Pensions for the people: addressing the savings and investment crisis in Britain

The Government’s policy of auto-enrolment and personal accounts represents a big opportunity for UK savers, but the scheme must be extended to cover pension payments above £3,600 if it’s going to have a major impact. By limiting pension payments to £3,600 many savers will be forced to open private pensions that charge exorbitant costs (often up to 40 percent of the value of their pension).

‘A long, healthy and happy retirement’ is what everyone wishes for themselves and their loved ones. A decade ago this was a reasonable prospect for most families: at the time, a combination of final salary pension plans and house price inflation masked inadequate levels of personal savings by millions of British households.

This is no longer the case. One of the least generous state pension plans in Europe will not be able to bridge the savings gap. The public coffers have been drained by the need to bail out Britain’s high street banks.

The willingness of individuals to save and of companies to use that saving to invest in profitable projects is at the heart of a successful modern economy. We entrust our savings to those who claim the expertise to manage them. A chain of agents takes our money and invests it in those areas of the economy that should be the most productive.

There are two reasons why the investment chain is so significant in a capitalist economy. First, because it should allow cost-effective investment in companies; agents select the best companies to receive funds in order to get the greatest returns, which can be passed on to the saver. This, of course, requires that the agents in the investment chain do not add unreasonable costs. Second, the investment in shares should mean those who raise funds can be held to account; it is the shareowner who appoints the board of directors of the company, and therefore ultimately controls its conduct.

But at present, neither of these goals are being realised. The cost of the investment chain has been rising, reducing returns to savers and/or raising the cost for investors. And the governance of our companies is widely seen to be inadequate; we have, as the City minister would say, “ownerless companies”. As Adam Smith would have reminded us, and as the current financial crisis would attest, that is a recipe for “negligence and profusion”.

We believe this situation can be remedied. A combined effort from private, public and social spheres can generate new institutions that will ensure the management of our savings in a way that is cost-effective and begins to call to account those responsible for managing our companies, and our financial institutions.

This report addresses three issues

• It shows how we can develop new low-cost forms of savings.

• It shows how these can contribute to a framework for responsible investment. Taken together, low-cost, responsible saving can markedly increase returns to savers and benefit the economy.

• It aims to demonstrate that the financial community is able to provide these services and would be interested in doing so, and it sets out the practical steps needed to establish these new investment vehicles.

These proposals are made possible by the establishment in 2012 of a system of auto-enrolment complemented by a system of personal accounts, and matched funding, for pensions contributions, carried out by NEST (the National Employment Savings Trust).

However, the potential of the personal accounts system could be squandered without small but vital reforms to its current design.

• First, the infrastructure of auto-enrolment and the infrastructure of personal accounts need to be made available to a range of approved providers conforming with basic principles of responsibility and low cost.

• Second, the infrastructure must be available to savers beyond the current savings limit applying to the personal accounts system.

These are relatively simple measures to implement. With these changes there is a good chance we can create a culture of saving and long-term investment in the UK, to the benefit of our economy and our citizens.

The RSA proposes that the infrastructure of the personal accounts system should be made available to a wide range of approved providers that conform to the basic principles of responsibility and low cost.

This report also makes the case for the development of a new type of pension fund that would cut costs by two thirds, increase returns on pension savings by up to 50 percent, and work to ensure companies are run in the interest of long-term owners.