Bee-Mail - 22 November 2010

Why Means-Testing has to go 

Today I'm reproducing the text of a blog posting I placed on the Citywire website recently. It is about the means-testing issue that the Coalition Government says it is about to resolve. As I write this we are awaiting a policy paper on the issue and I have great hopes that some positive steps will be taken soon. Many of the people I have spoken to as I've travelled around the country in the last few months have asked me the same thing; do I think the new Government really will end the problems created by means-tested entitlements for elderly people that act as a real deterrent to saving for younger people? My answer always is that it has to be 'Yes', or the current reforms are bound to fail.

My blog on Citywire was my way of explaining that in the particular way that I happen to write; the text follows here:

There is one question I keep getting asked as I go around the country speaking to financial advisers: will this Government really grasp the nettle and deal with the means-testing issue.

That issue, in case you've been on Mars or somewhere for the last five years or so, is that people who become entitled to means-tested support in retirement stand to lose quite a lot of the value of any private pension savings they have as a consequence. In some extreme cases some people, mainly women (because of the way our system works), could even lose all of the value of their private pension savings. Anyone that happens to would obviously live to regret having saved in the first place if it didn't make them one penny better off than their non-saving next door neighbours.

Government ministers today are for the first time saying they understand this problem and that they intend to do something about it. We are currently waiting to see what that something is.

It is extremely important that the issue is resolved before 12 million employees are conscripted into pension saving through the new pension reforms that start to roll-out from 2012. Employees auto-enrolled into pension schemes through the new legislation will retain the right to opt-out if they wish and that is why the means-testing issue needs to be resolved first. The arguments put forward by ministers over recent years went along the lines of 'Well, it's only going to affect a few people so don't worry about it' and that kind of thing. But I've never bought into that argument.

It's true that not everyone will be affected, but it's also the case that there's no way any one person could know in advance for sure whether or not it's going to be them. That's enough to spook a whole crowd of people into panic.

The new pension system, which we must all hope will be successful, is predicated on the idea of inertia nudging people into saving and keeping them saving. Inertia systems such as this have prospered elsewhere in the world and they should work here too. I think they will as long as there's no chance of people getting spooked by real worries and uncertainty.

The word inertia, of course has two meanings. It can mean that something that is standing still can be very hard to get moving. A default system that puts all employees into pension schemes may thus remain in that state by and large for a long time. If so, millions more of us will save for a pension.

But inertia also means that once something is moving it can be extremely difficult to stop it. What may well start out as an immovable savings culture could quite easily turn into an unstoppable rout if people start to get spooked and opt-out of their pension schemes. If that happens there's no telling where it would end; such a rout could extend to pension schemes that were in place well before the new auto-enrolled schemes came into existence.

That would be a true disaster.

Any of you who, like me, spend what spare time you do have to watch TV watching re-runs of classic westerns will already be aware of the dangers in this. Herds of cattle, put in a field or left out in the prairie will stand around more or less forever held in place by the magic of inertia. The cowboys' role is simply to keep an eye on them and whistle while they're cooking up coffee around the camp fire and that sort of thing. But, and we've all seen the films so we know it's true, you only need a few of the cattle to get spooked and before you know it you've got a stampede on your hands. The fact that only a few are affected by the initial spooking incident is neither here nor there.

That's why the means-testing issue is important...

If you'd like to see the blog posting on Citywire, where you may also add your own comments to the many others already made, you can get to it by following this link here: Without action pensions stampede could turn into a disaster