Comments on Pensions White Paper

by Dr. Ros Altmann

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Undoubtedly, the reforms announced today are an improvement on our current system, but they are not good enough.  The idea that these are hugely significant radical reforms that will create a pension system that is ‘coherent, comprehensive and will stand the test of time’ is a magnificent display of collective wishful thinking. 

Bottom line:

This will leave us with a better system than we have now, but not a good one.  It will still be the most complex system in the world for many years to come and will do nothing for people immediately.  By the time the state pension is increased in line with earnings, it will have fallen further from today’s already unacceptably low level.  The reforms are a cobbled together compromise that will not stand the test of time and will not deliver a decent pension system for the 21st century.

These forms fail the Government’s 5 key tests.  The only one of the 5 tests which is clearly met with the White Paper proposals is ‘affordability’!  That is probably the only one the Chancellor really cares about and even then, he has left himself a huge get-out clause in case he changes his mind.

Government’s 5 tests:

SIMPLICITY – failed
SUSTAINABILITY – failed
PROMOTING PERSONAL RESPONSIBILITY – failed
FAIRNESS – not too bad – quite improved
AFFORDABILITY – yes!

What do we need?

We need a simple, fair state pension, paid at least at the pension credit level of £115 per week, with minimal means testing.  That would allow a clear understanding of what will be provided by the state and would prevent the huge disincentive effects of means testing that are associated with both the current system and the proposals today.  Means testing takes away some of people’s pensions or any income from part time work.  This makes people far more reluctant to bother saving, or indeed they may be frightened of it.  A universal, citizen’s pension would overcome these problems and deliver simplicity and fairness, while also dealing with the poverty that would still remain in a means tested system with imperfect take-up.

Criticisms:

1. The state pension system will remain far too complex for people to understand.  There will still be three parts to the state pension and people will not be able to predict how much they will receive from the state.

2. 35-45% of pensioners will still be on means testing for decades into the future, which leaves the risk of pensions mis-buying on a grand scale, if people do not get advice

3. Raising the state pension age is too rigid an approach and will prove unfair to the lowest income groups, who have shorter life expectancy

4. The national savings scheme of personal accounts is not likely to deliver a high pension and will be at risk of market and annuity rate falls.  Just focussing on low costs is not enough to render this scheme suitable.

5. Changes to the Financial Assistance Scheme are so mean.  Government is responsible for a huge social injustice and, after years of begging and fighting, these people are offered a bit of assistance and many are excluded.

We are promised the following:

1. New personal pension accounts which will be low cost and ‘high quality’

How will this ‘quality’ be determined?  Who is to say they will be any better than stakeholder pensions and surely the most important thing is not the cost, but the ‘suitability question’.  Individuals will be expected to choose their investment options, with no advice so there is a huge danger of ‘misbuying’.

2. The state pension system will be simpler and more generous

Well, everything is relative!  It may be a bit more simple than the current ludicrous system, but it will certainly not be simple – indeed it will still be the most complex state pension in the developed world.  It may eventually be more generous, but the Chancellor has left himself a huge ‘get-out clause’ so that we are not really sure these reforms will even be implemented, if the affordability test is failed and anyway, not before 2012.

3. The contributory principle will be reformed

Again, this is a bit of good news, but more bad news too.  Abolition of the 10-year rule is great, but the Government will now be introducing two new contribution principles – a child carer weekly credit and a credit for carers of the disabled who care for over 20 hours a week.  So there will still be people who fall foul of these rules and still thousands of civil servants required to police it all.

4. Constant ongoing reviews

The system will also be subject to constant reviews and more tinkering, as the White Paper proposes ‘rolling deregulatory reviews’.  If we did actually get radical reform now, we would be able to look forward to a better system, but as it is we really are still not sure what we will get.