Problems of Private Pension Provision

Readers Question: What are the disadvantages of leaving pension provision to the private sector?

I have answered this question previously in – advantages and disadvantages of Private Pensions

I think the biggest problems of leaving pensions to the private sector are:

• Inequality. Some will be unable or unwilling to save for a private pension.
• You could argue saving for a private pension is a merit good. i.e. people underestimate the benefits of saving for a private pension. e.g. people take short term view and don’t save or they have poor information about the necessity of saving or people may save in a pension fund that goes bankrupt (like my Father and Maxwell’s pension funds).
• Means Tested Benefits. If the government do leave pensions to the private sector, it is likely they will be underpressure to give more means tested pensions to those who have nothing. The government wouldn’t want to appear heartless in allowing pensioners to starve because they hadn’t saved. But, if you end up with means tested benefits anyway, it could be a disincentive to save. For example, the current Pension credit is a strong disincentive to have a small private pension because it gives a minimum income guarantee for pensioners with no private pension.

Relying soley on private pensions is not a good idea. But, that doesn’t mean they don’t have a role to play. The government need to encourage people to take additional private pensions, and avoid the current situation, where the means tested Pension credit creates a disincentive to save.