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Pensions in the wilderness

Ros Altmann declares that politics is bereft of pension ideas and innovation and the only way to resolve the crisis is to completely overhaul the system and bring in a flat-rate residents’ pension. Interview by Gregor Watt

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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.”

Ros Altmann

  • 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

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. All makes sense to me Ros but sadly Government always have other ideas and seem to rarely look at long term solutions which is why we now have the problems we have.

    It will certainly take a really strong leader to do what is really needed and put the country first before their own party.

    Keep up the good work though, as it may well lead to changes over time

  2. Julian Stevens 5th March 2010 at 1:01 pm

    I completely agree that politics is bereft of ideas to sort out the mess of the present pensions framework. More galling still is that the government refuses obstinately to listen to anything that the industry is trying to tell it in terms of what needs to be done to improve matters, starting of course with removeal of the annuity trap and the lack of inheritability of unspent funds in retirement. Consider the succession of totally useless pensions ministers appointed by this government over the past 12 years, not one of whom has overseen anything but further damage.

    And where did all this start? Stakeholder, bloody stakeholder pensions. Jeff Rooker ought to have been strung up and hung out to dry instead of having been given a peerage and a gold plated index linked public sector pension.

    I find it difficult to talk to clients about it without becoming visibly angry.

  3. Rob Cunningham-Snell 5th March 2010 at 1:19 pm

    As usual Ros Altmann has relevant and important opinion on how our pensions problems can be addressed. I fail to understand why she is not given more prominence in the decision-making in this area. Sour grapes over her support for the wind-up victims just is not acceptable. I my view the Conservative Party should take her onboard immediately, come to a conclusion as to what they can and will do, based on her exceptional knowledge and radical thinking and promote it with a vengeance. It could help win them the election AND begin to turn our huge pensions problem towards a positive future. Ros’ experience, knowledge, qualification and existing public persona make her one of the few people currently perfect for the job. (….and she’s seemingly such a lovely person too!)

  4. Oh how I agree with Ros Altman. Regarding the state pension it always seems to be jam tomorrow but never jam today. Radical increases could be afforded if they closed down all the quangos !

  5. Richard Nicholl 5th March 2010 at 8:17 pm

    The government refused to listen to Dr Ros several years ago and stuck their head in the sand. Now they are doing the same again. We need an expert like Ros to resolve this problem. She should be invited to be Pensions Minister, and end the constant flow of inexperienced puppets that have been entering the Ministry revolving door over the last few years!
    But Gordon would never accept that, he is too convinced that he has not damaged anyone’s pensions during his period at The Treasury.

  6. A pension is a long term savings contract that allows a person to receive an annuity based on the funds accumulated and life expectancy. My goodness that was so easy, so why do we make it so complex? Is it not time for us to go back to basics and get it right!

  7. Well said Ros Altmann. Quite simply the best overview posted in recent times. If one/all of the current parties do not snap up the most valuable assest this country currently has available to them on pensions knowledge, then we are truly going downhill fast.

  8. jacquie richardson 7th March 2010 at 5:53 pm

    We need somebody with vision and courage to sort out the problems with pensions both now and in the future. Dr Ros Altmann writes with honesty, clarity and most of all knowledge and ideas in how to sort this mess. Several Pension Ministers have come and gone during the years of this Government during which time the problems have spiralled out of control. She is rated by the Media as one of the leading authorities on pensions and always being asked for comment.. What has stopped Gordon doing likewise? Sour grapes or a guilty conscience?

  9. Freddie George 8th March 2010 at 9:07 am

    Another load of waffle from someone who doubtless makes a good living from this!
    The whole system, not just pensions, needs an overhaul. Many, due to what has in instances been well publiciesd rip-offs by pension providers, feel it’s better to spend money rather than save because the state will take care of you and you will have no worries. This starts with being better off on unemployment benefit than if you work. No pay, no pension and national insurance contributions. Human nature.

  10. 20+ years ago when I was selling pensions one of the biggest selling points was that we have an ageing population and the ‘state’ will therefore find it increasingly difficult to maintain the purchasing power of the state pension without raising the tax burden of those working. Ergo you Mr/Mrs/Miss ‘Prospect’ should consider a top-up at the very least.

    While never claiming that ‘investing’ in our Personal or Company schemes was the complete or indeed only solution we did claim it was an excellent, tax efficient, starting point. Contributions were not taxed and the funds were also treated favourably.

    Gordon Brown has decimated the private sector ‘Final Salary’ or ‘Defined Benefits’ schemes, making them much more costly to fund at the required level, while presiding over an explosion in the number of highly paid public sector workers in inflation proofed ‘DB’ schemes, which also allow employees to retire early, whilst insisting that it is necessary to raise, in stages, the age at which the basic ‘State Pension’ is payable. I have no especial problem with the latter point, despite reaching 64 this year, as long as there are sufficient safeguards for those unable to work through ill health. While my good health continues I wish to continue working!

    Ros Altman, as per normal, speaks a lot of sense on this subject but, as per normal, almost all politicians will bury their heads in the sand and hope that someone else will do something, the time scales being just too long for any but the most dedicated ‘Statesman’ to consider. As we have no Statesmen/women, only career politicians looking for the next opportunity to put the party opposite on the ‘wrong side of the argument’, we have little hope of them putting in place a proper, fair, long term solution.

    As evidence I point you to Gordon Browns tax grab on pension funds, billed as leveling the playing field for ‘investments’. (his most miss-used word ever) The real reason was that it was a tax rise that, as many pundits then said, would not be noticed by Mr/Mrs ‘Average’ until they got a smaller pension in 10/20/30 years time. Typical attitude of those without practical experience and only theory to rely on. Level playing fields for ‘investments’??? Absolute rubbish, raising £6bn per annum without anyone feeling immediately worse off was his objective. Had he been sincere about level playing fields then what about ISA’s etc…. No Gordon Brown was being his usual ‘too clever by half’ self and applying his theoretical knowledge of economics towards his own politics of envy, the thought that anybody should be in a position to make provision for themselves. No, his only ‘level playing field’ is to bring everyone down to the lowest common denominator, in this case reliance on the state. This must be so because Mr Brown denies that he has made any mistakes with regard to his time at the Treasury, so this must have been his objective.

    As a general comment, long term economics and planning should somehow be taken out of the normal run of political debate, being much too important for politicians, in the hurly burly of Parliament, to be involved in.

    Problem is how to do it!

  11. John Hutton-Attenborough 9th March 2010 at 10:25 am

    When are the Government going to wake up to the fact that there has to be a clear financial incentive to save. Tax relief at 20% is not enough if the sting in the tail is that ultimately you could be paying tax at higher rates in retirement. Who really believes 20% income tax as a threshold is sustainable in the future? Until you have now fully used your ISA allowance and annual CGT allowance what possible reason is there now to invest in a pension? To do so leaves you open to the risk that tax rates will change again, legislation will make a pension even more restrictive and the market to provide “income” in the form or annuities will collapse.

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