Kevin Brown: Light amid the darkness

Listen to this article

00:00
00:00

Are we all being unduly pessimistic about pensions? I don't mean the health of the system, which is obviously moribund, but the prospects for getting the kind of radical change required to revive it.

So far, the barriers to change have appeared pretty strong. Andrew Smith, the former pensions secretary, demonstrated why in a lacklustre green paper a year ago that simply refused to recognise that there is a problem. Gordon Brown, the chancellor, has stuck rigidly to the line that the only real problem lies in raising the incomes of the poorest pensioners, which he has in part achieved through his pension credit (though something like 30 per cent of eligible pensioners have not claimed it). Brown has been unwilling to engage with critics who point out that the means testing that goes with the credit is a big savings disincentive for low-to-middle earners.

Now, though, the logjam may be breaking. Most people will have noticed that Tony Blair acknowledged an undefined need for change in his Labour party conference speech in Brighton, while Alan Johnson, the new pensions secretary, floated the idea that means testing may have to be reduced. The most important conference aside may have come, though, from Malcolm Wicks, the junior pensions minister, who suggested at a fringe meeting that the pensions credit was only a short-to-medium-term policy. There are also rumours that Ruth Kelly, the Cabinet Office minister who is reviewing pensions policy for Blair, may be more sympathetic to the argument that pensions policy is in crisis than she was in her previous incarnation as a Treasury minister.

Taken together, these developments suggest that the tectonic plates are moving under the government. But there are also signs of a growing consensus elsewhere around a basic framework comprising a higher state pension, more saving (whether compulsory or encouraged thorugh the tax system) and longer working lives. When the CBI and the TUC not to mention the Association of British Insurers, the National Association of Pension Funds and both the Conservative and Liberal Democrat parties find themselves on the same ground, it is clear that progress is being made.

Of course, Brown remains to be convinced. But the white smoke from the pensions department may signal that he is willing to be convinced. Certainly, it is in his political interests to resolve this issue before he takes the helm from Blair, if he ever does. Kelly could be a key player in this. If she changes her mind, and if means testing can be presented as having done its job, Brown may feel able to follow. If not, Blair may have to show some of the leadership he speaks about so often.

Panic roomAnother week, another set of doomsters warning of disaster in the housing market.

This week the pack was led by Neil Woodford, the star fund manager at Invesco Perpetual, who forecast a 40 per cent fall in prices over four years. Merrill Lynch, the investment bank, also suggested that prices might fall for the next four years before rising in 2009.

I take Woodford's view very seriously. He is concerned about the build-up of consumer debt and the potential for a big cut in spending as interest rate rises bite. His funds are heavily invested in defensive stocks, and he is steering clear of housebuilders and other consumer-sensitive sectors. Unlike most of the housing doomsters, Woodford stands to make or lose a lot of money if he gets this call wrong. Like the prospect of hanging, such pressure tends to concentrate the mind.

Yet Woodford has been wrong before, at least in terms of timing, and he could be wrong about housing. Looking behind the headlines, I see nothing yet to undermine the consensus industry forecast that housing will achieve a soft landing. This week's house price indices from Halifax, Nationwide and the Financial Times confirmed that the slowdown that began in the early summer is continuing. Even Merrill very sensibly hedged its bets by issuing a range of forecasts, each with a probability attached, that allow for any outcome between a sharp fall and a steady increase.

It will be some time before we can tell whether the slowdown will turn into a crash, but expect to be terrified out of your wits on a regular basis over the next few months.

Leaflet dropThe insurance industry deserves congratulations for distributing copies of a new fact sheet on contracting out of the state second pension to 6m people who have bought personal pensions. The pamphlet has even won an award from the Plain English Campaign, which is no mean achievement in the context of this fiendishly complicated subject.

Whether it will be much help is a different matter. The basic facts have been clear for a long time. Egged on by the then Conservative government, millions of people opted out of the old State Earnings Related Pension (Serps, now renamed the State Second Pension) in return for national insurance rebates paid into private pension funds.

At the time (at least for the early leavers) it looked a no-brainer: personal pensions seemed likely to pay out much more than would be available through Serps. The stock market collapse put paid to that, however, and the impact of falling investment returns has been magnified by rapidly increasing longevity and falling annuity rates.

The issue for those who contracted out is whether to call time on the experiment and contract back

in again. For many, this will be a sensible option especially those who are approaching retirement and whose funds will therefore have insufficient time to benefit from any market recovery.

But it is not a simple calculation. Advice will be needed, and it may be hard to find; financial advisers will not, of course, receive a commission for recommending that clients opt back in. On top of that, we are clearly entering a period of potential reform in the pensions framework. That means that the risk of the government screwing you by changing the system just after you've decided what to do is even higher than usual.

The ABI leaflet will help, but it won't provide easy answers. And it has

to be said that at least part of the motivation appears to be growing fears among the life and pensions companies that they will find themselves facing a raft of mis-selling allegations for encouraging clients to opt out in the first place. A few of the big companies have already warned customers that they should be thinking about what to do, but others are plainly motivated by fear. The Commons Treasury committee set lots of life executives' hearts fluttering when it bashed the industry for failing to warn endowment customers that they might face problems.

The leaflet will help to deflect that sort of criticism, but it may yet turn out to be too little, too late.

kevin.brown@ft.com

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.