospect of having to grow the next crop themselves.

Cheques on posterity

Governments are the most feckless and hopeless of pension providers. They have the unique advantage of being able to change the rules when it suits them. So the state’s old age pension is just about worth picking up. The new pension credits are scarcely worth that, and half of the prospective creditors don’t bother. No funds stand behind the pensions promised to those who work in the public sector — ministers themselves, of course, included. They are cheques drawn on posterity. All the same, intrepid actuaries have tried to chart this universe and to work out how far short these pensions are of being funded. Their latest estimate comes out well beyond £500 billion, which is not so much a black hole as a bottomless pit. Posterity will revolt at the prospect of filling it, and those who are in the hole must school themselves to stop digging.

Call on us

We ought to have learned by now not to rely on any government to look after us in our old age. We may now have to learn not to rely on the benevolence of the company we used to work for, all those years ago. Looking back, it was always a fragile relationship. Companies have their own demography, and people live longer than they do. So who does that leave to provide for us? By a process of elimination we come back to our own choice and our own efforts. This would be one of the calls on our income or on our personal wealth, which at the moment is looking quite healthy. We seem to have managed it rather better than our former employers have managed their pension schemes. We still need a regime that fosters long-term saving and leaves us to get on with it. That, though, would deny ministers and regulators the chance of knowing better.

The kindness of strangers

They make every transaction more complex, in the name of safety. They send the Compensation Fairy flapping round, deploying the benefit of hindsight at other people’s expense. They tell the life assurers to invest more cautiously, and then mount a raid on their reserves. They offer credits which might have been designed as a disincentive to save. We are lucky enough to have a strong and competitive financial services industry, but it is constantly told to explain itself and is constantly stood in the corner. Of course it needs to improve — to be less complacent, less mechanical, better able to cope with its lapses and to listen to its customers — but these are the businesses which will have to look after our savings. If they are to be any more than moneyboxes, they will need the scope to innovate and to take views, and sometimes those views will be wrong. Such is life. We have seen what will happen if we prefer to depend on the kindness of strangers.