Whenever a group of pensions people get together these days, the conversation seems to get round to the new Conservative Party pensions policy. It is published in a pamphlet entitled “a fair deal for everyone on pensions” and can be downloaded from their website at www.conservatives.com.
The pamphlet is co-authored by David Willetts, MP and Stephen Yeo. David Willets is the Shadow Secretary of State for Work and Pensions and his nickname is “two brains”. Stephen Yeo is a Fellow of the Institute of Actuaries, and his co-authorship of the pamphlet gives a very significant credibility to the costings it contains.
I have heard criticism of the policy and some of the assumptions but I have heard no challenge to the computations themselves.
The pamphlet starts with a brief critique of Labour's pension policy and the effect this is having on UK pension provision. The key point is the increasing reliance on state pension in general and means-testing in particular, contrary to the Government's objective of moving from 60 per cent state and 40 per cent private to 60 per cent private and 40 per cent state pension.
The next chapter analyses the evils of means-testing, including low take-up among the very poorest and penalties for private saving. This is then developed into a concentration on pension credit, concluding that it is unfair to women, does not reward savings properly, and is complicated and intrusive. A descriptive chapter on state pensions follows.
The specific proposals are unveiled in Chapter 5. The Conservatives would increase the basic state pension in line with earnings, while means-tested benefits would increase only in line with prices.
Over a period of years the basic state pension would catch up and overtake means-tested benefits so that anyone who had a full basic state pension would not be in the means-testing net.
This would be paid for in the short term by abolishing the New Deal, which they claim is wasted money anyway. In the long term it would be paid for by abolishing future accrual under state second pension. The saving in cash flow from not paying contracting-out rebates would more than cover the extra cost of basic state pension indexation, leaving money over to be used to incentivise private pension provision.
This might take the form of “buy one get one free”, or Bogof, under which the Government adds £1 for each £1 an individual pays in, up to a certain limit.
Such incentives are likely to be focused on the key target group of middle earners who are not currently providing adequately – alone or with an employer – for old age.
The Conservatives claim that there would be no losers under their proposals but some critics point to working and retired women who do not have a complete entitlement to basic state pension.
The Conservatives also assume that means-tested benefits under Labour would only go up with prices after the next election anyway. They say they will re-do their costings if or when Labour commit to earnings indexation for means-tested benefits beyond the life of this parliament, which is something Labour has conspicuously failed to do so far.
My main criticism of the Conservative policy is that it dismisses contracting-out too readily. The early years of contracting-out showed that it is a powerful incentive for private pension provision if used in the right way. Nobody seems to be seriously considering the option of restoring contracting out to its former glory.
Some people have questioned whether the Conservatives will go back to the drawing board on their pensions policy as a result of the change in their leadership. I doubt this very much. Remember that Michael Howard was a key member of the Shadow Cabinet while this policy was being formulated, so must be assumed to be signed up to it. Also, the policy has been well received.
Whether or not the Conservatives win the next election, their pension policy cannot be ignored. The Government is pretending that the only problems with pensions are in the non-state sector. If nothing else, the new Conservative pensions policy blows that pretence out of the water.