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.

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