Feature article published in Daily Mail on pension reform

by Dr. Ros Altmann

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It’s time for
some clear and joined-up thinking on pensions policy. Pensions have
two main functions. Firstly, providing social welfare and secondly,
as an investment vehicle. Social welfare should be Government’s
responsibility, just as unemployment benefit ensures the jobless are
not in abject poverty. Unfortunately, UK pension policy has tried to
force the private sector to take responsibility for both social
insurance and the investment aspects. This has proved unaffordable.

Continuous cuts in state pensions over the years, plus billions of
pounds spent on contracting-out rebates, have left us with the
lowest and most complex state pension system in the developed world.
Forcing company schemes to provide revaluation, spouse cover and
inflation-linking has left employers struggling with huge deficits.
The ideology that private funds, invested in equities, would provide
enough to meet pensioners’ social welfare and investment needs, has
failed.

Attempts to transfer social insurance costs onto the private sector
have backfired, because the costs and risks of private pensions are
too high. Nearly half our pensioners need means-tested pension
credit to avoid poverty, and mass means-testing of pensioners is
undermining private pensions altogether. Since pension credit
claimants lose between 40% and 100% of their private pensions, many
people shouldn’t contribute to pensions at all. Reform of state
pensions is essential, to prevent confidence and contributions
falling further.

What can we do?

Introducing a £110 a week citizen’s pension, indexed to earnings,
would simplify state pensions and clarify the state’s social
insurance role, without undermining the investment role of pensions.
Ending contracting-out would save £11billion a year, easily
financing the extra £7bn annual cost of citizen’s pensions.
Government would no longer provide earnings-related pensions, but
why should society ensure that higher-earners also receive higher
pensions? Surely it is up to them how much they save.

There would be a clear distinction between state and private
pensions. Government provides enough to live on, but only just.
Anyone wanting a better lifestyle later, would need private savings
and these savings would not be penalised by means-testing.

Policymakers would still need to encourage the investment element of
pensions, to provide more than the state minimum. Although
compulsory contributions may sound appealing, they could prove
dangerous. Many employers and individuals are in debt and forcing
them to contribute, especially with pension credit in place, could
be the biggest mis-selling scandal ever. Compulsion would also
damage economic performance, with extra pension contributions
reducing wages, investment, employment or profits. However, ‘soft
compulsion’, including contributing part of each year’s pay rise
into a pension, or automatic enrolment into company schemes, while
still allowing people to opt-out, would be much safer.

Since workplace provision is much more cost-effective than
individual pension arrangements, employer schemes are important.
However, with lifelong employment a rarity, average job-tenure
around five years and pensions confidence collapsing, employers need
meaningful incentives to offer pensions to their workforce.
Individuals, too, need better incentives. Just relying on tax relief
– which gives least help to those who need most – is unfair and
inefficient. Matching incentive payments, say an extra £2 for every
£3 anyone contributed, would be fairer and more effective.

Raising pension age to 70 sounds sensible, but is not a long-term
solution. By 2030, age 70 may be as outdated as 65 is now. Far
better to re-think retirement altogether. Pensions were designed to
last 5 or 10 years, but we now expect to live on them for decades.
What a waste of resources! With improved health and working
conditions, abandoning fixed retirement ages and encouraging
part-time employment in later life, is more flexible and healthier
for people and the economy. Retirement should be a ‘process’ not an
‘event’.

In summary, a citizen’s pension, better incentives, plus gradual
retirement, are radical, workable reforms, to cater for both social
welfare and investment roles of pensions. The sooner we approach
pensions policy with clear thinking, the better.