Message to the Pensions Minister: You cannot improve things by distorting free markets

The Daily Telegraph reports today that:

  1. About 60% of private sector pension schemes “have clear rules” entitling retirees to annual increases in their pensions in line with RPI (Retail Price Index);
  2. RPI is presently increasing at an annualised rate of 4.5%. The Government´s new price basket – the Consumer Price Index (CPI) – is presently growing at 3.2% per annum.
  3. Steve Webb, our Pensions Minister, is today publishing a “Consultation Paper” which appears to be a precursor to legislation to override the contractual provisions of such pension contracts. If the proposal is adopted, pension trustees will be able to substitute the term “CPI” for “RPI” in these agreements.

I have not read the Consultation Paper, but I would hazard a guess that the thinking behind this initiative lies in the belief that our business environment will benefit from this measure since many funds are technically insolvent, or close thereto. Business needs this sort of government help and, net net, we will all be better off.

As readers of any of my previous articles will know, I do not pretend that our economy or banking system is looking particularly healthy. However it seems obvious to me that the root of the present problems lies in the original distortions to the banking market in particular, and a raft of other economic clunking fist intrusions in other sectors.

When will our new leaders stop following in the footsteps of the Old Labour belief that the Government can regulate and legislate to fix the economy? Does our Government believe that the best of all worlds is one in which a civil servant interferes in every limb of business?

Many pension funds are insolvent. This is not a post-’08 crash problem. For decades actuaries have been optimistically under-estimating longevity of cohorts of retirees and the soon to be retired.

But a pension fund is no different from a stand alone business, it has shareholders, debtors and creditors. It is run by managers. Should it flirt with insolvency the present laws encourage negotiated solutions among its stakeholders. If a deal cannot be agreed then all sides know liquidation can be invoked. What is wrong with this legal template? How does Mr Webb come to think that there is a problem here to be addressed by further laws?

The proposal also grabbed my attention for another reason. Its authors assume that the present positive differential between the growth rates of RPI and CPI will continue for decades.  I noted the bland reference to “Treasury forecasts” as some sort of authority. Goodness me! Have our new ministers learnt nothing in the 7 months since they inherited responsibility for our Civil Service?

As a believer in social cohesion I am also deeply concerned. The unions are belatedly waking up to the reality that the banking bailout of ’08 was a mistake, that its only long term effect will prove a mass transfer of wealth from workers and taxpayers to bankers and holders of bubble assets, whose prices remain artificially inflated by continued government market distortions.

If Mr Webb wants to be remembered as the Minister whose actions proved the final straw before a wave of strikes and civil disorder gripped Britain in 2011, he should press ahead with his proposal.

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One reply on “Message to the Pensions Minister: You cannot improve things by distorting free markets”
  1. says: lola

    Mr. kerr, yes to all that.

    Working in retail FS we have seen for years how successive governments have tampered with pensions rules and always to the ultimate disadvantage of all ‘stakeholders’ (yuk) but most of all to members. The law of unintended consequences is nowhere better demonstrated in pensions legislation.

    Personally I would scrap all defined benefit schemes and have only defined contribution schemes. This would have untold benefits to society. For example true savings would be available for investment. Pension savers would know the value of their fund. There would be no actuarial mumbo jumbo. It would connect everyone to the success or failure of UK plc. (I would especially apply DC schemes to state employees – they are the most disconnected from reality of all employees).

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