NESTing in the Wrong Tree: Worries about the New National Pension SchemePosted: June 19, 2012
Modern pensions don’t work unless there is economic growth. The whole idea of investing in a pension fund is to earn a return that exceeds the annual charges levied by the fund managers. In a low-growth world pension saving is of dubious benefit, and in a zero-growth world I would argue that investing in a conventional pension is pointless, unless you want to act as a benefit society for pension professionals.
From October this year in the UK, the phased introduction of auto-enrolment starts. The process begins with the largest employers and ends in 2017 and 2018 with the smallest and with new businesses. Employees will be able to opt out, but employers are forbidden from trying to persuade them to do so.
A new organisation, the National Employment Savings Trust (NEST), has been set up to offer ‘low cost’ pensions, particularly for employees whose individual contributions are small. For the first five years, until the end of September 2017, employers have to contribute 1% of each scheme member’s annual salary in the band £5,715 to £38,185. The total contribution, from employee, employer and from tax relief on the amount paid in, must be at least 2%. For someone earning £12,000 a year, the employer would pay 1% of £12,000 minus £5,715, which is £6,285. One per cent of this is £62.85. Double it to 2% to include the employee’s compulsory contribution and tax relief on the contribution, and we get to £125.70, or the price of one meal for two in a smartish restaurant (so I understand).
Now consider the deductions. NEST – a comfortingly reassuring name – will charge 1.8% per contribution plus 0.3% of the fund annually. If you pay in £125.70 you pay £2.26 and if there is £500 in your fund at the end of the year you pay a further £1.50, total £3.76, which is the growth you need to cancel out the charges.
Returns in NEST are not guaranteed. The managers may hope, expect, aim, assume, that growth will exceed charges, but they don’t know. It is certain, though, that the charges will pay them pretty much regardless of fund performance.
Contributions are due to increase to a total of 5% in 2017-18, when the employer must pay in 2% of salary within the mandated band, whatever it is by then, and from October 2018 the total rises to 8%, with the employer paying at least 3%.
To me, NEST is little more than a mechanism for forcing low- and middling-paid workers, small businesses and ourselves as relief-granting taxpayers, to subsidise the financial services industry, which is not the outcome most people would want.
BNY Mellon publishes annually the average performance figures for UK pension funds. In the five years to and including 2011, funds recorded an average real rate of return of 0.7%, after deflating in line with the Retail Prices Index. In the 10 years to 2011, the average real rate of return was 2.5% a year, but this period included the pre-2007 booms fuelled by consumers utilising bonanza credit.
Even 2.5% a year before charges would not be enough to persuade me to start pension saving (were I not too old already) because charges would slice away most or all of the growth.
The availability of tax relief somehow lends an aura of respectability to pension saving, as if government were acting as some sort of guarantor. I believe it is time to phase out tax relief as we consider how to prepare financially for old age in the era of zero growth.
The realisation that continuous growth in a finite world is impossible is at last emerging into the mainstream. Tim Jackson’s Prosperity without Growth: Economics for a Finite Planet* is, I think, a good example of a text with the capacity to change minds, a distant vision of a society in which exploitation has been replaced by stewardship. There is an obstacle course of Grand National proportions to negotiate first, doubtless with many fallers and some fatalities on the way. Pensions as we know them are not going to make it to the finish line unchanged, and part of me hopes that NEST will be withdrawn before the race starts.
Instead, we have to think about ‘retirement’ not as an event but as a gradual process, in which “the Cinderella economy”, as Tim Jackson calls it, plays an important part. The Cinderella economy is composed of local and community-owned enterprises for which the guiding principle is improvement of the quality of life for all, not the resource-exploitative pursuit of short-term cash profits. If we can create community organisations in which cash and barter credits can be circulated locally, we also create opportunities for people of all ages to receive moderate wages without subjecting them to the constant demands to improve productivity, which are endemic in large commercial organisations in their pursuit of added value.
The pensions industry would probably assert that every penny of pension saving is needed to invest in productive ventures to keep the wheels of global commerce turning. If only that were true, but the wheels are breaking off around the over-indebted periphery of the European Union, from Ireland to Italy, Portugal to Greece, and elsewhere the wheels are pulling away container upon container of irreplaceable fuels and minerals to be turned into disposable products and pollution.
A pension has come to mean a personal truckload of cash, converted into income to pay living costs once wages stop. A pension could also mean a place within a community much more concerned than at present with providing its own food, energy, housing and care.
If we stick to traditional pension plans like NEST, the managers will have no option but to invest in damaging extractive industries, polluting processes and high-interest bonds issued by desperate companies and countries, as they chase growth. Better, I think, to develop more inclusive mutual organisations in which pension saving is plain saving, rather than investment seeking growth, and also local economies in which rewarding occupations for the fit elderly and care for the infirm elderly are accorded far more importance than they are today.
*Prosperity without Growth is published by Earthscan, paperback edition 2011, ISBN 978-1-84971-323-8.