The Observer – Pensions: We Need a Revolution – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    The Observer – Pensions: We Need a Revolution

    The Observer – Pensions: We Need a Revolution

    The Observer – Pensions: We Need a Revolution

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    Pensions have hit the headlines again. The pensions crisis has been highlighted once more by Tory proposals to accelerate the timetable for raising state pension ages. They say this is necessary in order to fund planned increases to the meagre Basic State Pension. Having risen only in line with price inflation for the past few decades, the basic pension has fallen way behind average earnings. The 2007 Pensions Act provided for a restoration of the link with earnings inflation by 2015 at the latest yet, even before this measure starts, the Conservatives are claiming it may be unaffordable.

    How can this be? The changes to the state pension were part of the detailed package of reforms arising from the 2006 Pensions Commission report, titled ‘A New Pension Settlement for the Twenty-First Century’. Indeed, just three years ago Ministers assured us that these represented ‘the most radical reform of the pension system since Beveridge’ and the Pensions Commission itself welcomed them as ‘a new pensions settlement which could last’. But apparently they already need to be changed. So much for long-term thinking.

    The truth is that the reforms were not really radical. They were a political compromise which has not stood the test of time. The changes entail tinkering with the existing system, tweaking certain parts, instead of the complete pensions overhaul that is needed, in order to bring the system into the 21st Century.

    Can we rely on politicians to rise to this challenge? Political time horizons are short-term, pensions policy is long-term. Politicians’ time horizons are not conducive to pensions policy. The problem is well illustrated by the fact that we have had no less than eighteen Ministers in charge of pensions – and six Pensions Acts – in the last few years.

    Perhaps because pensions are so important to every potential voter, politicians have been too frightened to be truly radical. Leaving the comfort zone of current practice and embarking on a new path may upset vested interest groups, or alienate certain stakeholders. However, there are times when such boldness is essential. I believe this is one of those times.

    Just changing state pension age is not the answer. Just tying the Basic State Pension back to earnings inflation is not a solution either. The national insurance system has failed our pensioners. Our state pension is about the lowest – and by far the most complex – in the developed world. It has also failed to cope adequately with women’s work patterns. Already, just under half of UK pensioners end up having to claim means-tested benefits to avoid poverty. We are heading for a nation of impoverished pensioners, while the Government keeps claiming its pension reforms have sorted everything out for the future.

    Instead of tinkering with the present system, we should think afresh. A radical reform agenda to finally put an end to the complexity, inadequacy and mass means-testing of current state provision.

    We need to end the confusion between pensions as a later-life social safety net and pensions as a long-term savings vehicle. If the State provides a social welfare base, then people can be encouraged to provide more for themselves. But at the moment, the state pension does not provide adequate social welfare and mass means-testing of pensioners undermines private provision.

    After a lifetime of work and contributions, a person with a full national insurance record will be entitled to the princely sum of £95.30 in Basic State Pension – perhaps with a bit extra from the State Second Pension. But this is not enough to avoid poverty, so millions of pensioners have to claim Pension Credit and other means-tested benefits which give them at least £130 a week. Anyone over 60, as long as they have not bothered to save, do not keep working and have no other income can receive much more than those who contributed loyally to national insurance and saved for their future.

    This is not a sustainable position going forward. We need to sweep away the mind-boggling complexity of our current system. We do not need both a Basic State Pension and a Second State Pension – each with different qualification rules – and neither of which provides adequate social welfare. We should merge them together and pay anyone who has lived in the UK for more than, say, the last ten years, a ‘residents’ pension’. A simple, flat-rate basic minimum pension, set at or slightly above the pension credit level.

    This could be paid at least from age 75. The majority of these pensioners are entitled to pension credit anyway, and there would be cost savings from not having to administer the means test. In fact, the cost of administering pension credit is around £200 million a year and the errors made in over-payments by officials amount to around £150 million each year. The costs of such a residents’ pension would easily be funded by changes such as ending contracting out (which could save around £6billion a year straight away), or reducing the regressivity of national insurance, or adjusting the age allowance and tax reliefs.

    A residents’ pension would avoid mass means-testing of pensioners, so pensioners would not be penalised for having saved, as well as encouraging more flexibility around retirement ages and the process of withdrawal from work. Then people can decide whether and how much longer they want to work, and more easily plan for their later life income.

    This could end poverty among the elderly. It could also end the means test for most older citizens and would finally be fair to women, recognising their contribution to society in their own right. This need not even entail extra Government spending. But it would require visionary courage and a commitment to true simplification of pensions – both of which have been conspicuous by their absence in recent years.

    We need to wake up to the scale of the challenges ahead. The first and essential element of a sustainable solution is to overhaul the state pension, simplify the system and make it a stable base on which private income can safely be built. We need radical, long term thinking to deal with this crisis. More tweaking of our outdated system will not do.

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