Here is a little calculation you can do about what happened to our pensions. We have been through a generation where the British system of occupational pensions all but disappeared as a reliable prop for retirement, and where the institutions created to make it possible to have that comfortable retirement have all but disappeared too - partly thanks to over-regulation, partly thanks to an outrageous and disastrous political fix.We have entered a new world where people save less than half as much as they used to for their retirement, and where they are systematically fleeced by the financial sector – providing them with future retirement incomes at least 20 per cent and sometimes 70 per cent lower than they were.
And despite all this, hardly a word has been heard in complaint, and I explained why in my book Broke: How to Survive the Middle Class Crisis.
What we have instead is 'defined contribution' personal pensions. Here's the difference (and I'm indebted to Morris and Palmer for their calculations here). The old defined benefit pensions used to take a mixture of contributions from you, your employer and the government amounting to of about 22 per cent of your salary. For personal pensions, which define your contributions but not what you get out (defined contribution), the average is only 9 per cent – even though you might be paying exactly the same amount into both schemes. Big difference.
It means that if you pay into a personal pension for forty years, you will get out 41 per cent of what you would have got from a defined benefit occupational pension. But then an implacable arithmetic kicks in. For the personal pension, there are entry and exit charges. There are annual management charges and other hidden charges, some explicit, some not. Imagine that the annual charges are around 1.5 per cent a year. It seems like an insignificant amount, but it builds up implacably. For many people, 1.5 per cent a year over forty years will eat up almost half the contributions you make into your pension pot – a whacking £45,000 from payments of £108,000.
Then there is the cost of an annuity - which thanks to the Lib Dem pensions minister Steve Webb, you no longer have to buy - which is 10 to 15 per cent higher for people in personal pensions. The terrifying conclusion is that your pension will be about a quarter of what it was if you had paid into an old-fashioned occupational pension. A quarter. That is a huge difference, and not one that was ever mentioned during that whole debate a generation ago.
And despite all this, hardly a word has been heard in complaint, and I explained why in my book Broke: How to Survive the Middle Class Crisis.
What we have instead is 'defined contribution' personal pensions. Here's the difference (and I'm indebted to Morris and Palmer for their calculations here). The old defined benefit pensions used to take a mixture of contributions from you, your employer and the government amounting to of about 22 per cent of your salary. For personal pensions, which define your contributions but not what you get out (defined contribution), the average is only 9 per cent – even though you might be paying exactly the same amount into both schemes. Big difference.
It means that if you pay into a personal pension for forty years, you will get out 41 per cent of what you would have got from a defined benefit occupational pension. But then an implacable arithmetic kicks in. For the personal pension, there are entry and exit charges. There are annual management charges and other hidden charges, some explicit, some not. Imagine that the annual charges are around 1.5 per cent a year. It seems like an insignificant amount, but it builds up implacably. For many people, 1.5 per cent a year over forty years will eat up almost half the contributions you make into your pension pot – a whacking £45,000 from payments of £108,000.
Then there is the cost of an annuity - which thanks to the Lib Dem pensions minister Steve Webb, you no longer have to buy - which is 10 to 15 per cent higher for people in personal pensions. The terrifying conclusion is that your pension will be about a quarter of what it was if you had paid into an old-fashioned occupational pension. A quarter. That is a huge difference, and not one that was ever mentioned during that whole debate a generation ago.
Because the debate in 1985, leading to a huge battle in government between Norman Fowler and Nigel Lawson, ended with the 1986 Pensions Act and the advent of personal pensions. Partly because of the row, the personal pensions project - designed as a kind of Thatcherite antidote to 'socialist' collective pensions where you share risk - excluded some kind of combination of the two: shared risk but also portable.
Unfortunately for the middle classes, they believed that the pensions industry was still a middle-class institution and fundamentally on their side. Nothing could have been further from the truth.
The problem was that, deep down, politicians of both the Labour and the Conservative parties hated the pensions industry. To the Thatcherites of the 1980s it looked like a form of corporate socialism. To the Blairites of the 1990s it looked like a corrupt form of capitalism. The temptation for Gordon Brown as Chancellor in 1997 was too much, and he raided the so-called ‘surplus’ with a £5 billion tax (a precedent set originally by Lawson himself).
In the mid-1960s, just over 8 million people were in company pension schemes, so-called defined benefit schemes, which meant that they were protected by sharing the risk and knew what kind of pay out they would get – usually two thirds of their final salary. Nor would they have to worry about annuities or investments.
For all the good intentions of Norman Fowler, the pensions industry never tried to recreate something along the same lines for a wider mass of people – leaving individuals increasingly at the mercy of the industry.
Far from innovating to reproduce effective and secure pensions for everyone, they provided a means by which individuals could gamble away their savings. Far from providing a choice of charges and competitive rates, the industry colluded within itself to keep charges high and to obscure information about their real costs.
So when we look back on the coalition years, it seems to me that - very quietly in the background - one of the heroes will be the pensions minister Steve Webb. It helps of course if the minister happens to be one of the nation's experts on pensions, but don't let's pretend that any of this is easier - especially in a department shaped by those two ideologies.
His work to release people from the grip of the financial services industry over annuities is now being followed by the introduction of 'collective' pensions, which define the contribution like personal pensions, but allow you to share risks and rewards with other members. It is an absolutely vital reform.