How will the new Government deal with the Pensions Crisis?
After years of damage, can we revive our pension system?
by Dr. Ros Altmann
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Iain Duncan Smith has taken over as Secretary of State for Work and Pensions. His credentials are strong, especially for welfare and work issues through his leadership of the Centre of Social Justice. He wants to simplify the benefits system, if he can simplify pensions at last, that would be brilliant! However, does he have experience on private pensions and long-term savings?
He takes charge at a crucial time for pensions policy. Pensions hardly featured in the election campaign, but, the demographics demand action, notwithstanding the state of public finances. Those retiring now are often facing financial difficulty. Equally, younger people are not engaging in pensions, as policy has encouraged borrowing, rather than saving and as a series of scandals has hit pension confidence.
We all know there is a pensions crisis. For the past 13 years, we have watched our once-thriving retirement savings culture fall apart. As the baby boom generation comes up to retirement, their state pensions will be too low, their private pensions are often not delivering what they expected, annuity rates have plummeted and companies are struggling with huge pension deficits. Over 2 million pensioners are in poverty, there is mass means-testing in our state pension system, Pension Credit penalises private pensions and we have by far the most complex pension system in the world.
I believe there are ten key areas that urgently need to be addressed. There have been announcements on the first five, and all sound like good news to me, but the details are not yet known and, as always with pensions, the devil is in the detail.
State pension – age, adequacy and complexity
- review state pension age with view to increase to 66 faster than planned
- ‘triple guarantee’ for Basic State Pension to rise by higher of 2.5%, earnings or prices
Being honest about the costs of public sector pensions
- Independent Commission to review affordability
Ending compulsory annuitisation
- commitment to abolish requirement to buy annuity at age 75
Equitable Life scandal
- Will pay compensation
Ending age discrimination and the default retirement age
- Will phase out default retirement age
The following areas are also important, but no announcements have been made on these yet:
- Helping companies struggling with pension deficits
- Reviewing the FSA regulatory approach that makes it too easy to borrow and too hard to save
- Sorting out the mess of higher rate pension tax relief changes
- Reviving a long-term savings culture and improving pension flexibility
- Reviewing auto-enrolment and NESTs – is this safe in the current environment?
In all these areas, we will be watching developments and hoping that finally our Government will act to ensure a revival of our once-strong savings culture.
There is so much to be done, after years of neglectful damage. The opportunity for radical and successful reform is there – I do hope the policymakers will take it.
Dr. Ros Altmann