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An end to the means

Is a decent basic state pension finally on the cards?

Is the prospect of a universal state pension at the level of the pension credit actually within touching distance? An increasing proportion of the pension professionals I talk to seem to think so.

It is fair to say that the pension sector is in a period of unparalleled self-examination right now, making the Turner review look like an exercise in tinkering by comparison. The sheer length of the list of reviews, regulation changes and floated policy ideas currently ongoing is overwhelming – Nest and automatic enrolment, public sector pensions, the obligation to buy an annuity at age 75, the change to indexation, an end to contracting out of final-salary schemes, transfers from DB and universal benefits such as winter fuel allowance to name but a few.

Looked at in isolation, the process may seem piecemeal but talk to those who have been in and out of Whitehall having input into the various reviews and you get a sense that at last things might be going in the right direction.

It would be wrong to say that a consensus is forming around the idea of a decent basic state pension. That consensus has been there for years – the problem was just that Gordon Brown was not part of it. Now he is out of the equation, supporters of a state pension, at around £130 a week, are beginning to believe their time has come.

Pensions minister Steve Webb does not need any persuading of the virtues of such a concept, having backed it for years. But if he did, he would not be short of ideas of how to pay for it.

Last month in this column, I referred to the detailed work done by Michael Johnson, a fellow of the Conservative-friendly Centre for Policy Studies, showing how taking money from higher-rate tax relief could pay for the abolition of means-testing by boosting the basic state pension.

Earlier this year, Baroness Hollis put out a paper explaining how, for virtually no net cost to the Treasury, state pension could be boosted to the level of pension credit by 2020 by bringing forward the flattening and capping of state second pension.

Some high-earners might realise they could have been in for a £160 a week in 30 years’ time but now find it capped at £130, argued Hollis, but their partners would probably have a bigger pension as a result, meaning household income was roughly the same.

And a third solution, put to me this week by Standard Life’s John Lawson is simply to tax higher-earning pensioners. Rather than means-test 45 per cent of pensioners at massive cost to us all – if ever there were a pointless Government department worth culling surely it is the DWP’s pension credit office– why not give everyone more and take the difference back off 55 per cent of pensioners through tax?

I doubt any of these solutions are 100 per cent novel as all these ideas have roots in papers published over many years. The difference now is that we have a pensions minister who supports the basic premise at the core of such proposals.

Now Brown is no longer in office, you have to look hard to find anyone who actually supports sticking with the current means-testing mess but there are bound to be some civil servants in the Treasury who find the thought of such radical change too challenging to embrace and Webb’s biggest task remains winning them over.

Means-testing has been a thorn in the side of the pensions industry for decades. We have barely two weeks to the start of the party conference season where crucial decisions could be made, provided the political will is there. Webb should be given all possible support to get his point across this autumn.

John Greenwood is editor of Corporate Adviser

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