Nigel Stanley: Osborne’s pension reform ‘destroyed a very carefully built consensus’ | Video

Transcript

George Osborne’s 2014 budget marked the end of compulsory annuities for pensions. Was this a move too far? Nigel Stanley, Head of Campaigns and Communications for the Trades Union Congress, believes the Chancellor’s decision has “destroyed a very carefully built consensus.” He talks to World Finance about what the problem with ending compulsory annuities is, whether people can be trusted to plan for the future, and if collective decumulation could be ideal for retirement.

World Finance: Now the main fixture of this policy of course is ending compulsory annuities, now why wouldn’t you invite such a change?

Nigel Stanley: Well I think the problem with what the chancellor did is, he swept away annuities, but he didn’t put anything in its place. The great thing about how we’ve done pension reform in the UK is, it’s been slow, careful, and been done through consultation and consensus building. And yet suddenly in the budget this big rabbit was pulled out of the hat, and suddenly we don’t quite know how pensions are going to work. And it’s destroyed a very carefully built consensus.

And yet suddenly in the budget this big rabbit was pulled out of the hat

World Finance: Based on these reforms, what do you think the intention was of the government?

Nigel Stanley: Oh I think it was a bit of a political trick. I mean, we are in a tight electoral situation, we have an election coming up. This was a, “Oh, let’s challenge the opposition to do something! Let’s ask them a question they don’t want asked! Are you against personal responsibility?” Well actually, we’ve built a whole pension system in this country around the idea that personal responsibility doesn’t work in pensions!

When we had personal responsibility, leaving it up to people to make decisions about their future, to run an internal discount rate in their own personal economic model, so they could calculate the value of deferred consumption against income today, then it didn’t work! And so this is just political rhetoric.

Yes we should give people more freedom, but we need to think about how we should do it.

World Finance: But I have to attack that a little bit, because the idea of having an annuity system that just doesn’t work – in some ways has even exploited people who perhaps wouldn’t know any better – doesn’t that make the model just show cracks in it all together?

Nigel Stanley: Oh the annuity model in this country was broken. I think everyone agrees with that. The fact that insurance companies’ share prices tanked as soon as it was announced just showed how much of their profit streams were coming from annuities. And I think one of the problems with annuities is that because people live longer, the annuity is a guarantee that can go on for decades in the future – guarantees are expensive! What we need is a system which has target return, but not guaranteed returns.

What is new is this destruction of annuities, this destruction of pensions

World Finance: Well what about those pro-reformers who say, okay, you want to take a big chunk of cash and perhaps invest it in real estate in the city, or perhaps put it in a fund. Are those not also long-term plans?

Nigel Stanley: For sure! I have no objection to people who’ve saved a huge amount having the freedom to do what they want with it. And we’ve always had that. That existed before the budget anyway, so there’s nothing new about that. What is new is this destruction of annuities, this destruction of pensions as some kind of risk-sharing, risk-pooling vehicle, with the objective of providing an income in retirement, which is what the members of unions want, it’s what ordinary workers want.

If we go out of the studio today, walk down the street, and ask passers-by “What do you mean by a pension?” they won’t say “A huge bank account when I’m 55,” they will say “A regular cheque every month. That’s what I want from a pension.”

World Finance: But when you have this big pot of money it sounds like you just don’t trust people to share their money wisely in their retirement.

Nigel Stanley: I don’t trust people not to be ripped off. If we trusted people there wouldn’t be any rip-offs, because people would make the right decisions. And you know, I’m not being kind of left-wing trade unionist here, I’m simply understanding what goes wrong with markets. And what goes wrong with markets is asymmetries of information. We also know from behavioural economics, if there’s one thing people are really really bad at, it’s planning for the future.

I don’t think the danger is they’re going to rush and splash it all out on something stupid. But the danger is they will not know how to decumulate. And the trouble with the chancellors’ proposals is, he’s destroyed an insurance principle -based argument which is a good one, but he’s not put anything in its place. He’s thrown away the risk-sharing baby with the market-failure bathwater.

I don’t trust people not to be ripped off. If we trusted people there wouldn’t be any rip-offs

World Finance: Well you’ve got a plan that you think would be ideal for pensioners in the UK, and that includes collective decumulation. Tell me what is that all about?

Nigel Stanley: Well with collective DC, the advantage is that you pool longevity risk when you retire, but you also share out the gains and losses of investment both when you’re saving and when you’re decumulated spending, so that you can guard against volatility, but still take some risk in your investments.

World Finance: The government is moving forward with their sweeping reforms; how do you propose that they now reassess what they’ve put in place?

Nigel Stanley: What the chancellor has done is create a vacuum. I would rather that we built patiently and constructively, but I think it’s up to unions, it’s up to responsible people in the pensions world, it’s up to employers to work together to put something in its place. Now the government – actually it’s probably fair to say another bit of the government – is also keen on this collective DC approach I’ve described. And we are going to get a change in the law to make it easier to do that.

And it works in other countries. It works for employers, because we’re not asking them to take on extra risk. It works for members because they can smooth their returns and take the risk out, the volatility out, that they don’t like. And it provides them with a better income in retirement than the DC that we’ve introduced following the automatic enrolment of everyone into schemes. Which is progressive, but the schemes could probably be made better by this risk-sharing approach.

World Finance: Well thank you very much for joining us today.

Nigel Stanley: It’s been a pleasure, thank you.