The government is planning a creeping nationalisation of the pensions industry. Reports suggest it is “committed” to keeping the triple lock while planning to raise taxes on private pensions by cutting the lifetime allowance or reducing tax relief on contributions. The net effect of these measures over time will be to increase the state pension while making private pension contributions less attractive. That’s nationalisation by stealth.
And there’s a case for it, because it is prodigiously difficult for individuals to save for their old age even if they can afford to do so.
One reason for this is that we’ve no idea what future returns will be. Even over long periods, we’ve no guarantee that luck will even out to give us average returns. Say, for example that the average equity premium over cash is four percentage points a year – much higher than theory would justify. Then basic statistics tells us that with annualised volatility of 15 per cent there’s a two-thirds chance that the premium will be below 1.3 percentage points a year. That’s an investment lifetime of negative real returns. And this greatly understates risk, because we’ve no assurance that the average premium will be four percentage points. Instead, we face what economist Richard Bookstaber calls radical uncertainty: we don’t even know future average returns.