July 22, 2014 2 Comments

Chancellor George Osborne was dismissive of the critics of his Budget 2014 pension reforms in an interview with the BBC this week. “It’s not my money, it’s not your money… We have to get away from the patronising view that the state knows best”.

This is a subtle and attractive argument, appealing to the middle classes who tend to believe that they are far better decision makers regarding their own future than the state would ever be. However, there are fundamental contradictions in this policy approach that weaken the Chancellor’s argument and make it appear that he doesn’t believe his words himself.

If the people are truly better at managing their own money, then why has he sponsored the auto-enrolment policy so trenchantly? Surely it’s their money and they know best how to use it? So what lies behind the Government’s policy of interfering by pushing people towards pension saving, via their auto-enrolment policy? It does seem a little patronising of the Government to assume that current workers will not provide for their own retirement by saving regularly out of their wages.

Then there’s the false premise that it’s not my money. At first glance, the truth of this seems self-evident. However, if people fail to manage their own longevity risk correctly, it will ultimately be the taxpayer who will have to cover the cost of the older retirees who have run out of money. So in fact, it is my money, taken by the state, that will ultimately provide the backstop to this whole arrangement and therefore it is completely in my interest that people should be at the very least encouraged and preferably forced both to save for retirement and to guard their income against the risk of longevity.

Compulsory annuities and drawdowns protected by the min/max arrangements ensured that this risk was being managed by the life and pension providers and the state was not on the hook for the potential liabilities when people ran out of money. Now individuals are supposed to bear the risk themselves, which seems a giant leap for those who were so financially unaware that they had to be pushed into saving for their pension in the first place.

This Government’s policy on pensions lacks a coherent underlying philosophy and the Chancellor’s glib words seem to be an attempt to cover up what appears to be a high-risk approach to solving the problem of how to ensure that increasing longevity doesn’t weigh down the UK economy over the next few decades.

The problem with this is that it will be some decades before it will be possible to tell just what effect these reforms will have on the ability of individuals to support themselves in retirement. Happily, the current government will not have to deal with the fall-out, if it turns out that in mandating longevity insurance in the form of annuities, the state actually did know best.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

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About Tom Murray

Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe Internet insurance architecture since August 1999.