The national pensions savings scheme: retail brands lose out – thank goodness
The Pensions Secretary has come out in favour of the Turner Commission’s recommendation to exclude competition between existing insurance company and bank brands for consumers’ semi-compulsory pension contributions when the new ‘national’ pensions scheme is introduced. If you do not believe governments are better organisers than private firms or better allocators of resources than public markets, this will strike you as dangerous stuff. But in this case the Government is right.
The long-term savings market is different because of the perverse economics that mean more providers and more products have driven consumer costs up, rather than down.
These perverse and highly unusual economics are key to the FSA’s realisation that the existing model for the distribution of long-term savings products does not benefit the customer. I’ve given a lot of prominence to this: it is an amazing thing for a regulator to go public with a statement that the industry model is broke.
The cost effects of competition by many public brands in a business that at heart has a commodity nature were a key finding of the Sandler Review. I would like to think No Monkey Business (the book) had a hand in this as it was widely read and marked up within the review team. It was not surprising (but still reassuring) that Turner also picked up on these perverse economics.
If the rules for competition are altered for this new scheme, so that the competition for managing any part of the assets of the scheme is conducted by tender by the organising authority, the commoditisation of the investment function will be achieved. There will still be competition but the criteria will be technical competency and administrative efficiency. The same criteria, with cost-competitiveness largely a function of scale, have already lead to dominance by a small number of index-fund managers in the global institutional market.
This approach has the greatest chance of reducing the Cost Wedge. This itself makes a significant and certain difference to the product of the nation’s savings, in the form of higher pension outcomes than would otherwise be the case.
We cannot blame the Association of British Insurers for trying to defend their turf but their sales pitch is no longer working in the corridors of power. They have successfully resisted the commoditisation of savings at great cost to consumers and the nation. The game will not be over for most companies, however, until investors who make their own choices about how to invest and with whom, or who to get advice from and how to pay for it, wake up and smell the coffee.