ePolitix.com speaks to John Godfrey, group communications director of Legal & General, about pensions, the life expectancy of Britons and the UK stock market.

Question: How important is it that the UK's economic success is built on consumer spending? Should more be done to encourage individuals to save for their long-term needs?

John Godfrey: The UK's economic performance for the last decade does appear to have been largely driven by strong consumer demand. The economy is fundamentally sound, but it is based on spending.

What we need to do now, as a country, is to encourage individuals to make greater financial provision for the future.

Many people are under-saved generally and have inadequate financial protection for family or possessions.
 
The direction of government policy is to encourage people to take more financial responsibility for their own lives, but more needs to be done, particularly in terms of financial education.

A greater awareness needs to be generated amongst the population with regards to financial planning and financial decision-making.

Question: Is there a pension crisis? What does the government's proposal for personal accounts mean for the existing pension industry?

John Godfrey: Crisis is quite an emotional word, but there are certainly issues that need to be addressed.

What we have seen is the decline of the traditional defined benefit scheme provided by employers, and its replacement  by defined contribution schemes, and a move to encourage people to take more responsibility for their own pension arrangements.

Many, however, have pension schemes which will not replace their income to the extent they expect on retirement.

What the government is proposing through personal accounts is to provide an additional layer of pension saving, particularly for the group that is most under-pensioned, and this is focused on using people's inertia to sign them up to schemes by default.

We're supportive of this in principle and if further pension arrangements can be put in place that benefit a new group of people, that's very good.

We have some issues around points of detail though and we're particularly concerned that it is targeted to the right group of people, that it shouldn’t give rise to the unintended consequence of levelling down where people already have pretty good provisions under existing employer schemes, and that it doesn't give rise to unfairly subsidised competition for the existing industry.

If it expands the amount of people and money being saved for pensions in the system overall, then that can only be a good thing, but we will keep a watching brief on the points of detail.

Question: We seem to be living longer as a nation, but also to be stoking up health problems for the future through obesity, binge-drinking and so forth. What does this mean to providers of life insurance and pensions?

John Godfrey: This is quite a complex question. In our industry, the issue of demographic change is an important one: expected longevity is hard-wired into the way we construct and price products, for example in the life cover and annuity markets.

The bottom line is that if people live longer, the amount of money they need to set aside for retirement will, other things being equal, have to be larger than it has been in the past.

The added complication is that a longer life can involve higher costs for care and support or medical treatment in old age than has been the case before.

Changing health and lifestyle trends have a strong bearing on both the life insurance and annuity markets.

The reduction in smoking over the last decade is an obvious example. Interestingly though, we may well be looking now at a very complicated situation where part of the younger generation is working against this long-term trend to better health and longer life.

One of the ways our industry looks at these things is through very rigorous, actuarial statistical analysis which feeds through into the way we price products.

This is, by definition, driven by existing data and there may well be be scope for more work alongside the government and other organisations in developing ways to combine actuarial work with research into other types of societal change such as healthcare.

Question: Why is it so much more administratively complicated for people to save than to borrow - is the UK financial services industry over-regulated?

John Godfrey: It certainly is more administratively complicated to save rather than borrow. If one looks at the volume of paperwork that has to be gone through, the amount of checking and reference taking, especially where advice is being on suitability of product, it can be seen to be much more time consuming to invest your own money than to borrow somebody else’s.

We worry that too much regulation can stifle innovation amongst financial services product providers. There is quite a high level of regulatory risk which is pushed back to financial services industry players, such as us, and this can be a disincentive to product development as well as making it expensive to get people into the long-term savings process.

Of course, there has to be an appropriate level of regulation because the consumer has to be treated fairly, and financial services companies have to be properly capitalised and run.

The FSA is moving to a more principle-based regulatory regime that may make matters easier: time will tell as to whether it will reduce the cost of regulation. The FSA and the Financial Ombudsman Service should of course move to the simplest regulatory regime which provides appropriate protection for customers, particularly where we are talking about basic financial products.

Question: Are assets/wealth unfairly distributed between older and younger generations as a result of things such as property price increases, end of defined benefit pensions and student loans? What could be done to ease transfer or to make things more equitable?

John Godfrey: This is quite a political hot potato. There's some interesting research and ideas from think-tanks and a few politicians and certainly it would appear anecdotally to be the case that while the baby boom generation is better off and living longer,and more comfortably, life is harder for the iPod generation who are embarking on careers with a heavy level of debt and are finding it hard to get on the property ladder, let alone save for the long-term.

There needs to be more work – and some serious thinking - in the political world as to how to address this and potentially make things more equitable.

Lots of facts come into the equation: inheritance and taxation of inheritance; encouraging lifetime savings is important but it must be suited to today’s young employees, rather more complicated than than just telling people at the age of 23 to sign up for a particular lifelong pension scheme which pays out only at 65 (or 70?); and there is an interesting debate to be had about ways to free up capital that is tied up in the housing sector, for example through equity release type products which may not have been popular but could represent a positive step forward.

Question: How do you see the prospects for the UK? 

John Godfrey: We regard the UK as a fundamentally good market environment for Legal & General. Government has presided over a benign economic environment and a number of policy changes – for example, the A-Day changes to pensions have helped too.

We see a demographic trend for our company and for our industry which will continue to help us, with more people living longer and acquiring more wealth during that longer life span.

Question: You own a bigger slice of the UK stock market than any other institution (over four per cent). But is 'UK plc' dwindling due to companies being taken private? 

John Godfrey: We are the largest fund manager in the UK, with a big presence in index tracking funds which means owning a large slice of the UK stock market and often being one of the largest shareholders in an individual company.

Components of the index do change on a regular basis, so our holdings get adjusted pretty frequently: that's just a function of how markets operate. Private equity is just another mechanism for supplying capital to companies and in some cases it can be as good or a better way of doing it than through a traditional listing.

We are a medium-sized private equity player ourselves, so we have a part in that process. It is frustrating if you think about companies being taken private, improved in terms of performance and then brought back onto the market: then, investors in index tracking products miss out on that uplift.

This was quite a big theme earlier this year  but one result of tight credit conditions and market volatility at the moment is that we will probably see less talk of major UK companies being taken private.