It is a good time to be assessing the coalition Government’s record on pensions after 18 months in office. On the plus side, it is refreshing to have a pensions minister in Steve Webb who has a grasp of the issues. I spent seven years as Shadow pensions minister and in that time shadowed some eight Labour ministers, so it is good to have some expertise and continuity in that job.
On the debit side, the coalition agreement promised measures to reduce red tape and “help reinvigorate occupational pensions, encouraging companies to offer high quality pensions to all employees.”
So far, there has not been much sign of that. Yet, according to the ONS, active membership of occupational schemes is at its lowest in almost 60 years.
The issue of public sector pensions has continued to be fraught with actual and threatened union action. John Hutton’s report struck the right balance between the interests of scheme members and the cost to taxpayers. Indeed, in local government, for example, many lower-paid workers will be better off with a career average approach.
The coalition’s recent enhanced offer is still up for negotiation but at the time of writing, it is hard to see the hardcore public sector unions buying into it. Yet I suspect there will be limited public sympathy. After all, a modest increase in contributions and in retirement age will still leave public sector workers miles better off than most of their counterparts in the private sector. And it seems more than fair to preserve the current entitlements of workers within 10 years of retirement. It remains to be seen whether the coalition sticks to its guns on this.
One issue which affects both public and private sectors is the switch from RPI to CPI. Webb was obliged to navigate an inelegant U-turn over whether to legislate for this issue as it affects occupational schemes. The logic of the Government’s position was to clear this point up by legislation. The result is considerable confusion and litigation, the British Airways scheme being a prime example.
A policy I developed for my party in opposition was the scrapping of compulsory annuitisation. A whole new range of possibilities is opening up for the decumulation phase. But despite the recent moves by the ABI, I think the Government should do more to turn Omo into a form of default option.
At the same time, ministers need to be more red-blooded in their opposition to the potentially damaging effects of Solvency II.
The coalition moved swiftly to restore the link between the state pension and earnings, something Labour whinged about for decades but did nothing about in government. And ministers are looking at two options to restore the value of the state pension in due course. This makes sense if we are to minimise the numbers opting out of auto-enrolment.
Both the sharper rise in the state pension age and the scrapping of the default retirement age (something I see as my political legacy) make total sense. And the Government has gone some way to tackle the unfairness for a group of women in their fifties by delaying the rise in the pension age in 2020.
The big game-changer in pension saving is, of course auto-enrolment. A series of surveys tell us that most employers are aware of the advent of auto-enrolment but also that most employers have done little or nothing to prepare.
Success in the post-2012 world will be all about scale. Experience abroad shows that members can benefit from reliable returns, low-cost administration and modest investment management fees while hedging some of the volatilities inherent in DC. This has to be the future for decent pension provision.