Mervyn King, the former governor of the Bank of England, says Britain has no shortage of things to worry about. Photo: Geoff Pugh for The Telegraph
Mervyn King doesn't like the word «crisis». «It's been overused,» he says, in the same measured tone that characterized his decade as governor of the Bank of England.
But given that he ran Threadneedle Street during the 2008 banking crisis, this difficult. think of someone who can better speak on this topic.
The collapse of Lehman Brothers that same year wiped trillions of dollars from stock markets, undermined faith in finance and left central banks as the only game in town. Lord King, who left the Bank in 2013 and was given a life peerage for his «significant public service», vowed to continue what he called the tradition of «relentless truth-telling» when he entered the House of Lords.
He was heading to Westminster when he stopped by The Telegraph offices for a chat over lunch. His assistant had already emailed in advance to suggest what he'd like to eat: «A small sandwich, like tuna, would be more than enough,» she says.
This is one of the hottest weeks. year, but King, 75, showed up in a suit and gray tie. Between bites of baguette and a clear distaste for exaggeration, he says there is no shortage of things we should worry about.
The savings crisis «needs to be addressed urgently»
And tops this list? “The biggest challenge facing the UK economy is that the UK saves the smallest share of its national income than any other G20 country,” he says. “We save less than Argentina. This is unusual.”
He warns that this problem needs to be addressed urgently so that part of society is not left without enough money for retirement, and tells me that the last time he was in this building. this was when it was occupied by stockbroker Salomon Smith Barney.
This was more than two decades ago, when the UK pension system was also in a deteriorating state. «The big problem with pensions is that 25 years ago you could go to an international meeting and brag about the British pension system,» he says.
0809 The UK has the lowest OECD savings rate
Back then, most people worked for the same company for most of their lives and were promised a retirement income that would match what they earned at work. These so-called defined benefit schemes have now been largely abandoned in all sectors except the public sector.
“People received a pension at retirement linked to their income while working. And what went wrong, of course, was that people realized that companies could go bankrupt.” King says the phasing out of final salary and career average schemes was the result of well-intentioned rule changes by regulators, accountants and actuaries who had not kept up with the times.
Companies, he adds, were forced to prove they were safe “at every conceivable moment”, which “meant you could only invest in certain safe assets, such as long-term government bonds, and that was fine. Except that government bond yields have fallen to extraordinary levels. And instead of rethinking this, we essentially just lost the entire private sector defined benefit pension system. And this is a disaster.”
The disaster, which the Institute for Fiscal Studies (IFS) has warned of, could have potentially big consequences. A recent think tank report found that the average private sector worker saving less than 8% of their earnings into a pension.
That's around half the 15% level recommended by Lord Turner's Pensions Commission back in the 2000s. comprehensive analysis of the system. The outlook for self-employed workers is even bleaker: less than one in five of the four million self-employed people are currently saving for pensions.
Stephen Bird, chief executive of asset manager Abrdn, recently called for a doubling of the 8% minimum pension contribution, which was phased in through automatic enrollment.
King won't talk about numbers, but agrees the outlook is grim. “I don't like to use the word crisis, but it is a serious problem that many young people will not have access to a pension linked to their career income.”
2,505 highly paid people are not enough
He warns that politicians have for too long been addicted to quick fixes that ignore the real problem.
“When I worked at the Bank, I resisted the proposals many young managers wanted to offer their new employees salary without pension on the basis that these people value cash more than pension promises,” he says.
«And I would say, 'But you'd be surprised how many people in their early forties come into my office and say, I'm sorry, I love working at the Bank, but I'm going to go to the City because I have there is no adequate pension for my wife and children, and I need to earn more. And that's why I said that having a decent pension scheme is a fundamental part of people's lifetime earnings. Because if you don't, people will just turn to the state.»
«Threadneedle Street was my second career.»
King's career with the Bank spans more than two decades. The son of a railway employee and a housewife, he was born in 1948 in Buckinghamshire, but after his father Eric retrained as a geography teacher, the family moved to Wolverhampton, where King studied at the local grammar school.
It was here that he became an avid Aston Villa fan after his family moved onto the same street as two of the club's most famous players. King attended his first home match against Newcastle in the 1960/61 season, and has been an active supporter since then, even serving briefly on the club's board of directors.
An academic child, King was the first in his family to who went to university after graduating top of his class from King's College, Cambridge with a degree in economics. He previously said that the fact that his grandparents couldn't afford to send Eric to university made his father even more determined to send his two sons to «the best local public schools.»
However, Threadneedle Street, which King calls his second career, was not initially part of his destiny. He worked for nine months as a supply teacher during the holidays in 1966, which he called «the most tiring job I ever had in my life.»
After graduating, he continued to teach on both sides of the Atlantic, at the London School of Economics, and periodically at Harvard University and the Massachusetts Institute of Technology, not joining the Bank of England until 1990, when he was in his forties and rising through the ranks to became governor in 2003.
Arriving at the Bank of England in 1990, King's career spanned two decades. Photo: Chris Ratcliffe/Bloomberg News
Late bloom is a constant thread in King's life. He didn't discover his love of music until he was in his forties and didn't buy his first CD until the 1990s, a classical collection that included Beethoven's Seventh Symphony, a track he later described on Desert Island Discs as «dance music.» In a 2013 BBC show, he also promised to take dance lessons with his wife Barbara after leaving the Bank. So did he fulfill his promise? “Yes, we took dance lessons together in New York,” he says.
Interior designer Barbara Melander was his former university sweetheart, but they lost contact after she returned home to Finland after graduating. Three decades later the phone rang. It was Barbara, by then a divorced mother with two daughters.
Lord King told Desert Island Discs: “We met at Frankfurt airport and I felt the same way about her as I did in 1970.” adding: «Moral of the story — never change your phone number.» They married in 2007.
“Arrogance has infected monetary policy.”
King, who is semi-retired, says the current pension system is failing the younger generation and believes «radical reform» beyond «radical reform» is needed. fiddle around the edges» proposed by Chancellor Jeremy Hunt.
0608 Average balance by age
«We've been able to create this extremely complex system and limit the amount [people] can save for retirement.» says King, highlighting the so-called annual and lifetime allowance, which places limits on the amount people can put into their pension pot — a rule that has forced many doctors into early retirement.
Hunt refused from the lifetime allowance in its first budget and increased the annual limit from £40,000 to £60,000. King believes this is not enough. “Why such restrictions? We as a country are not saving enough, so why are we stopping people?
The conversation turns to his former employer. King declines to comment on whether he believes the UK could go into recession, adding that it is “not obvious” what policymakers should do next, although he adds that it is important to “get through inflation”, which is still running at 6.8%. significantly above the Bank's target of 2%.
He warns that «hubris has infected monetary policy» around the world, as central bankers all assumed inflation would fall to 2% because they believed it would. «This is what I call King Canute's theory of inflation,» he says. This ultimately led Threadneedle Street to commission former Fed Chairman Ben Bernanke to conduct an independent review.
A number of responsibilities that have been added to the Bank's remit over the past decade have also distracted policymakers from their core job of keeping inflation under control.
This began after the financial crisis, when the then Chancellor George Osborne handed sweeping powers to the Bank, creating a new regulator called the Prudential Regulation Authority (PRA) to oversee financial services firms and a new Financial Policy Committee (FPC) to oversee firms' performance. providing financial services. control broader risks to financial stability.
It was a move that King said he was never entirely comfortable with, reflecting on a conversation he had with his predecessor Lord George, even before the Bank was granted operational independence in 1997.
“We agreed that the great danger of the Bank of England's banking supervision, not to mention all the other things — such as developing climate change schemes — is that the urgent crowds out the important.”
King (below right) was never happy with George Osborne's (centre) decision to give the Bank sweeping powers after the financial crisis. Photo: Alastair Grant/AP Pool 'The bank can't do anything about climate change'
King said Sunak's decision as chancellor to add climate change considerations to the Bank's mandate «makes absolutely no sense» and distracted policymakers from their core job of containing inflation.
“If you keep adding things, eventually the straw will break the camel's back. Climate change certainly was. If you look at the number of speeches on climate change, the amount of time and effort devoted to it, the number of senior level people working on it. You need more people working on monetary policy and making sure we're doing it right.»
He adds: «The Bank of England can't do anything about climate change. It is not even clear that the biggest and most immediate risks to the stability of the banking system come from climate change, not pandemics or cybersecurity. Therefore, paying special attention [to climate], in my opinion, does not make any sense.”
This summer, along with its annual report, the Bank published an 85-page report detailing how it will achieve net-zero emissions by 2040, including through the installation of heat pumps. King believes this resource is a waste of money. «I think this will inevitably weaken the institution's ability to ensure that the brightest and best people focus on the Bank of England's most important task, which is achieving price stability.»
He believes the move to net zero has become a «quasi-religious debate» as politicians and politicians pursue arbitrary goals. “I think it would be a mistake to put all our eggs in the net zero basket for the UK. And it is especially wrong to require every single business, company or organization to be net zero,” he says.
“As Tony Blair said recently, whatever the UK does on emissions will have negative consequences.” negligible impact on global emissions. Technology is what we have to offer the world. It makes no sense for the government to set arbitrary dates for banning gas boilers or petrol cars. It makes sense to think about total emissions.
“So I think a government that was really serious about trying to get to net zero would introduce a proper carbon tax, at first at a low rate and then gradually increase it, because that's the only thing that really [matters]. And if they're not willing to do that, then they won't be willing to tell the electorate that we care enough about net zero.»
0907 The Cost of Net Zero
King believes political posturing is part of the problem. Never one to shy away from sporting analogies, he brought in Maradona and the England cricket team to explain the inner workings of monetary policy.
Because politicians on both sides of the political aisle lack vision, he says. voters have not been inspired by Rishi Sunak and are unsure of what the Labor Party stands for.
King says: “We have quite a difficult situation now in which Keir Starmer is like a football manager leading the score is 3:0 at half-time and tells his players: “Guys, just go out for the second match.” half, don't risk it. Keep possession, transfer it. We don't need to score anymore. It's in our hands, but don't make mistakes.
“Rishi Sunak loses 3-0. Now he can't go crazy and throw everyone on the attack because then he'll lose 6-0.
“But what he really needs to do is find one or two of these big policy areas and say: “Those are the two big issues I'm going to focus on.” I can’t solve this problem by the next election, but I can start to solve it.” And if he doesn't do this, then we will never, ever carry out the necessary reforms. And I think the main theme should be that we are giving our grandchildren a huge national debt.»
'Aging population' to increase cost pressure
Growing pressure on Britain's public finances is another reason why an expert says policymakers must act now to reduce the country's debt pile. According to the Office for Budget Responsibility (OBR), health spending as a share of GDP will double over the next 50 years as spending on adult social care rises from around 1.3% of GDP — or around £30 billion in today's money — to around 2 .3% of GDP over the same period.
King warns that this pressure will only intensify. “It's easy to identify areas where we'll have to spend more,” he says. According to him, supporting the aging population related to health status and care costs is one of the most important areas. Defense is another concern as countries around the world increase military spending following Russia's invasion of Ukraine.
“It is incredibly difficult to identify areas where you would like to spend less. Social benefits are definitely going to be an area that people need to be very careful about.” He cites disability benefits as an example.
“The number of people eligible to receive them has changed rapidly over time, and this clearly has nothing to do with the underlying disability.”
The government is also concerned. This week the Department for Work and Pensions said it would spend £25.9bn on incapacity benefits this year, representing a 62% rise in real terms on 2013/14 when it was just starting to roll out Universal Credit .
King calls this the crux of the problem. Oversimplification of the benefits system, while increasing the number of claims for diseases that are difficult to classify, has resulted in many people being given benefits that do not meet their needs.
“Nobody likes to be seen as hard-hearted, but it's a matter of practical circuit design,” says King. He admits the issue is controversial, likening it to «the domestic political equivalent of small boats.» You can see the problem, but it’s very, very difficult to come up with a solution.”
It’s not all doom and gloom, however. King is clearly enjoying the heat at his home in Kent. “It’s going to be a great week of reading in the garden,” he says. And he wants the younger generation to enjoy the same comfort as he does in retirement.
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