By Stefan Dunatov
With a new government comes the chance to reassess policy and implement reform. The savings and investment industry needs overhaul; here are some suggestions.
First, design a better savings policy with clear rules that encourage people to set aside significant levels of wealth for their retirement. Then, leave these rules alone so that pension and savings planning doesn’t become an annual routine to reassess what is and isn’t permissible – this task only benefits financial advisers. As a minimum, reintroduce tax relief for all earners or encourage larger pots of tax-free pension savings in any tax year.
Even better would be to extend compulsory auto-enrolment for all employees and include national insurance contributions in workers’ individual pension pots.
Second, design a better investment policy for government that identifies and invests in key infrastructure across the country – especially the rail network and perhaps social housing. Above all, we should make sure that any significant project, from nuclear power plants to bridges to roads, with an expected internal rate of return greater than the cost of government borrowing is assessed and managed properly.
Third, stop the nonsense that governments should act as if they were households and balance their budget. This fallacy is at the heart of some of the most damaging economic thinking in this and previous governments.
Shrinking the government deficit while the current account deficit remains unchanged must mean that either households or businesses save more, which will slow any economic expansion. The government has the capacity to borrow enormous quantities of cash at extremely low real and nominal rates of interest. So long as the projects to which those raised funds are being
invested produce an adequate rate of return, those debts will be self-sufficient and the market will see them as such, so long as the government is transparent about it all from the outset.
Finally, the country faces a serious threat of significant numbers of people retiring on defined contribution pensions that will provide inadequately for their retirement. This has two important implications. Firstly, the government must look at ways to re-socialise the risk of individuals who are either unlucky in when they retire or in how investments have performed during their savings period – or both. We have already written about the latter point and the investment industry must improve its approach to managing savings in a ‘de-cumulating’ phase. The government is able to help with the former issue, though, by offering different types of government securities, such as deferred limited-life annuities linked to inflation or GDP growth, to help supplement or stabilise incomes.
Although the tasks facing the newly-appointed PM are vast, few are as pressing – nor as far-reaching across the population – as pensions.
Stefan Dunatov is chairman of the 300 Club and CIO at Coal Pension Trustees
