FT comment piece on pension reform - Ros Altmann

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    FT comment piece on pension reform

    FT comment piece on pension reform

    FT comment
    piece on pension reform

    by Dr. Ros Altmann

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

    Pensions policy
    is heading in the wrong direction. It has not adapted to
    improvements in longevity, health and work practices over the past
    50 years. Pensions are in crisis, as companies and individuals cut
    contributions and confidence has collapsed. This will lead to
    poverty and economic decline.

    The UK pension model – based on offloading state pension
    responsibility onto the private sector – is failing. State pensions
    have been cut, and we have spent billions encouraging people to
    transfer into private pensions, because successive Governments
    believed private funds – invested in equities – would deliver better
    pensions over time. Until 2000, unusually high equity returns seemed
    to validate this model, but that was an illusion. Transferring
    pension risk away from the state does not make that risk disappear.
    If the private sector does not deliver, the risk ultimately falls
    back onto the state anyway. State pensions have been reduced too
    far, and private pensions have not offset this, leaving half our
    pensioners (and three-quarters in future) needing means-tested
    pension credit to avoid poverty. This undermines private pensions.
    Pension credit claimants lose 40% or even 100% of any private
    pension, so locking money into a pension just doesn’t make sense for
    basic rate taxpayers. Compulsory contributions in this environment
    are surely unthinkable, since pensions are an unsuitable investment
    for many people.

    We urgently need to change course. Scrapping State Second Pension
    and introducing a £110 per week citizen’s pension, indexed to
    earnings, would simplify state pensions, ending mass means-testing
    and pensioner poverty. The additional £7billion a year cost could be
    financed, without tax increases, by the £11 billion savings from
    abolishing contracting-out rebates. The age at which this pension
    starts could be indexed to longevity. The state would no longer
    provide earnings-related pensions, but it is not clear why it
    should. If people earned more when working, why should this mean
    Government has to pay them more when they are not working?

    A citizen’s pension provides a clear division between what the state
    pays and what people must do themselves. Once private pensions are
    no longer penalised, financial services providers would be free to
    sell pensions to the mass market, with a clear message. Government
    will provide enough to live on, but only just. To have a better
    lifestyle later, you will need more – and your savings won’t be
    penalised by means-testing.

    We then need better pension incentives. Policy has concentrated on
    ‘supply side’ reforms -informed choice and cheaper, simpler products
    – but has ignored demand. People have lost faith in pensions and
    don’t want to contribute. Current incentives rely on tax relief,
    costing £10billion a year, (half of which goes to top-rate
    taxpayers). This is inefficient, opaque and regressive – giving
    highest incentives to those who need least. A system of matching
    payments, providing the same incentive for the same contributions –
    perhaps £2 for every £3 contributed – would be fairer, clearer and
    more effective in encouraging basic rate taxpayers to save. If this
    were coupled with ‘soft compulsion’ reforms, such as requiring
    people to opt out of employer schemes, rather than opting in, or
    encouraging them to put part of any pay rises into a pension each
    year, evidence suggests take-up would dramatically increase.

    Urgent action is needed on occupational pensions. Most final salary
    schemes have closed, as they have become unaffordable. Employers
    expected strong equity returns to meet these open-ended,
    inflation-linked commitments, but they did not. The uncertainty of
    this ‘pray-as-you go’ approach has left huge deficits and thousands
    of people destitute, despite decades of contributions, which has
    undermined confidence.

    Contributions to new occupational money purchase schemes have fallen
    sharply. With average job tenure around 5 years, employers no longer
    feel obliged to provide pensions for their workforce and, if we want
    them to contribute, better incentives are required. Compelling them
    may have some appeal, but employer contributions have to come from
    somewhere. If companies put more money into pensions, then wages,
    investment, employment and/or profits must fall. We must recognise
    financial reality.

    The bottom line is that pensions cannot solve the pensions crisis!
    Policymakers should start this debate. Most people will never be
    able to save enough to provide a ‘decent’ pension. Pensions were
    meant to last 5 or 10 years, but people now expect them to last for
    decades. Paying people not to work, when they are able to, is such a
    waste of resources and is unsustainable. Just raising the retirement
    age is not the answer. A more flexible approach, which can
    accommodate demographic change, is needed. Retirement should be a
    process, rather than an event. There is a new phase of life, waiting
    to be grasped. 10 or 20 years working part-time at older ages. This
    is much healthier for individuals and the economy. The policy
    challenge is to encourage employers to provide jobs and help
    individuals plan for gradually cutting down, rather than suddenly
    stopping work completely.

    We must radically re-think retirement, abandoning fixed retirement
    ages. Pensions could then supplement income, rather than providing a
    complete replacement. Gradual retirement, coupled with a citizen’s
    pension and better incentives, would finally bring pension policy
    into the 21st Century.

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