Posted by Jake on Sunday, October 02, 2011 with 13 comments | Labels: Article, banks, British Bankers Assoc, Miliband, Osborne, pensions
“Let me tell you what the 21st century choice is: Are you on the side of the wealth creators or the asset strippers? The producers or the predators? Producers train, invest, invent, sell. Things Britain does brilliantly. Predators are just interested in the fast buck”
Fast buck? What’s the speed limit on a buck? How can you tell a fast buck from one doing the statutory 30 miles per hour? The predators themselves know they have nothing to fear from yet another empty crowd-pleasing political promise. Promises made by Labour, Liberal, and Tory alike, all to pledge to the ordinary ripped-off British voter that they would do something if only they could. Predator and politician know there is always a commentator ready to say on air, online, and in print how hard it would be to separate the producers from the predators, and how it would never work, and that it would do more harm than good in any case, and regrettably it would be best to leave things as they are.
Of course these commentators aren’t speaking to Producers, Predators, or Politicians. They are speaking to us ripped-off Britons. They speak to convince us that nothing can be done, and we should allow ourselves to be preyed upon in the greater interests of the nation. Politicians and predators rely on this, to provide cover for political inaction and continuing predatory depredations.
It is of course true that many companies fall somewhere in between being clearly "good producers" and despicably "bad predators". However, using this fact to block any action is just a weak, though generally successful, attempt to disguise the fact that there are clear unambiguous villains out there. Just because the whole business world doesn’t need a mighty smack, doesn’t mean there aren’t specific rotten rip-offs that do need to be caned and expelled.
A perfect example of an unconstrained predator, a predator who for decades has paid protection money in the form of taxes and levies to successive governments for its licence to continue freely predating, is the pensions industry.
The key characteristic of a successful predator is the ability to sneak around unnoticed until it has got its prey by the throat. The Pensions Industry is master of this form of ambush-predation. With gentle sounding charges of 2.5%, much less than the 15% service charge you pay when you go for a restaurant meal, the pension funds can grab nearly half of a lifetime's savings. Something you may only realise when you get the letter announcing your pitifully disappointing pension, discovering too late the jaws of post-retirement poverty that have been tightening on your throat for the previous 40 years.
Bitter battles are being fought between public and private sector employers and their staff over reduced pensions, higher employee contributions and increased retirement ages. A battle fought in an attempt to:
a) enlarge the size of the pension pot: by increasing the rate of contributions, and making people work and contribute longer.
b) reduce the amount the pension pot has to pay the retiree: by scrapping ‘final salary’ schemes, moving the inflation link from RPI to CPI, and moving the remaining ‘final salary’ schemes to ‘career average salary’ linked payments
c) reduce the number of years the pension has to be paid to the retiree: by making the employees work a few more years, thus spending a few less years collecting their pension in retirement before shuffling off to the next world/incarnation/ash-cloud/worm’s belly.
If politicians were actually serious about dealing with predatory companies then all the above can be solved with a stroke of a legislative nail-file, by blunting the claws of the predatory pension providers. As we will now demonstrate in an adult-friendly graph, people can get bigger pensions and retire years earlier if charges made by pension funds are slashed. After all, those charges go to pay the bumper bonuses – so this will not only alleviate pensioner poverty, but will also start to deal with excessive pay.
So, how many extra years do you have to work to pay the fund management charges on your pension?
As can be seen from the table above, taken from the UK government's online "the money advice service", reputable pension providers charge between 0.5% and 2.5% per annum to manage your pension fund. And here's the ambush.
- An annual 0.5% charge takes a reasonable sounding 13% of your final pension pot compared to what you would have got with no charges at all.
- An annual 2.5% charge takes a growling, hissing, slashing, biting, squeezing predatory 50% of what would have been your final pension pot!
The graph represents someone saving £100 per month, with an investment return of 6%, with each line representing a different charging rate. The difference between a 0.5% and a 2.5% charge is about 9 years of additional work to get the same sized fund. At current annuity rates, a £100,000 fund will get you about £6,000 per year flat rate for the rest of your life, and much less if it is indexed. For each £100 per month you save you would build £100,000 in about 31 years on a charge of 0.5%, but it would take you over 40 years on a charge of 2.5%.
If you were happily on the 0.5% charge and decided to work the extra 9 years in any case, you would build up an extra £70,000 in that last 9 years.
It is said that we can't target all predatory companies, because some companies aren't unambiguously and solely predatory and could be unfair if they got caught up in the net.
Maybe so. But that doesn't mean those companies that are clear and present predators can't be brought to heel. This is not anti-business, it would make business better at what it claims to do. And it would make us ripped-off Britons, who are after all the predators' prey, a little less ripped-off.