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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