As I watch everyone frothing with excitement over the Chancellor’s reforms to the pensions industry, I can’t help but be reminded of the Gramm-Leach Act of 1999.
Like George Osborne’s pensions reforms yesterday, this piece of American legislation threw out an ancient, outmoded, unpopular piece of legislation. It modernised an industry. It was greeted with cheers among most major analysts. And those who warned that it could be imprudent were derided as fusty naysayers.
In the case of Gramm-Leach, the effect was to repeal Franklin Roosevelt’s Depression-era reforms of the American banking system – but you see my point. After a period of between 50 and 100 years the public consciousness often forgets the point behind certain regulations. In 1999 the idea that investment banks and consumer banks should be separate looked outmoded and economically damaging.
In 2014 the idea that consumers should be compelled to turn their pension pots into an income rather than spending it as they see fit seems similarly archaic. But there was always a point behind this principle, which has been in place for almost a century. Left to their own devices, people can often underestimate how much money they need to set aside to live a comfortable life in the future. There is plentiful behavioural economics evidence to support this.
There is no doubt the annuity system has been a poor example for long-term saving in recent years – quantitative easing has pushed down the interest rates on the income you receive with them, so many people have seen pretty big pension pots converted at the point of retirement into a piddling income. And the arbitrary nature of the process – that what matters is the state of the market when you retire, and that you will be locked into the consequent income for the rest of your life – clearly showed that the system was not working.
All the same, I find the change rather unsettling. Managed well, the reforms should help people enjoy more prosperous retirements. People may even save more as they won’t fear the money being locked up in the future (though it’s just as possible some people splurge the money and end up in hock in their final days).
Certainly, the reforms will, as I mention in The Times today, boost consumption and will even lift the Treasury’s fiscal fortunes, although only in the short-run.
But let’s not lose sight of the fact that we are witnessing a profound change in pensions provision in the UK. Modernisations – however well-intentioned and however well-received – can sometimes turn bad. My point, I suppose, is that it’s far easier to dismiss these old, fusty regulations rather than consider that they were there for a reason.
That’s not to say they are perfect, or don’t need profound reform (which they do). But we should do so with a large dose of caution.
Just look at the United States, where the modernising, pioneering Gramm-Leach bill is now blamed for encouraging the creation of the too-big-to-fail banks which ended up toppling the financial system.