Dr Ros Altmann is in a radical mood. With an election only months away, the independent pension adviser says the lackof new policies from any political party is frustrating. A run through the list of the Tory policies – scrapping forced annuitisation, relinking the basic state pension to earnings, helping to support final-salary pension schemes – brings brisk replies from Altmann of “Yes but they haven’t said how” or “But that is on the cards anyway.”
She says that in principle, many of the changes suggested by the Tories are sensible ones but all the proposals are presented without any detail. “And the devil with pensions is always in the detail”.
She says the one big announcement from the Liberal Democrats – to abandon or at least severely delay, their commitment to introduce a flat rate citizens’ pension – is a real blow. “For somebody like myself who thinks that it is one potentially ideal solution, it is a real shame. I understand it but I don’t necessarily agree with it.”
As for the Government, Altmann is not complimentary about its track record. She says: “They have told us that they have embarked already on the most radical reform since Beveridge and it is all sorted out. I don’t believe that is true. We will still after all the reform to both state and private pensions, have the lowest and most complex pension system of pretty much anywhere else.”
Means testing looks set to remain a problem and Altmann says the Government’s own figures show that in the years between 2030 and 2050, 40-50 per cent of pensioners will be on means-tested benefits. The Government’s figures also show that following the relinking of the basic state pension to earnings, it will take until some point in the same time period for the value of the basic state pension to get back to what it was before the link was broken in 1980.
“So after all these years and all the reforms, you will end up with what you would have had had you never broken the link,” she says.
The Government’s most recent pension changes, aimed at curbing tax relief to the very highest earners, are also given short shrift by Altmann.
“I fundamentally disagree with what the Government has done. If they had redistributed that money or if they had done it in some obviously fair way, then you could have a debate. But they have introduced artificial cliff edges and retrospective changes which have taken money away from top earners’ pensions but haven’t given anything extra to the lower or middle earners’ pensions. So net, you have just left pensions worse off.”
Altmann says the lack of convincing pension policies make it difficult to say one party’s approach is preferable. “Before the LibDems dropped their citizens’ pension idea, that would have been my preferred approach. The ideas of dropping annuitisation, rethinking Nest and helping employers with their deficits that the Tories have suggested, I agree with, and the longterm aim apparently of the LibDems is still a citizens’ pension and I agree with that. But I think that Labour has been terrible news for pensions.”
She says all the parties seem to be lacking long-term ideas. “I don’t think any of the main parties seem to have a credible long-term approach.”
Altmann’s frustrations with current pension policies is partly due to the fact that the deep-rooted problems, such as demographic change, are not new problems. “Sadly, Turner in 2005 said there isn’t a pensions crisis. There will be one around 2020 if we don’t do anything. He is, in my view, fundamentally misguided in that. We have got a pension crisis, we have had one for the last 10 years, we are still in it.
Auto-enrolment a disaster waiting to happen
“What Turner was saying would be a pensions crisis isn’t a pensions crisis – that would be a pensioners crisis, a very different thing. The pensions crisis is now because people aren’t putting money into long-term savings and that will translate into the pensioners crisis because you will have people trying to live without a pension or without enough pension.”
But if the politicians seem bereft of ideas, Altmann has a few suggestions and her proposals range from the practical to a radical overhaul of the state pension system. She suggests that making it easier to work for longer or using auto-enrolment to boost long-term savings are good starting places.
“It is inevitable that people will have to work longer but it is not inevitable that they will have to work longer full-time. If we start to radically rethink retirement, and the Tories have talked about this, with it being a process rather than an event and you have a period of part-time work after your full-time career, where the pension is just a supplement to income for a while, not a complete replacement, then the whole issue of pensions becomes more affordable.”
Altmann also says that in principle the idea of greater workplace saving is a good one. However, she says in its current form the policy of auto-enrolment is simply a disaster waiting to happen.
“We need to redesign the system before we can safely auto-enrol people. We would need higher contribution rates, without a doubt. A big worry, not just about levelling down, that people will get less pension, is unsuspecting workers who are auto-enrolled into Nest will think they have got their pension sorted. And there is no way that that kind of level of contribution can be relied upon to deliver a decent pension anyway.”
At the more radical end, she suggests nothing short of a complete overhaul of the existing state pension system. She suggests that the state second pension could be scrapped and the means-tested elements to retirement income could also be abandoned. In its place should be a flat-rate pension paid at the current rate of full means-tested benefits.
“If you do away with contracting out, you have billions of pounds to play with straightaway. Other reforms would also allow you to not have to increase spending but still be able to have what I call a residents’ pension, not a citizens’ pension.”
She says the idea of entitlement to the state pension because of sufficient National Insurance contributions is already nonsense. “National Insurance is a myth, let’s get rid of the myth. You can get £130 a week without ever having paid into National Insurance when you reach 60. But if you have contributed fully for 40 years in your National Insurance payments, you get the princely sum of £87 pounds a week.”
In fact, Altmann says some of the problems of the current pension situation are down to the confusion over what a pension is for.
Other reforms would also allow you to not have to increase spending but still be able to have what I call a residents’ pension, not a citizens’ pension
“What we are doing is re-arranging the deckchairs on the Titanic. The system is sinking, it is not fit for purpose. Nobody understands it, it is far too complex. I believe we need to sweep it away and have a flat-rate universal pension. The age at which you pay it from is up for debate, I understand that and I don’t think it is a bad thing. But until you have the state providing the basic minimum social welfare, which was the main function of the pension originally, you won’t be able to have the private sector delivering the extra long-term savings bit to supplement your basic minimum.”
If the state pension is simplified and savers understand exactly what they can look forward to, it becomes easier to encourage people to save. Altmann also suggests this could be reformed as savers simply don’t understand tax relief on contributions and it is skewed in favour of the highest earners.
Instead, she says there are a couple of other ideas that are more easily understandable and more attractive to lower earners. “One idea would be a matching scheme so you can take it outside the tax system altogether. For every pound you put into a pension, you get an extra X per cent, at least for the first bit of your contribution, and it would be the same for everybody.
“The other idea would be maybe to have a lottery attached to contributions like we have with premium bonds. So whenever you put X pounds into a pension, you are entered into a draw that could win you a million. It wouldn’t cost that much relative to what we do.”
Altmann says current budgetary restraints could work in favour of more radical reform as without further change the cost of state pension provision will continue its inexorable rise. She says: “It is clear we can’t keep going on as we are. What are we going to do? Just keep cutting pensions? And having more and more of the population poor at older ages? That is a recipe for long-term economic decline anyway.”
- Independent policy adviser on pensions, retirement, savings and investment banking.
- She has worked as a policy adviser to Number 10 Policy Unit on pensions and as a consultant on the Myners review of institutional investment.
- She has a firstclass degree in economics from the University College London, was a Kennedy Scholar at Harvard and has a Ph.D in economics.
- After working as a lecturer at both Harvard and LSE she entered the city and worked as a fund manager for 10 years at Prudential, Chase Manhatten Bank, Rothschild Asset Management and Natwest Investment Managers.
- She is currently a non-executive director and a governor of LSE and chair of its investment committee.
- She is also a governor of the Pensions Policy Institute and a trustee of the Age Employment Network.
Key points for pension reform:
- Radical reform of the state pension system by scrapping S2P and contracting out and means testing and introducing a flat rate residents’ pension that pays out at a level equivalent to current meanstested benefits
- Scrap forced annuitisation
- Separate pension savings into state minimum welfare and private retirement income
- Change pensions into lifetime savings, which allow savers some access to savings before retirement
- Review current system of pension incentives and look at a cash matching or lottery-based approach