Wednesday, 13 February 2008

Reasonable force

A couple of years back I was asked to speak at an internal seminar run by A Big Financial Institution about the Government's plans for pensions reform, specifically what has now become Personal Accounts.

What was interesting about it was the sharp difference in views about compulsion - not just about whether to save, but also about whether to allow people access to their pension savings to use them for other purposes. Those of us on the panel thought people should be compelled to save for retirement, and that the money saved should only be used to provide retirement income. But a couple of the people from The Big Financial Institution arguably particularly strongly against the latter point. Notably one of them portrayed the idea of compulsion as thinking that people couldn't be trusted with their own money and as such as being very Nanny State-ish. It showed a moralising streak to the Government, he suggested.

Although this is a fairly typical tactic for arguing the neo-liberal position on choice, I think it deserves a hearing each time we are considering the constriction of choice. And actually I find some of the commentary about personal debt in the current climate quite moralistic. Access to cheap debt may have been a curse to some, but it has been a blessing to others, enabling them to have access to products and services they might have otherwise always put off.

Having said that, I genuinely think that when it comes to pension provision the evidence does suggest that choice needs to be tightly managed. One the one hand people don't save (even when it is financially advantageous for them to do so) if they have make an active decision, but do if they are given a significant steer by being auto-enrolled into a scheme. However if you make people build up a big pot of savings but allow them access to it, as the bloke at seminar suggested, I think many of them are going to spend it.

Those that advocate giving people access to retirement savings often point to the popularity of 401k plans in the US. But funnily enough the US Government Accountability Office has just produced a paper that shows some of the flaws in the system. Amongst these were low levels of coverage, particularly for the lower paid, and small fund balances (so small levels of income at reirement). But most interesting to me was the finding that about half of 401k plan members cash in the full balance of the plan when swapping jobs, rather than rolling it into their next employer's scheme or an alternative vehicle. What are they going to use to fund a pension? That's not moralising, that's the real world.

So, whilst I do think we need to be careful about restricting choice, when it comes to pensions I think making people save, and making them use the money saved soley to fund retirement income, is a reasonable use of force.

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