We need more competition – not a full frontal assault on the pensions industry

Barely a day goes by without a government attack on the private sector. Yesterday saw the publication of a report proposing charge capping for pension funds. Management fees levied by pension providers could be capped at between 0.75 per cent and 1 per cent. This was not delivered with measured language, but as part of a “full frontal assault” by pensions minister Steve Webb.

The policy instrument of price controls seems to be the flavour of the month with politicians of all parties. In the last three months, they have been proposed for energy, consumer credit, rents and wages. Politicians may like them, but economists regard price controls as the worst form of regulation.

So what could go wrong with the government’s pensions proposals? The first problem would be with small funds and small employers. A price cap defined as a percentage of a fund could make the provision of pensions to small employers and low earners unprofitable. We have already seen the advice market to the low-paid dry up because of the fixed costs of regulation. Will we see the pensions market dry up too? Small employers and the low-paid might be left with no option but to join the government’s own pension fund management arm – the National Employer Savings Trust (NEST). This would be ironic because, for many savers, NEST will not be compliant with the proposed regulation. Presumably, the government will give itself an exemption.

A price cap will also inhibit competition and innovation. The pensions market will end up with the same structure the energy market has today, with a few big providers offering the same form of passive fund management. New entrants – even if they are providing innovative products that consumers want – will not enter the market because the charges they are allowed to levy will not cover the startup costs.

It is likely that fund managers will design ways of avoiding the cap, some of which will be necessary and legitimate. For example, it is impossible to imagine a directly-managed real estate fund meeting the cap. However, the fund manager could invest in a real estate investment trust (REIT), which itself invests directly in real estate. The charges will therefore be incurred by the REIT, not by the real estate fund manager, and the cap will be avoided.

Webb also proposes banning firms from incentivising persistent savings behaviour. He should look at the energy markets. Here a similar policy of banning discretionary discounts has been followed. The result is that charges have risen for the minority, but not fallen for the majority.

Pensions is a market that needs looking at. It should be easier for small schemes to combine to create bigger schemes. It would not be unreasonable for employers to have to explain to employees if they offer a scheme that is significantly more expensive than NEST. However, the story of the regulation of consumer financial products since 1986 is that every intervention has made things worse, not better. Perhaps the minister needs to go back to first principles, and focus on competition rather than on control.

Philip Booth is editorial and programme director at the Institute of Economic Affairs, and professor of insurance and risk management at Cass Business School, City University.

This article originally appear in City AM.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

2 thoughts on “We need more competition – not a full frontal assault on the pensions industry”

  1. Posted 31/10/2013 at 16:51 | Permalink

    There are so many oligarchies in our economy at the moment that remain unchallenged by the government.

    All of these act against the public interest as one might expect and the government finds it far easier to try countering this through regulation, so we are completel stuffed.

    We have a lazy spendthrift government who believe they can exert control either through ownership (NHS) or by regulation (insurance, banks, energy etc).

    What’s not to like?

  2. Posted 05/11/2013 at 16:18 | Permalink

    Shurely “barely”.

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