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Does Smith have mettle to forge a new system?

As I write this, publication of Alan Pickering&#39s pension simplification review is expected “some time in July”. At the risk of having already been proved wrong, there follow a few thoughts about this process.

It is now widely anticipated that Pickering will recognise the need for a significant simplification of the UK pension system. It is also expected that he will acknowledge the fundamental interdependence of the state and private pension systems. The logical conclusion is that when he proposes a range of options for simplification, some of them will have significant implications for the state system.

The review will, of course, have the status of information and not instruction for new Work and Pensions Secretary Andrew Smith. He will be free to welcome and then ignore the report. It would be much preferable if he took this rare opportunity to implement some fundamental changes that put the UK system on a politically sustainable footing.

So far, Smith has kept a relatively low profile. He has made the necessary noises about the sterling work of his predecessor and has asserted that the Government has “the basic structure of the pension system right”. So far, so vague. Basic structure could mean pretty much anything, allowing a fair degree of room for manoeuvre. In Smith&#39s recent appearance at the TUC pension summit, he even went so far as to say he was “prepared to be radical to restore people&#39s faith in the pension promise”.

Does this mean the Secretary has an open mind? We must hope so but it is worth remembering that Smith is very close to Chancellor Gordon Brown, as was his predecessor Alistair Darling. The Government&#39s pension strategy is very much the creature of the Chancellor and, until he accepts the case for significant change, there is unlikely to be much movement.

The Chancellor has already committed significant new resources to state pensions, both in terms of new financial resources and new thinking and legislative action. He may well feel the job is at least half over and only the private sector needs further work.

That this is not so was brought out very sharply at a recent IPPR pension conference. At this event, Shadow Work and Pensions Secretary David Willetts described the new state second pension as “a very bizarre looking creature” and mused that “it does not look as though it will last very long”. This is rather close to saying that, if the Conservatives had a pension strategy, there would be no place in it for the state second pension. Pension policy requires broad consensus because it needs to survive for the long term and individuals need to be able to plan for the distant future.

One area of consensus is the need for a significant simplification of the pension environment. Another concerns the future extent of means-testing. On introduction later this year, the pension credit is set to extend means-testing to half of current pensioners. This number is likely to grow over time to more than two-thirds of pensioners.

Not only is means-testing unpopular with the public but it creates disincentives to make private savings.

Two other comments at our conference have stuck with me. The first was by National Association of Pension Funds chairman Peter Thompson, who said: “There are no easy answers in this area. If there were, someone would already have thought of them.”

The second was from Age Concern&#39s Gordon Lishman on the difficulties of achieving agreement over reform. He said: “The danger is that a coalition of diametrically opposed views and interests maintains the status quo.”

The IPPR proposal for state pensions is straightforward – end the provision of state second pensions plus their associated rebates and use the resources for an enhanced basic state pension at the level of the minimum income guarantee, which grows in line with earnings. This would dramatically simplify the system, would improve the incentives to save by eliminating a vast chunk of means-testing and should be comprehensible, popular and politically sustainable.

Our proposal is not uncontroversial, particularly in respect of the abolishing the rebates. Others have come forward with a range of alternatives, for example, compulsion or tax credits of various kinds. As so often happens, there is more agreement over the problems than over the solutions because realistic policy proposals inevitably involve trade-offs.

Smith is likely to be faced with a wide range of options. Some will involve small gains and few trade-offs. Some will involve potentially very big gains, significant risks and uncomfortable trade-offs.

The opportunity for a major pension review will not come again this Parliament. The key task for those with a voice in the pension debate is to make their concerns clear, indicate their preferred way forward and to encourage a bold approach. Meanwhile, the politicians must resist the temptation to characterise disagreement as consensus for inaction.

Richard Brooks is a research fellow at the IPPR


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