In its report Rethinking Pensions ^{x x} the EEF states that:

"We need to find a way through the risks, regulation, sheer complexity, and drain on management time that, combined, inevitably mean that some employers are deterred from providing pensions for their employees and which are causing many others to question their current involvement." (Introduction)

It proposes a "second tier pension" which is "a new national scheme of investment funds". All employees will contribute an initial 2% of earnings rising to 4% over 10 years. There will be a "central clearing house" and "an independent body, separate from government" which "appoints providers to run these investment funds". I go further and propose that an institution should be established which:

has members and is owned by the members,

is controlled by trustees,

manages investments in-house or by mandates, always retaining ownership,

keeps track of who owns which units,

corresponds with unit holders,

provides annuities and income drawdown plans.

Summary: Establish new institutions which are independent of the government and the financial industry.

Adair Turner said:

"We know that simply compelling people to save doesn't necessarily fix the cost efficiency problem. Australia again is a case in point. They have compulsory savings, but high annual management charges." ^x

The Australian Industry Funds ^x say they "charge low fees". But like stakeholder charges there seem to be further fees. For example in the case of the Retail Employees Superannuation Trust: "Asset based fee" is 0.1% per annum. ^{x x} However there are "investment management fees", ^{x x} and apparently further fees.

The efficiency problem needs to be addressed first, and then compelling people to save may be part of the solution. Compulsion is probably unnecessary if there are incentives to stay in and the requirement to opt out.

A problem with compulsion to save is, who does the money go to? The government is not trusted sufficiently and the financial industry is less trusted. Occupational pension schemes are trusted. But only a decreasing minority of employers have such schemes. This indicates the need for new institutions independent of both government and the financial industry. But then who is in charge? The EEF is a start.

Summary: Compulsion may not be necessary with sufficient incentives and the requirement to opt out.

4. Collection mechanisms

In the report of the DWP Principles for reform (2005) one of the "major issues on which there is a need to move forward to more of a national consensus" is:

"Given that individual savings products have fixed costs, is there scope for harnessing the power of the State through collective products run through central or local collection mechanisms to help secure lower charges for savers? Might such a product on an auto-enrolment basis help more people to save?" (page 18) ^x

If the "collective products" are "products" of life assurance or fund management companies, then this seems like the government acting as a salesman for the industry, which is surely unacceptable. The cost of their sales is considerable. Ned Cazalet said to the Treasury Committee:

"For those life assurance companies that are still writing new business and they spend money on a daily basis, the life assurance industry in aggregate last year spent £7 billion on trying to procure new business." ^x

If the "collective products" are not "products" of the industry, what are they?

Summary: There need to be efficient collection mechanisms.

5. Choice of fund and fund manager

I hope that we are not heading in the direction of a choice of funds scheme like the Sweden Premium Reserve scheme, or the Australian choice of fund legislation. "More choice means lower returns":

"TERs tend to increase as the number of options increase. So, essentially, Australia's superannuation system has evolved into an industry in which the main product is not investment expertise, but range and complexity of choice." ^x

On this website I have been enthusiastic about the Danish ATP sheme, which does not have a choice of funds and is much less expensive. There could be a choice of funds which are more or less risky. The EEF recommends a "limited choice of investment funds." ^x But nevertheless, in my opinion:

Summary: There should not be a choice of funds, at least for younger members.

6. The need for a new approach

The government's "informed choice initiatives" ^x "to help individuals to understand financial choices". Encourages individuals to do deals in markets, helped indeed by the FSA which is "helping consumers shop around for the best deal". ^x Investors do not generally know whether they have obtained a good deal until years after the purchase.

The new range of stakeholder products (formerly called Sandler products) were widely predicted to flop. ^{x x} as indeed they have done. ^x

Individuals are in no position to negotiate charges.

Are there going to be endless attempts to restore confidence in long-term savings like the report of the Treasury Committee Restoring confidence in long-term savings (2003)? This has a section 4 Aligning savers' and industry interests

"Fundamental changes are needed to provide better alignment between the interests of the industry, at all levels, and consumers." ^x

This seems like trying to put a square peg into a round hole. The industry for long-term savings, that is the industry which is regulated by the FSA, makes its money from actions which disadvantage savers, especially the charges, fees, levies etc which pay for in particular, as discussed in the report: senior management remuneration, ^x marketing, ^x regulatory costs ^x

There is a table in the report showing medium and long-term savings with the industry has 50% of the savings market (7 + 13 + 8 + 22).

Table 1

UK savings market (as at end 2002)

Type of saving	£ billion	%
Occupational pensions: insurance schemes	196	7%
Occupational pensions: in-house schemes	588	22%
Personal pensions	333	13%
Medium and long-term savings: insurance company products (e.g. bonds)	226	8%
Medium and long-term savings: other products (e.g. unit trusts)	576	22%
Deposits and cash	743	28%
Total	2662	100%

Source: Treasury Committee x

As discussed on this website the proportion of funds in in-house occupational pension schemes has been declining. If they are not replaced by new institutions, they may continue to decline until all unitised long-term saving is with the financial industry regulated by the FSA, and we will continue with the various problems discussed on this website and in the report of the Treasury Committee, such as Proliferating Peripatetic Pensions and closed funds.

The government is continually devising new "products" for the financial industry, that is the firms regulated by the FSA, such as stakeholder pensions and Child Trust Funds. ^x These put people to the trouble of choosing and keeping track of a "product". Their funds are likely to be eaten away by inflation if in a cash deposit account, and by charges if linked to shares. Much of this website is concerned with the excessive costs and charges of the industry. These result from funds being looked after by businessmen rather than by trustees. There needs to be a different approach from just endlessly divising "products" for the industry: a) establish new institutions controlled by trustees, b) help people to have share portfolios.

6.1 New institutions

Capital can be quite inexpensive to administer. Occupational pension schemes have trustees. The green paper Simplicity, security and choice (2002) gives the cost of administration of occupational pension schemes:

"For the largest schemes (those with over 40,00 members), the average administration cost is around £ 28 per member a year. For smaller schemes (those with fewer than 500 members), the cost is around £ 80 per member a year." (page 129, paragraph 10)

This is far cheaper than the stakeholder 1.5% of capital per annum. Over the 18 years of Child Trust Funds, 1.5% amounts to 23.8% of the initial capital. Often quoted on this website as an example of an efficient scheme is the Danish ATP scheme:

"Pension activity expenses amounted to DKK 27 for each member, while investment activity expenses were DKK 16 per member." ^x

6.2 Do-it-yourself

An increasingly popular method of investing is the high yield portfolio (HYP): ^x

"It is thirteen years since I opened my first personal pension with an insurance company (National Mutual as it happens). Ever since then I have been perennially disappointed with the thing because it has never, ever got bigger than the gross tax relieved contributions that were made to it. The cumulative charges always seemed to be slightly higher than the growth - and there wasn't much of that.

Finally last Christmas, after much soul searching I cashed all the myriad of policies in, took the transfer cost hit and moved the whole lot to a SIPPdeal SIPP. I then invested it in a HYP standing all the dealing costs in the process.

Today, a mere nine months after starting the HYP SIPP I have finally achieved a pension pot that is worth more than the contributions that went into it - and that's before all the dividends come flooding in this month." ^x

The HYP concept is supported by academic studies showing that a wise investment policy over the years has been to invest in larger companies chosen simply from the size of the dividend. The increasing popularity of HYPs is a kind of wider share ownership. This is different from the sale of shares resulting from privatisations to millions of people, each person being allowed only a limited number.

Do-it-yourself is only suitable for a minority of people who: a) are more wealthy and, b) are not phobic ^{x x} and, c) are not too busy with other responsibilities.

Summary: People who are less wealthy or more phobic or more busy, should not need to do deals in financial markets.

September 2005