Critique
of Pensions Bill

by Dr. Ros Altmann

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The
Pensions Bill, issued by the Department for Work and Pensions, has
some very good proposals on ‘Work’ but is sadly inadequate
on ‘Pensions’.

The
move to encourage later and more gradual retirement is to be welcomed,
but the measures designed to restore confidence in pensions and
encourage more people to contribute are simply not enough to address
the crisis which has built up in our system.

Three
main areas are missing:

1.
No compensation for those who have suffered as a result of believing
the last Government’s promises that it was going to protect
pensions and make them safe!

2.
No improvements to the current, complicated State system.

3.
No new incentives for individuals or companies who were not contributing
to pensions yesterday, to start to do so tomorrow.

1.
Compensation:
In order to restore confidence, the Government should agree to compensate
those people who have lost their pensions on employer insolvency.
Agreement to compensate those who have lost their pensions after
decades of contributions, which they were assured were protected,
is urgent. There are certain steps which need to be taken immediately.
Annuity purchase should be put on hold so that Government could
eventually use the assets in these funds, to pay out all members’
pensions over time as they become due. This will enable the Exchequer
to right this injustice without having to find new money for many
years. During this time, Government can set aside funds to continue
paying the pension entitlements. I estimate that this will cost
a total of around £5 billion over 50 years which is actually
under £100 million a year on average. This sum is easily found
within the DWP budget and would be a tiny price to pay, to restore
confidence in employer pensions.

Since
the initial premiums for the PPF will only be flat-rate, perhaps
the insurance could be introduced now, rather than waiting until
next year. Then, no more people should be affected by the current
unfair laws and proper plans could be drawn up to organise the compensation.

If
Government waits too long, more schemes may have wasted their assets
on buying expensive annuities from the only two providers who are
now offering them and the cost of compensation will be much higher.
Also, if Government is forced to compensate by the union case being
brought in the European Court, the beneficial effect on confidence
will be much lower. Government should voluntarily agree this, to
show members that they can trust the system when the law claims
you are protected.

The
other concern on the PPF proposals is that there is no penalty for
underfunding of pension promises. If we move to scheme-specific
funding standards and away from the MFR, this implies that schemes
could be funded even less well than they currently are. This could
mean that we will run into exactly the same problems as were faced
by the PBGC in the US, with severely underfunded schemes being dumped
on the insurance system. It is not clear when any underfunding penalties
will be imposed, but they are vital.

2.
Lack of incentives:
The Government is focussing on the ‘supply side’ of
pensions – offering information, leaflets, decision trees
and cheaper products, – but has not understood that it is ‘demand’
for pensions that is the main problem. People simply don’t
trust pensions and don’t want to put their money in. We urgently
need significantly better incentives to encourage reluctant savers
to part with their money for the long term and struggling employers
to try to provide pensions for their workforce. One idea that might
be considered is giving everyone higher rate tax relief, rather
than the current system which rewards those with the lowest incomes
the least. The top 10% of taxpayers receive £2 from the State
for every £3 they put into their pensions. Everyone else receives
only 85p. That’s the way tax relief works and it is simply
not attractive enough to get people to put money into pensions.

3.
Problems of the State system:
Successive Governments have continually tried to provide pensions
on the cheap and this Government has carried on the trend. Our State
pension is the lowest of all major countries, by some considerable
margin, and is due to fall further. Our system has been relying
on employers and individuals to top up the State pension, in order
to have a more adequate income in old age. Until the last few years,
we had a pension system that was the envy of most other countries,
with apparently generous, well funded employer schemes providing
good incomes. However, this situation has changed dramatically,
as asset prices and interest rates have fallen and longevity has
risen. Employers are dramatically cutting back their contributions
to pensions (as they move from final salary, to money purchase arrangements).
This means that individuals will need to contribute more, but the
State pension system is now a disincentive to pensions. The means
tested pension credit is likely to cover over three quarters of
pensioners and is making pension saving potentially unsuitable for
most of the population. In this environment, it is hardly surprising
that people do not want to put money into pensions. We must re-evaluate
the State pension system and ensure that it does not undermine private
provision. Either pay higher level of State support, without means
testing, funded by ending contracting out.

To sum up:

The
scale of the crisis demands much more urgent action than is currently
proposed. People have lost confidence in pensions and difficult
decisions are required in order to address this. Unfortunately,
much of the Bill has ducked the most difficult issues and left it
to others to fill in the details. This is not enough. Tomorrow’s
pensioners need something done today.