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John Greenwood: Will Downing Street get behind state pension reform?

If you were a Downing Street strategist, what would you fear most right now – a rolling out of auto-enrolment hampered to a degree by confusion over state pension or the launch of a policy that will pit against you millions of pensioners, public sector workers and a core of your own voters?

Most people in the financial services industry are hoping that political leadership and vision will win out over short-termism. There is no doubt in my mind that pensions minister Steve Webb’s vision of a flat-rate pension is the best way forward, but given the precarious state of the Coalition right now, it would be no surprise if Webb’s bosses perceive the policy as toxic.

Within hours of the Daily Mail first breaking the story of Webb’s plan for a flat-rate pension back in October 2010, its website was deluged with complaints from pensioners angry that they were going to miss out on the generous new scheme. A week later the paper ran a headline ‘12 million to be caught in cruel £41,000 pension apartheid’.

It took years for then chancellor Gordon Brown to recover from the televised slow hand clap from elderly delegates at the National Pensioners Convention that followed his 75p increase in state pension in 2000. It is not something the Coalition will want to replicate. Webb’s plan looks like it will see someone retiring in March 2016 taking home whatever the basic state pension has been uprated to by then, possibly around £120, with someone retiring a month later walking off with around £40 a week more. The policy looks like creating millions of aggrieved pensioners who will look at the situation in black and white terms – that younger people have sorted themselves out and left the old, as usual, with nothing.

The policy will also open barely healed wounds with public sector workers, who will find they have to pay an extra 1.4 per cent National Insurance, on top of the hardships they already perceive themselves to be suffering from on account of the previous round of changes. LibDem Treasury chief secretary Danny Alexander’s pledge that the last round of cuts was the last for some time would come back to haunt him.

Whether those in the squeezed middle who would have received combined basic and secondary pension of more than £140 will wise up to what they are losing remains to be seen. Many of these are natural Conservative voters and might, if they knew what was happening, baulk at having something so valuable taken away from them. Will higher earners understand that they could get £20 a week less pension in 30 years time under these proposals, and if they do, will they care?

For once, the fact that no-one has the faintest clue what state pension they are going to get means they probably won’t. But the potential risk of upsetting this group should not be underestimated. One expert I spoke to about this said this issue was not important because they are only losing around £1,000 a year, as state second pension was being cut back anyway. But that is still a considerable setback in pension saving for the many people earning decent money today but with no pension whatsoever.

A 45-year-old yet to start pension saving, and lets not forget that there are less people in pensions today than ever, will have to pay in around £75 a month just to earn back that £20 a week he would have got from S2P, even before he starts saving for anything else. For those with substantial existing pensions, that will go unnoticed. But let us not assume that just because someone is on course to receive high levels of S2P that they have any other pension savings at all – many do not.

The Government’s position is tenable at present, with the DWP saying a White Paper will come out later this year. That will mean the crucial first months of auto-enrolment will be untroubled by talk of means-testing. In the longer term let’s hope Webb can persuade Downing Street that the national interest is more important than the weekly news agenda.

John Greenwood is the editor of Corporate Adviser


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. All of this talk about better pensions in the future is just that, talk. Governments get elected using lies. The only time it is truthful, but very elusive, concerns their own well being. Truth is that MPs get very generous pensions already, and that, combined with expenses theft, already allows them to swan off into the sunset overseas (ala Bliar and Thatcher), away from the dross of the UK

  2. But still the current government has done absolutely nothing in terms of honouring the Conservatives’ pre-election manifesto pledge to put right all the damage inflicted on the pensions framework by 25 years of needless meddling and complication. In fact, everything it’s done so far is quite the opposite, albeit affecting mainly high earners, such as cutting the annual input allowance and reducing the LTA.

    What about restoring Contributions Insurance?

    What about restoring the facility to secure life cover as an integrated element of a pension plan?

    What about scrapping the tax on dividend income?

    What about addressing the annuity (rate) trap?

    What about allowing unspent funds in retirement to remain in Trust, thereby removing the punitive death tax? Why not allow such funds to pass directly into pension plans for the next generation?

    What about raising, instead of reducing, both the annual input allowance and the LTA?

    All the government’s done is cut, cut, cut and pressed ahead with NEST. It’s done absolutely NOTHING to reverse the tide of antipathy against locking away money in a pension plan. Maybe Steve Webb privately would like to facilitate measures to address this antipathy, but clearly his masters at Downing Street have told him in no uncertain terms not to, and instead to try to look useful by promoting a quite different and negative agenda.

  3. Totally UN fair, Webb has already said it will save money, by no means testing. Everybody should be the same if they have paid into the system all their life.

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