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Steve Bee: Can the state pension deliver what’s needed?

steve bee

I have always thought the old-age pension, as it used to be called, was a good idea. The idea was it should provide working people with a bedrock on which to build their lifetime savings. There is, though, clearly a danger in providing a basic pension for all in that it has to be sufficient to provide at least a subsistence level of income for anyone who chooses to make no other provision for themselves.

Others still may be unable to make further provision in terms of personal savings and the state-provided pension therefore needs to be of sufficient value to keep them from the ignominy of additional means-tested support; the availability of which would merely serve to undermine all additional pension saving by everyone else.

William Beveridge summed this up succinctly when he said: “The state, in organising security, should not stifle incentive, opportunity, responsibility; in establishing a national minimum it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.”

Fine words, but words that were not acted on by succeeding generations of politicians as they managed the decline of our state pension over the second half of the 20th century. We had to wait until the second decade of the 21st century for the abandonment of the disastrous 1960s experiment that saw the state take on provision of a second, earnings-related pension for half the UK workforce, before we were able to finally introduce a single-tier, subsistence-level pension for our older citizens.

That new state pension should provide the clarity and certainty Beveridge envisioned and encourage widespread pension saving under the auto-enrolment reforms. We have a real chance that the vast majority in the UK workforce will be able to accumulate lifetime pension savings through workplace pension schemes.

But there is much talk these days of the affordability of state pension entitlements. Many say the state pension should not be an entitlement, but a benefit. That  goes against the grain of what social security is all about.

Beveridge, again, explained as follows: “Any plan of social security worthy of its name must ensure that every citizen, fulfilling during his working life the obligation of service according to his powers, can claim as of right when he is past work an income adequate to maintain him.

“This means providing, as an essential part of the plan, a pension on retirement from work which is enough for subsistence, even though the pensioner has no other resources whatever; some pensioners will have no other resources. It means also providing a pension which is not reduced if the pensioner has resources.

“On the contrary, direct encouragement of voluntary insurance or saving to meet abnormal needs or to maintain standards of comfort above subsistence level, is an essential part of the plan for social security. It follows the plan must include provision of pensions up to subsistence level, given as of right to people who are past work, regardless of the other resources that they then possess, but in respect of service and contribution during working life.”

Steve Bee is director at Jargonfree Benefits

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. At last. Someone with recognised expertise seems to agree with what I have been bleating on about for years. Not only can the State Pension deliver – it should. Unfortunately as Bevan said so many years ago “The secret of the National Insurance fund is that there isn’t one.” If governments then and since had any honesty or ethics National Insurance contributions would have been ring fenced to provide ‘what it said on the tin’ – pensions and health care. As it is it is part of general taxation and the populace is conned into believing that BRT is 20%. When you count in the employers’ contribution it is nearer 40% and even higher for higher rate taxpayers.
    As it is the UK still pays the most parsimonious pension in the OECD. And we now have the abrogation of responsibility where the onus is now shrugged off onto the private sector under the auspices of AE. How much more honest just to increase tax to pay for a better State Pension, with no investment risk or uncertainty.

    So articles like this from a recognised ‘guru’ are most welcome indeed.

  2. It’s always a pleasure to read your articles Mr Bee. You describe the New State Pension as being at “subsistence-level” and I am not sure that it is. At least, it may be for the current cohort nearing retirement, the vast majority of whom own their houses. My concern is that it is nowhere near the subsistence-level of “Generation Rent” as they reach state pension age. There is a significant risk that it will continue to fail the very people for whom it should be providing security in retirement, and benefit a great number of people who do not need it. I am absolutely in agreement with the ideals set out by William Beveridge, but I suspect that these are simply no longer affordable. If this is the case then we’ll need to make difficult compromises to ensure that it does deliver what is needed for future generations.

  3. Whilst an efficiently run State Pension should form the ‘bedrock’ it is also vital that private pensions are attractive, efficient and grest value. Unfortunately millions have become disillusioned by the horrendously expensive personal pensions that were once promoted by Steve Bee and his colleagues at various insurers in the 80s through to 2000+. There is simply not enough money to support a swollen financial services industry and provide decent pensions.

  4. Trevor Harrington 19th September 2016 at 9:08 pm

    Society moves on.

    Years ago, there were the “haves” and the “have nots”, and indeed Beveridge did a lot to equal this imbalance in society. People succeeded and invested in themselves, their businesses and, of course, provided for their futures by investing in land, housing and stock markets. these people became the higher society and the wealthy few.

    By investing their hugely excessive earned income into assets with dividends and rental incomes, their wealth was transformed into real assets with variable values. However, the day to day value was less relevant provided that those assets had increasing rentals or dividends to support the investor later in life.

    In those far off days, it was perceived that the people who were now known as the “haves” as distinct from the “have nots”, with their wealth and land and properties, had acquired that largess by unfair advantage, by supressing the poor, and exploiting them to an unacceptable level. So, the people with what was perceived to be less than their “fair share” of the country’s prosperity rose up and protested, quite rightly, that they should be given more of the new wealth and social security in society, along with health care and pensions.

    I do not think that many would disagree with the above historical course, or indeed it’s inevitable outcome.

    We now arrive at today’s political, economic and social position. Many would argue that the public sector pension (unfunded and paid for by the private sector) has been so generous, and so lucrative for the participants, that the new “haves” are now those public sector pensioners who have escaped through the system and currently reside on pensions which are massively beyond anything which they have earned or deserve. The “have nots” are the new society who have seen their private company pensions decimated, and in many cases destroyed, along with their personal pensions which have been taxed and decimated by successive Governments who were more intent on buying the public sector vote.

    How has this new social inequality come about – by way of successive Governments massive overspending on their own pet projects which have no plan for proper funding, but projects which simply reside in their own belief of what they happen to think is right for the nation. The result has been many decades of national budget deficits and an accumulating national debt, which is now so huge that in a different interest rate scenario would undoubtedly bankrupt the entire Country, and probably the entire western World as we know it today.

    I have heard it said that at least 50% of the current national debt is entirely attributable to our unfunded public sector pension awards, notably the hundreds of thousands of such pensions which have been awarded early, through spurious disabilities, so called ill health, and early retirement redundancy benefits.

    So, the this Government, of this day, faces the enormous financial problem of how to fund the profligacy of their (our?) predecessors, and how to face the current day “haves” compared with the “have nots”.

    Huge cuts in public sector spending would no longer meet this sort of shortfall, but pushing out the state pension from age 60 to 67 for women and 65 to age 67 for men will go a very long way towards closing that yawning financial gap. Especially if you also “average” the state pension down to £151 per week instead of the awards of recent years where many state pensioners are receiving over £225 per week.

    Alongside this, we also have to address the real problem of huge and undeserved pensions (unearned) being awarded to the public sector, not only in the future but also those which have been awarded in the recent past.

    The maximum lifetime pension allowance is coming down again next year to £800,000 or 20 x £40,000 per year – quite right too.

    In my opinion, those who are already in receipt of pensions in excess of these figures will undoubtedly shortly be taxed at a super tax rate, probably starting at an additional 10% on marginal pension in excess of £40,000 and then rising over the next few years to anything approaching 25%. This is, of course, in addition to the existing rates of personal taxation.

    Equally, quite right too.

    You heard it here first.

    • Trevor
      You sound like a member of Momentum. While I can’t argue about your criticism of public sector pensions reducing LTA is chucking out the baby with the bathwater. “People succeeded and invested in themselves, their businesses and, of course, provided for their futures by investing in land, housing and stock markets.” Sure! These people worked bloody hard. Often provided employment and contributed hugely to GDP through their entrepreneurship. Your view is Marxism gone nuts and has been proven not to work. It is actually anti-capitalist. I presume you have worked hard – don’t you think you are entitled to the fruits of your efforts? Your (in my opinion warped) view that “acquired that largess by unfair advantage, by supressing the poor, and exploiting them to an unacceptable level” is not in general borne out. (Yes there are well publicised exceptions, but by no means the rule). In my two careers I can say, hand on heart that this was as far from the truth as it is possible to get. There are plenty of good employers who have amassed huge riches (regrettably I’m not among them) while their employees have also benefited (true in my own case).

      Remember that the Government still encourages what you are pleased to call inequality. Those who can afford to spend (approx.) £19k can enhance their state pensions by £25 per week; equivalent to a return of around 7%. Do you really think that these people obtained their £19k by going out and robbing the poor?

      So you want to tax those who have saved and now have decent pensions? (Yes I concede that something needs to be done about some of the obscene public sector pensions – but that is not to say that the private sector should be penalised as well). Well what about those who also have half a million plus in ISAs and are enjoying tax free income? Do you want to tax them too?
      Once Jeremy has appointed you to the shadow cabinet it will be time to emigrate.

      Your view

      • Trevor Harrington 20th September 2016 at 5:20 pm

        Dear Harry,

        In your vernacular … you have me wrong mate … I suggest you read my previous post without any of your more obvious pre-conceived ideas of what it might contain.

        My first reference to the “haves” was concerning those employers in Edwardian times who were undoubtedly exploiting the working man, or at least by todays standards they certainly were.
        I am indeed very much advocating the proper reward for those who deserve it, as distinct from those who do not.

        Large numbers of those who very obviously do not deserve it are those many hundreds of thousands who have fraudulently claimed their Public Sector pensions early, through spurious claims of ill health, or those who have been fettered into high salary positions four or five years before retirement, after a working lifetime in lowly salaried positions.

        From the same sector (public sector) there were those many thousands who were cajoled into early retirement at age 53 with full enhancement of pensions to prospective age 60 (Teachers in the early 1990s), because it was politically more acceptable rather than making them redundant.

        As far as my own personal knowledge is concerned, I could talk to you about the dozens of policemen retired with bad backs in their 40s and 50s, who then immediately take up further employment. Indeed I could talk about the case of a chief constable who took four chief inspectors on one side on a Friday, signed them all up with bad backs, early retired them on enhanced benefits the same day, and commenced work for the security company, of which the chief constable was MD, transporting prisoners between prisons … on the Monday. We could discuss the GP doctor, who discovered that his NHS pension was going to be £40,000pa and who also discovered that by feeding his GP practice partnership profits back though as salary for five years, he could retire on an NHS pension of over £100,000 per year … and who now spends his life happily in New Zealand and The UK. We could talk about the NHS dietician who moved from one county health service on a very generous redundancy package involving £60,000 in cash, started work as head dietician for the NHS county next door, served less than five years (continuous service between the counties you know) and retired at age 53 through ill health and an enhanced pension to age 60 … on £38,000 per year pension … Or, how about the policeman who was likely to be subject to prosecution as he had run over a pedestrian and killed him, who was ordered to take early retirement through ill health so that the force would not come into disrepute … it goes on … and their are thousands of them countrywide.

        Also in this bunch of “underserved and unearned pension benefits” are those private sector employees who have fed ravenously from the table of ridiculously high salaries in the boardroom for a few years and then cleared off with some huge pension (in my analogy exceeding £40,000 per year), for which they have not served the appropriate time and have not paid proper personal pension contributions for during their limited period of employment, but for whom the lower salary earners are now destined to pay for him for the rest of their lives.

        My point is this … It has been speculated that possibly as much as half of the national deficit, and the resultant national debt, is attributable to public sector employees who have acquired pension benefits which are “undeserved or unearned”, and that the solution seems to be to remove the state old age pension, particularly from those who have actually earned it.

        Having said all this, I do not know of any other viable solution to the national debt, and I am saying that the shrinking lifetime allowance is a natural progression to the point where excessive pensions (over £40,000 pa) that are already in payment are quite likely to be the next source of extra revenue which is needed to pay off the national debt – especially since many of the pensions of that size, and already in payment … are …. wrong.

        • Trevor

          As I said, I have no issue with your diatribe against public sector pensions. By and large I agree with you. However I draw the line at any circumscribing of the private sector, no matter how unjustified you may regard some of it. That is up to owners and shareholders (same thing really) and is not the business of bureaucrats and regulators.

          • Agreed – except unfortunately, the Bureaucrats and Regulators are actually the owners and the shareholders, they are often precisely the people who are fraudulently claiming the unearned public and private sector pension …… and turkeys do not vote for Christmas.

  5. I’m sure William Beveridge would be appalled that 4% of state pensioners have a frozen pension based solely on where they live even though they have paid their NI contributions like everyone else.

  6. In response to Harry Katz, I thought that the N.I.Fund was ring-fenced ? I know that government borrow from it through the Debt Management Office but have to repay with interest as in the 2007/08 year – £1.3 billion . When the Fund gets too low, they have to top it up from taxes but that has only been done on a couple of occasions and I recall that it was in surplus to the tune of nearly 50 Billion not so long back.
    However, I am not seeking any arguments with you on that point.
    The big issue is the pension itself which is the property of the pensioner and not the government who are purely administrators of it.
    Denying a minority 4% of pensioners their rightful pension uprating which is based on the contributions of the pensioner and nothing to do with the country that they live in is fraud in the real world but they have made it law by section 20 being introduced into the Pension Act.
    The UK is the only member of the OECD to have such a discriminatory policy which goes against just about every agreement signed with respect to equality including the Charter if the Commonwealth signed by the Queen on their behalf. These may not be mandatory agreements but the word of the politicians is seen worldwide as being untrustworthy and the ‘frozen countries’ will always be asking questions and we will keep asking them to do so.

  7. Andy Robertson-Fox 20th September 2016 at 8:47 am

    I am sure that Steve Bee is more than well aware that the first need for 4% of all UK State Retired Pensioners is the abolition of Clause 20 of the Pension Act 2014. The current policy whereby it is frozen in some overseas countries at the level at which it is first paid in that country but up-rated annually in other foreign countries is simply irrational, illogical discrimination and totally unjust. Perhaps, when they have leveled that playing field moving it will be appropriate to move on to the issues Steve raises.

  8. @Trevor Harrington
    With regard to your “heard it here first” comment, it is certainly not the first time I have heard the’blame it all on the public sector workers pensions’ nonsense that you are spouting. I will mention it to my wealthy dustman when I see him on Friday, in his Armani suit and Rolex. It’s not the public sector workers who have caused the problems within the private sector. It’s giving too much money and power to the wrong people, generally bad policies, quantitative easing and tax breaks to the undeserving.

  9. For reasons that are clearer by each passing year, I too am of the opinion that an “Old Age Pension” is a good idea! I am also of the opinion that William Beveridge’s quote “The state, in organising security, should not stifle incentive, opportunity, responsibility; in establishing a national minimum it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family”, opens a much wider problem. If we are to accept, and I believe most people do, that the state has a central role in providing security whilst not stifling incentive or opportunity, then surely the state has a responsibility in educating people as to what incentives and opportunities actually are? As a society, people have a wide range of knowledge on all subjects ranging from no knowledge at all, up to being an expert. Financial knowledge, and especially pension planning is no exception. In the last month I have been the one to explain to a middle age teacher that she is now going to receive her pension at 67 and not 60, I have pointed out the benefits of joining a company pension scheme to a 21 year old who wasn’t going to bother because she was only going to be there “a few years” (the employer contribution was going to be nearly £400/m!) and I had to temper the expectations of a 62 year old chap on minimum wage who was under the impression that he would “be alright” now he had been auto-enrolled into what would be his only other pension apart from the state.

    I am lucky that nowadays I get to work and talk with a number of people taking their first steps into employment. They can range from highly qualified graduates to entry level employees in minimum wage situations. It does not matter what the level of education is, I find the knowledge of financial matters woefully low across the board. I have lived through a time where knowledge of retirement planning was left in the main to salesmen, to the current situation where good advice is available to those who can pay, otherwise here’s a state endorsed flowchart. Neither is useful. Neither is the current hype around auto-enrollment which, if it giving any impression at all, is giving the impression that it will be much better that it actually will be.

    I cannot see how this situation can be improved for those now in work, and, extremely reluctantly, I am almost at the point where I think a whole generation is going to be wasted in terms of helping them understand how and why they should be active in planning their own security in retirement. I can however, see how the situation can be improved for the new generation. Introduce a full and independent financial awareness subject into the school curriculum and send people into the workplace with the knowledge that will give them the genuine ability to understand and choose the right incentives and opportunities.

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