Private pensions industry is an utter failure and needs reform

Amazingly, the private pensions paid in that same year were very slightly less – at about £35 billion. In other words, not one penny of private pensions paid in that year was at cost to the private pension sector: all were paid at cost to the government.

Our guest writer is Richard Murphy, founder of the Tax Justice Network, who regularly blogs on UK taxation issues at Tax Research UK

There’s an item of government spending which has been subject to almost no review, which with only the very smallest of changes, recently announced in the Comprehensive Spending Review, will carry on at its existing level, apparently unchecked and beyond government control, and which amounts to the biggest and most ineffective subsidy to an industry that we have perhaps ever seen.

I’m talking about the subsidy that is given each year by the UK government to the private pension industry. As my research has shown, the total cost of tax relief for pensions in the UK – all of which arise because of the need to support the private pension sector – amounted to about £37.6 billion in 2007-08.

Amazingly, the private pensions paid in that same year were very slightly less – at about £35 billion. In other words, not one penny of private pensions paid in that year was at cost to the private pension sector: all were paid at cost to the government.

This is an extraordinary circumstance. The finding is exacerbated by the knowledge that despite the fact that stock markets have paid no net returns for more than a decade the private pension industry remains dedicated to investing in them, whilst directing less than 15 per cent of their funds to lending to the state.

It appears that as a result of the massive state subsidy they receive the private pensions industry has not learned anything from the radical upheavals seen in the real economy, or in investment markets. What is clear though is that this failure to learn has been at cost to the members of those pension funds – many of which are in deficit as a result – and to the state.

The result is a revelation. What we can see, if we look at the pensions industry in this way, is that the current private sector model of pension supply is hopelessly inefficient. It has required a state subsidy to deliver any return at all – and that return is quite amazingly less than the subsidy received.

Over a decade maybe £300bn of state subsidy (half of all state borrowing immediately before the current financial crisis erupted) has gone into the pensions sector despite which the sum it manages has fallen on at least as many occasions as it has risen even though the scale of private contributions was roughly double the subsidy given and all pensions paid were at effective cost to the state.

There is only one explanation for this phenomenon. The state subsidy for private pension contributions is very clearly being captured by the pension industry and its related elements in UK banking and insurance companies to be claimed by them as fees that have massively supported the profits they make, whilst leaving those who might be dependent upon UK private pensions at risk of poverty in retirement unless the state continues to subsidise their pensions to the extent of a £1 subsidy for each £1 of pension paid.

As an intermediary the UK private pension industry is an utter failure: it adds no value at all in this process according to this evidence. That suggests that now is the time for radical reform of pensions. The proposed new National Employment Savings Trust (NEST) pension scheme to be introduced in 2013 will not be the answer. It was built on the foundations of the Turner report, which was written before the financial crisis erupted, and which assumed that the financial markets would pay increasing returns for ever.

What are those solutions? Well, first I make clear that I’m not asking for a withdrawal of pension tax relief. I think that would be unwise and create far too much disruption to the pension industry. But a subsidy of about £38bn a year from the UK government should have conditions attached.

Fundamentally that condition should be that a significant proportion of all pension contributions should be invested in ways that ensure that the funds entrusted for pension investment are used to create new jobs – with a bias to the UK to the greatest degree possible within the constraints of EU law.

This would mean that the funds in question would have to be invested in new share issues by companies that could show that the proceeds of the share issue were to be used to create new products and employment; in bond issues such as those Colin Hines and I promote to be used to replace Private Finance Initiative (PFI) and to fund local authority infrastructure and for infrastructure funds such as a genuine Green Investment Bank.

If this were to happen then we estimate that at least £20 billion a year of new investment funding would be released into the UK economy. The impact would be dramatic: this is the kickstart that the UK economy needs to get real job creation going again.

The funding is available. The political power to direct it exists. What is required is the will to use it for right purpose. That’s what has to be created.

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