Thursday, November 19, 2015

Brown's Poison Pills part 2: Pensions

There can be few greater examples of a great achievement heedlessly thrown aside than Gordon Brown's catastrophic mismanagement of Britain's pensions.

During the second parliament of the Thatcher administration, that government realised that Britain - like the rest of Europe - was heading for a demographic timebomb which would wreck our ability to pay for pensions. So in 1984 they did something about it.

It was obvious thirty-one years ago that as people were living longer and a smaller and smaller proportion of the populations of Europe would be people of traditional working age, the unfunded pension arrangements whereby each generation of workers paid the pensions of the previous generation was headed for collapse.

Tony Newton, then minister at the DHSS, took a series of positive and negative measures in 1984 designed to encourage people to save so as to move to a properly funded system of occupational pensions paid out of the pension pot put aside by the pensioner during his or her working life. By 1997 those arrangments had worked brilliantly and savers in Britain had put aside more money in occupational pension funds than the whole of the rest of Europe put together.

An then in one of his first acts as chancellor, the worst piece of economic vandalism in my lifetime, an act of criminal irresponsibility so vast that there are no adequate words to express what total lunacy it was, Gordon Brown threw that achievement away with his raid on pension funds.

That raid - £5 billion a year when it started, but with an impact that grew like to more like six or seven billion a year when Labour left office, was described at the time by the president of the national association of pension funds as

"the biggest attack on pensions in living memory. Even Robert Maxwell took only £450 million."

The person who came nearest to capturing in a few words the insanity of Brown's mishandling of pensions is actually a Labour MP Frank Field, who in 2006 condemned Gordon Brown's latest daft proposals on pensions as "not so much preposterous, as positively dangerous."

He also said that "When Labour came to office we had one of the strongest pension provisions in Europe and now probably we have some of the weakest."

Brown got away with it because to most journalists talk of "cutting the advanced corporation tax dividend credit for pension funds," which was the mechanism he used to steal people's pensions, sounds boring and irrelevant. Although the Conservatives rightly and much more clearly described it as a £5 billion a year raid on pension funds, people were not listening to the Conservatives in 1997.

But that action and his failure to properly correct for it at any time in the following years didn't just wreck the savings position on a once-off basis. It damaged the incentive to save for many, many years to come. Because now that the precedent has been set, it is not enough just to offer people a good incentive to save for their pensions - because how can they know that a future government won't repeat what Gordon Brown did and simply help itself to billions of pounds of the money that people saving for their pensions have put away?

The only way to put the pension system back on an even keel, a nettle mostly grasped under the coalition, was to raise the retiring age. This might ultimately have had to be done anyway, but probably not so fast as the combination of the 2008 recession and Brown's mismanagement of pensions made necessary.  And when the impact of making people retire later over the next twenty years is added up, it will effectively have cost pension savers the better part of a trillion pounds compared with what, at the start of their working lives, they would once have been entitled to expect.

A trillion pounds to clear up Brown's mess - that's the measure of how devastatingly bad his management of pensions was.

To find another decision by a British chancellor which even stands comparison in being as foolish and disastrously wrong as Gordon Brown's raid on pension funds, you have to go back sixty years before to Winston Churchill's mistake of putting Britain back on the gold standard, which Churchill later described as the greatest mistake of his life.

Although for a time Brown fooled a lot of people into regarding him as a successful chancellor, the harm done by his mismanagement of pensions was so vast, and will continue to affect so many people for so long, that this alone would debar him from being considered as the genius which his admirers once regarded him as being even had every other aspect of his stewardship of Britain's economy been as successful as he claimed. As we will see, this is very far from being the case.


Jim said...

It was not so much a disaster going back on to the gold standard, in fact it would have been a very savvy move.

The problem was going back onto the gold standard, at the same Pound to Gold exchange rate as we left, after debasing the currency so much in the time it had been fiat, was a spectacularly bad idea

Chris Whiteside said...

For the avoidance of doubt, I don't dispute any of that. Brown's Raid on Pensions in 1997 was the worst economic mistake since Churchill's decision to go back on the gold standard and to do so at the previous rate.

Jim said...

Ok, I can concede that.