Comments on proposals of Pensions Commission Second Report

by Dr. Ros Altmann

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This excellent report addresses the important pension issues facing us in the coming decades.  It proposes reducing means-testing, state pensions that focus on poverty prevention, rather than earnings replacement, providing low-cost national pension savings vehicles for the mass market and a national debate about the length of time people in future can expect to be retired for.  All of this is welcome, but I would like to see the measures introduced much sooner.  In my view, radical changes, particularly to the state pension system, are urgent and the longer we delay change, the worse our pensions crisis becomes. 

Reforming the state pension system, which no-one currently understands anyway, is essential and the administration cost savings from ending mass means-testing of pensioners, plus the money saved by abandoning contracting-out rebates, would be sufficient to pay a £110 a week citizen’s pension to all pensioners over age 65 from 2010.  This would immediately remove the disincentives imposed by the state pension system on private pensions, and would also lift all pensioners out of poverty, because there would be no take-up problems.  It would also address the innate disadvantages faced by women in the current pension system, which the Commission rightly recognises but does not propose to radically address now.

As regards new incentives for individuals and employers, the Commission recognises the inequity and inefficiency of using tax relief, but plans to retain it.  This is disappointing, although there is an interesting element of ‘matching’ contributions in the proposed National Pension Savings Scheme, with 4% employee contributions effectively being matched pound for pound. 

Individuals need to understand that they will have to make choices about where their later life income will come from and this report should help start the debate on these issues.  I am fully supportive of auto-enrollment, rather than compulsion, but it is also essential that any national pension savings vehicle is truly safe.  The scandal of people who saved all their lives and have ended up with no pension should never be allowed to recur.

Once the roles of the state and private pensions are clearly separated, with state pensions going back to providing the social insurance of poverty prevention (national ‘insurance’ in fact), then the private sector is freed to choose between more saving or extending working life – via part-time work in particular – in order to have higher incomes later on.  Society should make it as easy as possible for people to save, aim to restore confidence in our system, but recognise that, for many people, savings alone will not provide enough income for 30 years of retirement, so that working longer will be much better for themselves and for the whole economy.  If this report speeds the move towards this goal, it will have been a huge success.