Sunday Post – What next for pensions

by Dr. Ros Altmann

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What next for pensions? The Tories’ proposals to raise the state pension age to 66 much more quickly than currently planned caused quite a stir.

Certainly, longer working lives are inevitable, especially as people are living longer, staying healthier and as increasing numbers of baby boomers reach age 65 in the next few years.

But the state pension age should not be increased hastily, without carefully considering how this will fit with other parts of our pension system. Instead of continually tinkering with bits of the state pension, we need to radically rethink the whole issue of both pensions and retirement.

We have had twelve years of missed opportunities while our pension system has been falling apart. I really hope that any future Government will make it one of their top policy priorities to sort this out. Pensions are important to all of us and a comprehensive rethink is essential.

So far, politicians have failed to rise to this challenge. Continuous meddling and fiddling with pensions in the last few years caused huge damage. Short-term political time horizons do not fit well with long-term pensions policy. This is amply illustrated by the fact that we have had no less than eighteen Ministers in charge of pensions – and six major Pensions Acts – just in the last few years.

In fact, the legislation passed in 2007 and 2008 has not even started yet, and is apparently already in need of reform!

The proposed rise in state pension age is designed to cope with the cost of increasing the Basic State Pension in line with earnings, instead of prices from around 2015. But just three years ago the Government said that the planned increase was affordable, as part of a radical reform package that represented a long-term solution to our pension problems and would be ‘A New Pensions Settlement for the Twenty-First Century’. So much for politicians’ long-term thinking.

The truth is that the Government’s reform programme, introduced amid much fanfare, was not really radical. It made some changes to the existing system, tweaking certain parts, but was not the complete pensions overhaul that we so urgently need in order to get us back on the right path.

In many ways, the biggest failing of this Government has been on pensions. That is why I urge the Tories to think carefully about their pensions policy proposals. Even before the credit crisis, pensions were in trouble, but now the falling markets and falling interest rates have damaged pensioners and their pensions significantly. Of course we have to deal with our deficits, but raising the state pension age is not necessarily the best way forward.

Indeed the initial announcement of an increase in the starting age for state pensions to 66 in 2016 had to be hastily clarified, to explain that it only applied to men. Women’s pension age in 2016 will be 63 and will not reach age 66 until 2022. This indicates the importance of carefully considering all aspects of pension reform before announcing changes. There are so many complexities to cope with and just changing one part of the system will have consequences and repercussions elsewhere.

In fact, it is possible that raising the pension age may not generate the anticipated cost savings, unless accompanied by other changes. If 65 year olds cannot find work, they may be forced onto means-tested benefits and Pension Credit while they wait for their state pension to start. This could even increase public expenditure, because Pension Credit pays £130 a week which is actually much more than the full Basic State Pension of only £95.30 a week.

Nearly half our pensioners are entitled to Pension Credit. This is a disaster for pensions because it penalises private pension savings, as well as making it less worthwhile for poorer older people to keep working.

The reality is that our national insurance pension system is not fit for purpose. Even with both the Basic State Pension and Second State Pension, workers may still end up in poverty. This is a disgrace.

The Tories have said they will set up a review of the pension age. That is welcome but far too narrow. Any review should look at a much broader range of pension issues, including consideration of public sector and private sector pensions, as well as annuities and part-time work in later life. The review needs to work on ensuring a long-term sustainable solution to the pensions crisis.

There are, in fact, far better ways to save money on pensions than simply raising the pension age. For example, ending the system of contracting out of the State Second Pension could save around £6billion a year immediately – no need to wait until 2016 for the savings. Changing the age allowance and tax reliefs could even allow a much improved pension for all older pensioners.

We could actually afford to pay a much higher, flat-rate pension without means testing to all older pensioners. This would mean significant cost savings in administration compared with the current system of administering complex mean-tests for millions of pensioners.

Paying a fairer, higher state pension would be a much better exchange for a later pension age. Let’s have a comprehensive, independent review, covering all aspects of pensions, not just the pension age. Whoever forms the next Government, I beg them to recognize these challenges and opportunities for all our futures.