Pension edge: james jones-tinsley
What the UK pension system needs is an apolitical, long-term agenda for change, but instead our politicians thrive on cyclical short-termism and opportunistic policy-making. Politics itself represents the biggest obstacle to change On October 12, the Pensions Commission released its interim report, Pensions: Challenges and Choices.
This is the first stage of a process which started with the release of the Pensions Green Paper in December 2002. This formally appointed the Pensions Commission, invited Adair Turner to be its chairman and instructed it to report back to the Government on what needed to be done to solve the longer-term problems faced by the UK pension system.
The interim report, 500 pages plus, is heavy on data, analysis and problem-spotting but stops short of making any specific recommendations. Instead, if we are to believe Alan Johnson, the new Secretary of State for Work and Pensions, the report is a first step in rebuilding confidence in the pension system and provides the platform for a Mrs Merton-esque “heated debate” within the public arena, which the Pensions Commission will draw on when it publishes its recommendations next year.
But hot air alone will not create the answers. Nor will a raft of carefully-worded soundbites emanating from the mouths of politicians. Only actions will create solutions and yet the commission's agenda and timescales merely serve to push those actions several more years down the line.
We do not need another 500 pages of statistics to tell us that there is a problem with pensions. We know that already and we have been trying to tell this to the Government for years. The time to start acting is now.
Only we can't. The Government will not let us because it has got to get itself through another general election first. And when the third term has been secured (if it is), then, and only then, will it start to address what needs to be done to solve the problem. And then we will have another round of consultations and let A-Day come and go and then the agreed solutions will be implemented sometime around the middle of the third term, so that any unpleasant actions that have to be enforced (like increasing taxes or raising the state pension age) will hopefully be forgotten in time for the 2010 general election.
What a cynical old boot you are, I hear you cry. But think about it. The biggest problem that the UK pension system has encountered for decades is suffocation by politics. What the UK pension system needs is an apolitical, long-term agenda for change, but instead our politicians thrive on cyclical short-termism and opportunistic policy-making. Politics itself represents the biggest obstacle to change for pensions and, therefore, taking the politics out of pensions would be the first item on my recommendation wish list.
Maybe I am being somewhat unfair. There are indeed some good pension-oriented politicians but there are much better pension experts too, who are not politicians.
On the eve of the report's publication, Tony Blair stated that bold, far-reaching reforms were needed to solve our pension problems. Surely, the creation of an independent, non-political pension think-tank, comprising recognised pension experts from across the country, is a prime exam-ple of this and one which we all now need to encourage in a vociferous, unified manner.
Other items on my wishlist of recommendations would include:
The promotion of a financial education programme in schools, co-ordinated by professional financial bodies, to help children to understand and appreciate the importance of saving for their future and the different ways they can save their money.
A complete reorganisation of the over-complex state pension system, replacing it with one simple regular payment, available to all UK residents from a common age.
An end to means-testing and the pension credit, which, like the state pension system only creates complexity (undoubtedly Brown's favourite fiscal tool) and acts as a disincentive to save.
Thorough simplification of the pension system, which we are promised will be introduced from April 2006, but can we be entirely sure of it until after the general election?
A reinvigorated and dynamic promotion of pensions via the workplace, spearheaded by a body comprising representatives of the TUC, CBI and appropriate professional bodies such as the Pensions Management Institute.
The creation of a quasi-group pension arrangement at national level for the self-employed to join, with suitable and progressive incentives to reward higher contribution levels and cost-effective advice delivered via a national IFA body.
Well, there we go – I have thrown my hat into the debating ring. Now it is your turn. We do need to debate, consider and talk through the solutions to our long-term pension problems. But how much more productive and timely we all could be, in both formulating and implementing our desired actions, if we were freed of the shackles of the self-aggrandising political cycle.
James Jones-Tinsley is head of pensions at Bates Investment Services The Pensions Commission, led by Adair Turner, has issued its first report amid much interest.
In reality, the conclusions are not unexpected. To ensure that future generations of pensioners have an affordable retirement and play an active role in society we have four options.
Pay higher taxes.
None of us can claim that we were unaware of the problem. What this report has done is to force more of us to remove our heads from the sand, which is no bad thing.
Over recent years, the inadequacy of our private provisions has been consistently highlighted, but long-term prudence has given way to a “live for today” culture and the not unnatural desire to make a quick buck.
Employers have moved away from offering their staff final salary pensions in favour of money purchase schemes in an effort to control costs, cut administration and reduce the risk that an open-ended commitment holds for the future of their business.
In a highly competitive business environment, one can hardly blame employers for taking action to ensure that they continue to trade and attract ongoing investment.
Why this report has caused such a stir is that all the things that we knew, and perhaps chose to ignore, have been given credence by the publication of a well presented study, supported by a significant amount of statistical evidence. It's a bit like discovering that some mythical creature is actually flesh and blood and is standing right in front of us.
How we react to this wake-up call is vitally important. The report concludes that no one option will resolve the issue on its own. A mixture of higher taxation, increased saving and longer working lifetimes is likely to be the outcome and again, if we are honest with ourselves, there is a degree of inevitability in that conclusion.
While the report falls short of making recommendations, the “fall back” scenario, if none of the above options achieve the desired result, is compulsion. The point is well made that in fact compulsion already exists to a degree through the state pension system and so it is rather a matter of whether it should be extended.
So, where should things go from here?
The message is that the role of the Commission should emphasise the long-term issues. We can expect recommendations to focus on future generations of pensioners rather than those already retired or approaching retirement in the shorter term.
Since the fail-safe for many people is the state pension scheme, something needs to be done to reduce the strain that is inevitably going to be placed on it in the future. We might anticipate that state pension age will be increased, possibly in stages, to achieve part of the objective.
The overall effect of increased taxation and compulsion would be the same. While both are unpopular options, compulsion may be the least popular measure of all and so I would see this as remaining the policy of last resort as it is fraught with other difficulties.
Extending compulsion would make the system as a whole less flexible for investors and may have significant ramifications for our consumer-driven economy and business as a whole.
There is a danger that the minimum would become the norm for some employers, which might then compound the situation and result in pressure for increases to it in the future. The potential for this to become yet another political football to be kicked about every four years or so is clear.
The best place to look for an answer to the problem may be in the workplace. Targeted incentives to provide access to pensions could potentially be very effective.
The Government is also committed to increasing financial awareness in the long term as a more financially aware working population is likely to save more. It is to be hoped that the Government provides some more significant incentives for employers that are willing to pay for workplace advice.
The debate on compulsion will run on but broadly, the report is to be welcomed as a factual base from which to take matters forward. It will be interesting to see where the consultation process and second phase of the exercise leads us in terms of future Government policy decisions.
Bob Perkins is technical manager at Origen