No one will be more disappointed with the Pickering review than the Government that commissioned it. Its hope was for a coherent package of reforms for pensions and savings that would address public concerns and offer a genuine simplification of the current system. This has not been delivered.
Contrary to early indications, Pickering almost entirely avoided discussing the relationship between the state and private pensions systems.
Instead, the report's attention focused on the problem of maximising the number of people in definedbenefit pension schemes.
The proposal to allow companies to require employee membership of schemes is sensible, if not revolutionary.
Other key recommendations – to allow employers to end price indexation and widows' benefits – have been aptly described as “an unattractive answer to an uninteresting problem”.
Ministers were scrambling to distance themselves on the morning of publication.
Everyone is agreed that there are serious prob-lems with the current pension environment. There is too much poverty among existing pensioners and, in the absence of decisive action, there will be too much poverty among future pensioners.
The extension of means-testing through the pen-sion credit faces savers on middle to lower incomes with severe disincentives. The system is too complex for purchasers, providers and advisers.
These fundamental issues have not been successfully addressed by the review and, to be fair, this was not its original remit.
Time for some audience participation. There are several serious proposals for pension reform floating around at the moment. These come from organisations such as the ABI, Scottish Life, the Pensions Policy Institute, Frank Field's Pensions Reform Group and from ourselves.
All of them share an important characteristic – they recognise the fundamental interdependence of state and private pension provision. It would be interesting to know what the readers of this article feel about these different proposals. I would like to give a thumbnail sketch of two from the Pension Reform Group and from the IPPR. Write to me at firstname.lastname@example.org or to the letters page of Money Marketing with your comments.
The universal protected pension is the name given by Frank Field's Pension Reform Group to its proposed new state second pension.
This would be a compulsory, funded scheme to supplement the basic state pension. The aim would be for the two pensions to pay out a benefit of between 25 to 30 per cent of average UK earnings throughout retirement. Payments would thus rise in line with earnings. All workers would become members through paying National Insurance contributions. There would be no opt-out. The scheme would be managed by a group of trustees independent of Government.
This proposal would not be cheap. It would require the end of contracted-out rebates and it also requires a 2 per cent increase in the employee NIC rate.The age for payment of the pension would be 70 rather than 65.
The universal protected pension proposal makes a serious attempt to deal with future pensioner poverty. The level of payment would eliminate dependence among recipients on income-support payments (the minimum income guarantee), and would dramatically reduce their reliance on other means-tested payments such as housing benefit.
The incentive effects would be complex. The increased level of income might reduce people's desire to make additional savings but, on the other hand, those additional savings would no longer result in the loss of benefits. Because contributions are related to income but payments are flat rate, the scheme would be significantly redistributive.
The IPPR proposal is slightly simpler – raise the basic state pension to the income support level, which is about 20 per cent of average UK earnings, and index it thereafter in line with earnings.
Pay for this by ending state second pension provision and the contracted-out rebates. Raise the age for payment of the new enhanced basic state pension from 65 to 67 between 2020 and 2030.
Most people would want an additional private pension and their contributions would not cause them the loss of entitlement to income support.
Critically, the IPPR proposal would reduce pensioner poverty now and in the future.
Both schemes simplify many elements of the current system. In both cases, opting out comes to an end, the pension credit disappears and the minimum income guarantee becomes a residual measure. Both schemes dramatically reduce meanstesting, with the universal protected pension performing somewhat better in this respect for its recipients.
Both schemes recognise a fundamental truth – there is no such thing as a free lunch. Paying for either scheme requires the end of contracted-out rebates, with the Frank Field scheme requiring an additional 2 per cent NIC hike on top of that. Both recognise the need to become sensible about pension ages.
One key problem with the Field scheme is that it promises not jam tomorrow but jam in many years time. If the scheme were introduced for those under 25 it would be another 45 years before a penny was paid out. It could be rolled out to older workers but only on the basis of partial entitlement. This might cause them a lot of disruption for potentially small benefits. In neither case does the proposal address current pensioner poverty.
The IPPR scheme is saying, provide a decent but not generous basic first-tier pension, get the incentives right, then let individuals provide for themselves in the market.
The Frank Field proposal is saying we need less means-testing, more compulsion and a bit more redistribution in our pension system but do not trust the Government or a private company with your money.
What do you think?
Richard Brooks is a research fellow at the IPPR