Dampier: Guaranteed pension plan "complete nonsense"
The industry expert says the Government’s proposal to underwrite all auto-enrolment schemes doesn’t add up.
The Government’s plan to give private pension-holders income guarantees when they retire is complete nonsense and proves it doesn’t understand the investment industry, according to Mark Dampier
(pictured), head of research at Hargreaves Lansdown.
A fall in the FTSE 100 of 15 per cent since the start of the financial crisis and a substantial rise in inflation have eroded many UK residents' pension pots, and pensions minister Steve Webb said the Government wants to use a consultation paper due this autumn to address this issue.
Insurance companies would provide policies that guarantee savers receive at least the value of their contributions under plans to be discussed between the Government, the insurance companies and pension providers.
"They should kill it now – it’s complete nonsense," said Dampier. "Guaranteeing investments doesn’t work. They have tried it with investment trusts for many years, it’s a non-starter."
"If you could have a guaranteed investment – you are telling me you can give me a return better than cash? It sounds like Bernie Madoff to me."
"We have a government that doesn’t understand investment in any way – you’d have to quadruple contributions to make it work but people don’t even contribute enough now."
From October large businesses will have to automatically enrol employees in company pensions, in a scheme that the Government is using to address UK residents' unwillingness to save for their retirement.
Dampier believes that the proposals to guarantee pension pots are designed to prevent people from leaving these schemes early.
"I understand why they’re doing it," he said. "They have done it on the basis that people will run away after a few years if they see their pot has gone down. But the real problem is people don’t understand investment."
"For the first few years of paying into a savings plan you want the investment to be poor so you buy more and then make better returns in the future."
"They are trying to have their cake and eat it."
He adds that the auto-enrolment scheme will be scuppered by pandering to a lack of education on the subject.
"We have a massive problem in this country in that people know nothing about investment," he explained.
"In order to avoid people getting scared and leaving, the contribution level on the auto-enrolment scheme is pathetically tiny and the investment profile will be low risk at the start, which is the opposite of what you want."
"In any case, what is considered low risk right now? Is it government bonds? Who knows?"
"The one thing people should do to reduce their risk is when people get near the end of their savings they should consider diversifying to try to reduce the risk on their investments, but the real problem is people don’t contribute."
"The only way to do it is to put an extra 1 per cent on management fees, so you might as well be in cash anyway," he added.
Campaigners have been arguing for financial literacy to become a core skill taught in schools, as high levels of personal debt and low savings in comparison to other countries have come under fire.
Dampier said: "Why can’t you do an O-level in personal financial planning? You can do a degree in it but why can’t you get any sort of qualification at school?"
He says, however, that one simpler reform would help.
"If we want people to pay more attention we should stop using the word ‘pension’, it just bores them and they stop listening. I always talk about a monthly savings plan, because that’s what it is," he finished.