26 Mar 2012 Updated at 11:35 GMT
I love my Grandmother, I really do. So I would like to apologise to her and all the other pensioners in the UK for what I am about to say – I’m glad George Osborne, the Chancellor of the Exchequer, clobbered you with fresh taxes; you had it coming.
The worry, however, is that the misplaced furore about an eminently justifiable “Granny tax” in last week’s Budget might distract us from the wider goal: it’s not just my Granny we ought to be going after; the government needs to wallop my Mum too.
And if the UK government does pluck up the courage to take her on, it will have a huge impact on the shape, size and structure of the investment industry – and the fees it charges in particular.
Osborne’s appetite for the fight may, unfortunately, have been lessened by the headlines to which he awoke post-Budget. The Daily Mail went with “Osborne picks the pockets of pensioners”, The Daily Telegraph had “‘Granny tax’ hits 5m pensioners”, and the Daily Mirror put it most succinctly: “Mugged!”
But it’s hard to escape the impression that the negative press was born out of the delivery of the Chancellor’s measures on pensions rather than their substance. He removed the higher tax allowances enjoyed by people aged 65 and over but claimed it was merely a “simplification”.
Even before he sat down, many people had worked out that it was actually a tax increase of around £200 a year for millions of pensioners. The press delighted in the apparent obfuscation – the only surprise in a Budget that had been comprehensively leaked in the preceding weeks – and duly roasted Osborne for it.
For a politician who is often portrayed as a modern-day Talleyrand, it was a low moment. Dressing up the tax increase as a simplification and hitting pensioners may have been “lousy politics” as Lord Tebbit, the former Conservative Party chairman, said. But that doesn’t necessarily mean it was the wrong thing to do.
For rather more sober analysis of the measure we had to wait until the second round of the news cycle. The Institute for Fiscal Studies level-headedly pointed out that it “looks like a relatively modest tax increase” on a portion of society “hitherto well sheltered” from the tax increases, benefit changes and austerity measures shouldered by the rest of the population.
I have yet to find someone who can lay out an adequate justification for why allowances should be based on age rather than means. The Institute for Public Policy Research points out that only a fifth of pensioners are poor.
The removal of age-related allowances – which were introduced at the beginning of the last century when old age almost invariably equated to penury and which add huge complexity to the system – falls hardest on the wealthiest pensioners.
But, while I believe it is important that my Granny pulls her weight during this national austerity drive, I worry that the fuss that the Budget has caused will distract the government from an even more important task: training its sights on my Mother.
She is a baby boomer – born between 1948 and 1965 (I won’t tell you which year precisely; she’d be cross). This is the biggest and richest generation the UK has ever known. Those born at the beginning of the boom will turn 65 next year.
As the IFS pointed out, it is these soon-to-be pensioners who will be hardest hit by the measures that Osborne sort-of-not-quite announced last week. That, surely, is as it should be. And it can only be the start.
The Pinch, a book written by David Willetts, the universities minister, has been criticised by some for demonising an older generation. Its subtitle (How the baby boomers took their children’s future – and why they should give it back) doesn’t help.
But, as he writes, generational name-calling gets us nowhere: “It is not that some generations are good and others bad; it is that some are big and others are small.” With size comes power and the baby-boomer generation has used its heft to force the world to meet its financial needs. Successive governments have pandered to its many votes.
And the cumulative effect, as baby boomers start entering the ranks of the retired, has been a steady increase in benefit costs that is close to beggaring the economy. This is not, of course, a uniquely British problem. Every western economy with a high median age faces similar issues; it is the painful throb that underpins the eurozone’s paroxysms.
People across Europe are facing up to the prospect of having to put more in their pension pots, work longer and get less in retirement. This is especially true in southern European countries that rely more on public savings systems and is why pension reforms are such an integral element of any solution to the eurozone debt crisis.
Market volatility, low interest rates and rising life expectancy are also slamming the private sector savings pools in northern Europe. But while the baby boomers may end up with smaller pensions than they had originally anticipated, they will almost certainly still enjoy longer and better-funded retirements than their children. It is right that their tax burden be increased.
Feeling the pinch
The greater the squeeze, however, the more attuned investors will become not only to the returns their managers achieve for them but also the fees that they are charged.
This is why the Financial Services Authority’s announcement that it will take a close look at fund management fees, though not before time, is to be welcomed. As Gina Miller, a co-founder and partner at SCM Private, points out, as long ago as 2000, the FSA found that only half of overall investment fees and costs were disclosed to UK investors.
B&CE Benefit Schemes, in a report for the National Association of Pension Funds, has uncovered more than 30 separate types of fee levied on private pensions in the UK. As well as standard annual management charges, which are expressed as a percentage of assets under management, providers often have a variety of add-ons, including administration fees, entry and exit fees. Some hike management charges for members when they change jobs but leave their pension pot behind.
SCM Private estimates that UK savers are still paying around £18.5bn a year in hidden charges. In January, Steve Webb, the pensions minister, told the industry to introduce more transparent fees and costs. If it does not do so voluntarily, Webb warned, he will consider introducing a cap.
The investment industry often counters accusations that it charges too much with the argument that it is so heavily intermediated. This, it is claimed, erodes margins. That is open to debate. But really the point is moot anyway.
Fund managers are about to collide head-on with a huge demographic and fiscal impetus to reduce fees. My Mum won’t invest in the products of those that don’t.
Posted By: True and Fair, 8:19 am