Forty-five years ago, I bought a Lotus Seven “car” as a self-assembly kit. I knew a lot about cars; I had previously owned a 1940s MG, a Morgan, and a Mini, and had serviced and maintained them myself. Those schoolroom classes on motor mechanics had been put to good use.
Like the infamous IKEA furniture, it came as boxes of components and sets of instructions. When it arrived, my enthusiasm and satisfaction knew no bounds; big boys’ Meccano, and all mine. Of course, I started to buy all the other toys I might possibly need, the hoists and jacks and ramps and wrenches. It became my sole topic of conversation. My self-view of my financial acumen was confirmed; because of the car sales tax concession, I was saving loadsa money.
Needless to say, I made mistakes and many parts were assembled and disassembled, installed and uninstalled; the use of the hammer grew, almost as much as my curses, while the car progressed glacially. That partially constructed thing occupied my garage for three years; it consumed all of my free time. I came to hate that car and myself for my stupidity. My diminishing circle of friends also came to hate that car and my impositions upon them for help.
Even when it was complete, it ran like a lemon and I had to take it to an expensive specialist garage for tuning. I bought a new MGB and sold the Lotus having driven it less than fifty miles and myself completely mad; my relief seemed tangible. The cost saving had proved illusory; it was finally an outrageous expense.
The relevance of this for pensions is that this is precisely what we collectively have been doing to our private pensions; reducing them to lifelong D.I.Y. projects, for which few of us are well prepared. We want and need a retirement pension income, and we are prepared to forgo some consumption today to finance that pension. We want to know we have the car to drive in retirement; we really should not need, nor do we want, lessons in motor mechanics or better instruction manuals. This is particularly true as the pension income objective is compound and highly uncertain; both consumption smoothing and longevity insurance.
Surprisingly, in view of the ABI’s recent responses to the proposed introduction of collective defined contribution schemes (CDC), the efficient solution does lie in insurance, though CDC is only one step on the right road. Mary McAleese, the former President of Ireland, put the case for insurance rather well: “The certainty and confidence that insurance provision brings to all our daily lives, whether business or personal, enables us to breathe more easily, to find the confidence to let innovation flourish and to engage with the present and the future, chastened by the past but not allowing the fear of the possible to paralyse us in the present.” For pensions, this amounts to buying the car, not the kit. For those who would like to believe that our existing methods might work, if only we applied more of them, let me take just one, transparency, among many possible and indicate its failings. The demands for disclosure and transparency arise from the desire for public accountability but it is never a sufficient basis for delivering this. Sufficiency would additionally require adequate and unambiguous communication. Moreover, in many circumstances, transparency is not even a necessary condition; notably where it creates perverse incentives.
The challenge for the UK insurance industry is to design policies that can provide occupational pensions cost effectively. Given the global pre-eminence of London in insurance, it is surprising that Germany and Sweden have more advanced offerings.