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.

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