Initial

Comments on Pensions Green Paper

by Dr. Ros Altmann

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The

recently published Green Paper on pensions reform contains many

proposals.  The document is produced by the Department for Work

and Pensions.  The proposals relating to ‘Work’ are

extremely valuable, but the proposals relating to ‘Pensions’

are, sadly, wholly inadequate.  There is little in the

Paper’s proposals that will address the real crisis of confidence

in our pensions system.  No new incentives are proposed which

would encourage basic rate taxpayers to put money into pensions, if

they were not doing so before.  In addition, the State pension

system has not been addressed at all, and the operation of the State

system undermines the private system.  As long as there is

means testing which spreads to most of the pensioner population, the

incentive to put money into pensions will be lacking.  Pensions

are no longer suitable for most people (unless they pay higher rate

tax or have substantial sources of other income).  However

cheap and simple the pension system becomes, if pensions are not

suitable, they are not suitable.

The

Green Paper does contain some useful proposals, but there are many

disappointments.  Some of the most important are listed below: 

Good

Points 0f Pensions Green Paper 

Encouragement

of flexible and gradual retirement 

One

tax regime for pensions 

Raising

of ‘trivial commutation limit’ to £10,000 

Requirement

to consult employees before making changes to pension schemes 

Immediate

vesting 

Bringing

self-employed into the State scheme 

Disappointments

0f Pensions Green Paper 

No

increased protection or compensation for those whose pension rights

were not protected by legislation, even though the Green Paper

states that the purpose of pensions law is to protect pensions –

‘legislation is there for a reason – to protect the pension

rights of members’ (p.54)! 

Long

on words – short on action.  Measures are required to improve

confidence now. 

The

paper has not come to grips with the urgent need to manage the

change from a primarily DB system, to one which is primarily DC. 

We have reached a watershed period in pension provision in the UK at

the start of the 21st Century and the old model is breaking down. 

In order for DC to be a success, the issues of contributions,

investment profiles and annuities needed to be tackled, but have not

been. 

No

new incentives for pension contributions by or for target group of

middle earners. 

There

is no recognition of the need to structure dedicated DC investment

products, suitable for different types of people, different age

groups, risk profiles etc.

 

Still

consulting on annuities – we’ve just done this. 

No

changes to state system, pension credit to remain and S2P not to be

joined with BSP.  Just because we are forecasting that the

public cost of providing pensions will remain low up to 2050, does

not mean all is well.  Given a substantial increase in the

proportion of elderly to younger people, this simply implies that

either the burden of providing adequate pensions is being

transferred from State to employer (or private individuals) and/or

that increasing numbers will be living on very low incomes. 

Both of these outcomes have significant negative implications for

economic growth in future.  This issue needs to be recognised

and tackled.  Corporate Britain cannot afford to underwrite

long-term pension liabilities which are being met by the State in

other European countries.  The profitability of our firms will

suffer significantly and our industrial competitiveness will be

eroded. 

Retention

of contracting out, with no real explanation of why the complexity

it entails is worthwhile. 

Reforms

to pensions are mainly ‘supply side’ oriented, rather than

tackling ‘demand side’ issues ie. just giving people information

and simple products will not increase pension contributions unless

people actually want to engage in the process in the first place,

which they currently don’t. 

No

initiatives to ensure advice is more widely available e.g.

encouragement of specialist and basic level of advice and incentives

for employers to offer access to independent advice. 

No

recognition of the fact that, if policy tries to make it cheaper for

employers to provide pensions, then the pensions provided will be

lower.   

The

paper suggests reductions in contribution rates of 20%, 30% and

more, with equanimity. 

No

call for the financial services industry itself to simplify its own

processes, procedures, terminology, application forms and so on. 

Customers find all the jargon so confusing.

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