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Papering over cracks

“The Government is announcing a radical overhaul of pension policy.

Ministers acknowledge that the current system is too complex for people to

understand and has lost legitimacy. Individuals no longer trust financial

providers, feel let down by employers and have lost faith in the state.

“Pensioner poverty has not declined under this Government. We recognise

that it is time to reconsider our strategy. We intend a dramatic

simplification of the state pension system as the necessary bedrock for

individuals to make their own plans for retirement, helped by employers and

private providers of pensions. We recognise this is a significant change in

policy but sometimes Governments have to admit that their current policies

are not working and they must think again.”

Children are allowed to fantasise so why not policy analysts? Of course,

the Government&#39s Pension Green Paper was never likely to be this radical

but there is a palpable sense of disappointment that, having acknowledged

complexity as a key problem, the Green Paper avoids any discussion of state

pension provision and its interaction with private pensions, which is the

main source of that complexity.

The Government&#39s proposals to radically simplify the pension tax regime

will do little to make pensions clearer from the point of view of

individuals. Forecasts of pension income are unlikely to help much either.

For individuals, the main problem is the existence of a basic state pension

backed up by a complex system of means-testing and a separate state second

pension with all the associated rigmarole of contracting out. Sweeping all

this away is the real key to simplification.

Despite the Green Paper&#39s lack of radicalism, behind the scenes there has

been much discussion in Whitehall about the sustainability of current

pension policy. Within No 10 and, indeed, the Department for Work and

Pensions, there has been some appetite to think again about the structure

of state pension provision. The Treasury, however, has been adamant that

current policy is broadly on the right tracks. As is often the case, the

Treasury has won the argument and the DWP has failed to stamp its authority

on a key area for which it has direct responsibility.

The Government could not have failed to notice the impressive consensus

that has arisen over the last year that pension policy is not on the right

tracks. The IPPR&#39s call earlier in 2002 for a dramatic simplification of

the state pension system has been echoed by a wide range of individuals and

organisations, including the National Association of Pension Funds and by

Alan Pickering in his evidence to the House of Commons select committee.

Opposition spokesmen David Willetts for the Conservatives and Steve Webb

for the Liberal Democrats also appear to be part of that gathering


Under what circumstances would the Government look again at more radical

proposals for shaking up pensions?

•If it is as unsuccessful in its second term at reducing pensioner

poverty as it was in its first term.

Between 1997 and 2001 the proportion of pensioners living in poverty did

not decline. If there has still not been significant progress by 2005, the

Government&#39s approach to tackling poverty through more generous

means-tested assistance will be seen to have failed in achieving its most

basic objective. One key to this is the take-up of the minimum income

guarantee, which remains low.

•If, by 2005, the Government cannot marshal a lot of convincing

evidence that lowto middle-income workers are saving more for their

retirement, the stakeholder element of the Government&#39s strategy will be

seen to have failed.

Stakeholder is already perceived as a bit of a damp squib despite having

placed downward pressure on the costs of having a personal pension.

•If the media continue to headline the decline of salary-related

pension schemes, this will perpetuate the notion that we are facing a

pension crisis.

Even if the Government can do little about this specific problem, it will

come under renewed pressure to address the wider pension framework.

So, the chances of another review of pension policy in the next few years

are higher than people might think and at some point the Government may

conjure up the courage to put forward radical changes in relation to state


The proposal in the Green Paper to set up an independent pension commission

may have caught some people&#39s eye. Unfortunately, its remit has been set

very narrowly. It will look only at how much is being saved into private

pensions. It will not even be encouraged to look at how to improve

employment rates for older workers despite the Green Paper stating clearly

that saving is only half the equation and that enabling people to work

longer can make a big difference. And, of course, it will not be allowed to

look at state pension provision at all.

The Green Paper represents a significant missed opportunity. After Green

Papers in 1998 and 2002, we can expect another one along by 2006.

Peter Robinson is a senior economist at the IPPR


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