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Bank of England's top economist in call to make pensions simpler

Published 19/05/2016

The Bank of England's chief economist has warned that over-complicated pension schemes harm the economy.
The Bank of England's chief economist has warned that over-complicated pension schemes harm the economy.

Over-complex pensions are harming the UK economy and reinforcing mistrust of the financial sector, the Bank of England's chief economist has warned, as he admitted even he was unable to make the "remotest sense" of them.

Andrew Haldane said ordinary workers had no chance of making informed decisions for their retirement funds when experts and financial advisers "have no clue either".

He called for simplification as part of the process of eroding the "great divide" between the public and bankers and other financial professionals caused by the 2008 crash.

But he also suggested changes were needed to the way maths was taught to reduce the "incredible" levels of innumeracy among British adults.

"A lack of trust jeopardises one of finance's key societal functions: higher growth," he said in a wide-ranging speech examining ways it might be restored.

"Of course, part of the reason so many members of the public find finance difficult is because it is difficult - and, sometimes at least, it is made deliberately so," he said.

"There is plenty of evidence, including from the financial crisis, of financial products being made more complex than was necessary and consumers being charged a premium for buying them.

"This damaging cycle persists because of the difficulties consumers understandably face when trying to compare these products.

"To give a personal example, I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions.

"Conversations with countless experts and independent financial advisors have confirmed for me only one thing - that they have no clue either. That is a desperately poor basis for sound financial planning.

"This problem is one which, if anything, is becoming more acute over time. More of the risk associated with financial decisions is these days being shouldered, not by the state or companies, but by individuals.

" Over the past 20 years, we have seen a secular shift away from defined-benefit towards defined-contribution pension schemes. That places the investment risk of pensions squarely on the shoulders of the individual, rather than companies.

"Whatever the merits of these shifts, they underscore the importance of simple, easily-understood financial products for the public if they are to manage these new risks.

"They also underscore the importance of adequate information on these products."

Mr Haldane said some people found financial issues difficult because they had been put off maths by poor teaching methods that failed to make the subject relevant.

"Research by the Department for Business, Innovation and Skills suggests there are an incredible 17 million adults in the UK whose standards of mathematics are no higher than those of a primary school child," he said.

"The way maths is taught may be part of the problem here. For many, maths is a turn-off because it seems unrelated to their everyday lives; it lacks real-world relevance.

"Sad to say, payday lenders have a greater resonance to many people than Pythagoras's theorem.

"The abstract nature of mathematics, as taught, leads many children to tune out or switch off entirely. Others conclude that they simply do not have 'a maths brain'. This is an educational scar that can last a lifetime."

The curriculum should focus on relating it to the " big financial decisions that, if flunked, can have big social, as well as financial, consequences", he suggested.

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