Ros Altmann’s pension clinic
The world of pensions can seem dull and boring. Scratch beneath the surface and it becomes a confusing place, with governments forever tinkering with the minute detail of our retirement plans.
In a previous life I worked as a pensions journalist so I know first-hand how complicated it can be.
However, there was always one person who could be depended on to help struggling pensions journalists and in turn their baffled readers. Someone who had the knack of simplifying the complex pensions web and who wasn't afraid of highlighting how a government proposal would affect different people, revealing the good, the bad and the ugly of UK pensions policy.
Step forward Dr Ros Altmann. Despite frequently being in touch with her and shamelessly using all her analysis notes to get to grips with various pension issues, I had never had the chance to sit down with her properly and put the world of pensions to rights.
So one cold, rainy day in May we meet up in central London for coffee. Although she left her job as director-general of Saga in February, she is still busy with other part-time senior roles (she has a meeting with the London School of Economics, where she holds three different positions, after our coffee meeting) and as a media commentator.
While Altmann is great at explaining pensions and campaigning for pensioners' rights, behind the warm and friendly exterior she is also a top economist and investment banker.
With her economist hat on, I ask her about the UK economy and when we might start seeing some good news. "I don't think the UK is still a basket case," she says. "We're not in recession, or depression. The economy is growing, but slowly."
Altmann has not been shy of airing her criticism about the Bank of England's quantitative easing (QE) programme, believing it has had a devastating effect on annuity rates and pension liabilities while also increasing inflation. "QE has helped and damaged different parts of the economy," she reasons. "It is not clear to me that the net effect of QE has been a stimulus."
Her main worry is that incoming BoE governor Mark Carney will be too "gung-ho" and could extend the QE programme. "Although we have headwinds from Europe, there's a good chance of 2 to 3% growth in the UK over the next year. We've already got £375 billion of QE, which is a third of GDP. If we create more QE it will be like good money after bad."
Altmann's view is that the economy must be rebalanced with interest rates rising slowly. "Either you make groups poorer [such as pensioners] or you work out how to cope with slightly higher interest rates."
It is the subject of pensions, though, that Altmann focused on during her academic days and that she still feels most passionate about. It is also where she spies the most challenges: long-term care funding, the pensioner rate of inflation ("about five percentage points higher than the national rate of inflation!" she exclaims), annuities and the political perspective, to name a few.
Talking on the latter, she says: "There is this political view that pensioners are well off and have pots of money they don't deserve. Actually only 2% of pensioners pay the higher rate of income tax. Pensioners need the money they have saved - they are going to have a long retirement. Taking money off them sends a bad message to younger generations."
She is also cross with the government at the way it has sped up the rise in the state pension age. It will increase to 66 by 2020, and while it was originally due to rise to 67 between 2034 and 2036 it will now do so eight years earlier, between 2026 and 2028.
"You've got to give people a chance to plan," says Altmann. "Many women in their 50s are already retired and are caring for others, and to be told you have to wait longer to receive the state pension is unacceptable."
On a brighter note, she is pleased that a simpler flat-rate pension will come into effect in 2016, and agrees with the decision to raise the state pension age. "It should have risen years ago, we're way behind the demographic curve," she notes.
But holding the government to account over looming scandals in the pensions industry is what Altmann does best, and at the moment, she is most worried about annuities. "The process of buying an annuity is better than it was before, but it's still not good enough," she warns.
According to Altmann, the first issue is that most people don't know what an annuity is, the second is that the product is completely inflexible and the third is the charges or commission people have to pay to purchase an annuity. "It's a scandal," she declares.
While pension holders need to become more informed about their rights to buy an annuity from any company they want, websites that have set up to help consumers do this pose a problem, says Altmann. "Websites claim to offer a free service. At the last minute they say they will deduct 3-3.5%, so consumers do pay and it could be the wrong annuity," she explains. "There is a duty on regulators to look after consumers who are looking for an annuity. Consumers are at the mercy of these annuity websites and salesmen."
The Financial Conduct Authority is examining annuity rates and whether insurers help consumers to shop around for the best rates. It is expected to report its findings later this year.
In addition to ensuring consumers are protected, Altmann thinks pensions and annuities should be overhauled and become more flexible to aid pension saving in the UK. "Where do I start? I'd get rid of the word 'pension', apart from the state pension. The word pension is associated with so many scandals and mis-selling. I would keep it simple - you would get your state pension from the government at age x. If you need more you would have personal 'life savings' or 'later-life savings' to give you a better lifestyle in retirement."
In Altmann's world savers would be able to withdraw from their pensions before they retired, perhaps to buy a house, fund long-term care or because they had "fallen on hard times". She suggests only the employer's pension contribution should be locked away until retirement. Another idea she thinks should be adopted more widely across the UK is the practice of putting some or all of any pay rise into your pension. "You shouldn't miss the money, as you never saw it in your pay packet. The US does it a lot. But unfortunately it's not part of the official policy on auto-enrolment in the UK."
I ask whether she would make pension saving compulsory. "Not with our current system of pensions," she retorts.
For all of Altmann's opinions on how pensions should change in our country and how pensioners can help themselves, I wonder what she has lined up for her own retirement. She frowns at the idea. "I don't intend to retire. I would definitely continue part-time work. I've seen so many people who have become depressed, debilitated or bored. They had so looked forward to retiring, with this 'golden pot' of money. But once they are out of work, it's hard to get back in."
In terms of finances, Altmann says she's lucky to have a defined benefit pension from her days working for the government. She also has defined contribution pensions, a self-invested personal pension and an ISA. "I have lately been contributing to my ISA the most, just because it's more flexible than a pension."
I ask whether she's thought about flying the flag for savers and pensioners more seriously - by running for parliament. "Oh I wouldn't know which party to go for," she says. "The House of Lords maybe? I would love to have some direct influence. I want to be part of the debate, because I don't have all the answers."
For now of course, Altmann seems to have her hands full. She has three children and does charity work. "I get involved with youth activities. I like to swim, I do a bit of walking. I live in Finchley and my favourite spot in London is Hampstead Heath looking out from Parliament Hill."
But you never know, maybe one day we will see Altmann pop up again in the government, putting lords and ministers through their paces and helping to shape a simpler and fairer pensions landscape once and for all.
This feature was writtren for our sister publication Money Observer
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).