Examples of how loss of final salary pension on wind-up has devastated people’s lives
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
When Labour came to office, it inherited what was considered to be one of the best private pension savings systems in the world. We had more private pension savings in this country than in the rest of Europe put together. Also, the Government seemed to have long-term state pension costs under control, despite the ageing of the population in the coming decades. The Treasury had been relying on falling state pensions being supplemented by increasingly generous private pensions to provide decent retirement income.
Before 1997, Britain had the lowest, most complex state pension, accompanied by very generous, but lightly regulated private schemes. Some 9 years on, we still have about the lowest state pension in the world, but it is even more complex. Gordon Brown introduced a raft of new benefits, some – like winter fuel allowances – are universal, and even paid to pensioners spending the winter in sunny climes, while others – like pension credit – are means-tested. Around half of pensioners now rely on means-tested benefits to escape poverty and although it is true that pension credit has lifted many pensioners out of poverty, its unpopularity and complexity makes it administratively expensive and low take-up still leaves over a million pensioners in poverty.
The Treasury’s insistence on means-testing as the long-term solution to state pension ‘affordability’ is surprising. It goes against views expressed by the Chancellor in 1993, when he told the Labour Party Conference: ‘I want the next Labour Government to achieve what in 50 years of the Welfare State has never been achieved. The end of the means test for our elderly people.’ In fact, he has achieved quite the reverse, with a far higher proportion of pensioners on means-testing now than the 39% in 1997.
Pension credit has destabilised our whole pension system and left millions more pensioners at risk of poverty in future. Private pensions are now an unsuitable investment for the majority of the population, because so many future pensioners will lose at least 40%, or even 100% of their pension in the pension credit means-test on retirement.
It is difficult to avoid the conclusion that this Government has been incompetent on pensions policy.
For example, since 1997, the once-thriving company pension system has crumbled. Most traditional final salary schemes have closed and replacement money purchase schemes are far less generous. What happened?
The first major policy change introduced by the Chancellor, in June 1997, was to remove dividend tax relief from UK pension funds, thus reducing dividend income for all pension schemes. Some estimates suggest this has removed a capitalised value of over £100billion from UK pension funds to date.
Of course, at the time, these funds were thought to be in surplus, and the Treasury kept reassuring scheme members that their pensions were completely safe. However, these false reassurances continued even once huge deficits arose, and the Chancellor offered no additional support to help schemes whose members who were increasingly at risk of not receiving the pensions they were relying on. In fact, Gordon Brown kept weakening the official funding standard, in a mis-guided effort to stop employers closing their schemes, but this short-term palliative merely hid longer-term underlying problems from the members who should have been told about the risks they were facing. Tragically, over 100,000 people have lost most or all their company pension, when their ‘safe’ scheme wound-up. The Chancellor has refused to make sufficient money available to remedy this injustice, despite the recommendations of the Parliamentary Ombudsman and Public Administration Select Committee. Instead, he has presided over the debacle of a Financial ‘Assistance’ Scheme which has provided almost no ‘assistance’ at all to the thousands who desperately need it and has further undermined pension confidence.
Future victims of failed occupational pension schemes have been promised protection by a new ‘Pension Protection Fund’, which is a huge improvement of course, but again the Treasury has refused to underpin it, so it is already in deficit.
Despite Green Papers, White Papers, reviews, consultations and initiatives aimed at encouraging more pension provision, the savings ratio has collapsed under this Chancellor (and borrowing has soared). In fact, the enormous increase in regulatory burdens on companies selling pensions means it is now much easier for individuals to take out a £20,000 loan they cannot pay back, than to put £20 a month into a stakeholder pension.
These stakeholder pensions were introduced in 2002 to help moderate earners access cheap, simple pension products. The pensions industry spent billions of pounds on set-up and marketing costs, but , given the loss of confidence and disincentives of means-testing, the ‘target group’ has not bought them.
The Treasury’s much-vaunted tax ‘simplification’ of pensions in April 2006 has also been something of a fiasco in many ways – the new legislation extends to more pages than the old and the Chancellor keeps changing the rules, so no-one can plan properly. Remember the last-minute u-turn on allowing residential property into personal pensions? Or the latest change of mind on forcing annuitisation over age 75? Having clearly indicated that it would not require over-75’s to annuitise, the Treasury now says this was never the intention! The uncertainty created by such dithering and micro-meddling has caused many people to give up on pensions.
If Gordon Brown really did want to increase pension savings, his policies have been spectacularly incompetent. Sadly, the Government has squandered a huge opportunity to put our pension system on a sustainable path for the future because of the Chancellor’s insistence on means-testing and complexity as core components of the state pension system. The recent White Paper is another missed opportunity to give our pensioners the decent income they deserve and introduce radical reform of state pensions, to provide a universal, non means-tested underpin for retirement income. Without this, private pensions will continue to flounder and this Chancellor could go down in history as the one who destroyed our once-envied private pension system.