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Realistic on retirement

The Government has signalled that it will produce a Green Paper on pension policy before the end of the year. Meanwhile, the House of Commons Work and Pensions select committee has begun an inquiry into the future of UK pensions and will be taking evidence soon.

How can this all be? Did the Government not publish a Green Paper in 1998 setting out the framework for its policies? Has it not been busily introducing a raft of reforms to implement its strategy? Were the Pickering and Sandler reviews not meant to sort out some of the remaining knotty problems?

Does the prospect of another Green Paper signal that the Government does indeed realise that it has not got it quite right? The select committee starts off its call for evidence by asking: is there a “crisis” in UK pension provision and, if so, what has caused it? It is vitally important that they and the Government get the answer to this basic question right.

The UK pension system can be said to be in “crisis” for two reasons.

First, and most important, an unacceptably high proportion of current UK pensioners are living in poverty. The Department for Work and Pensions fourth annual report Opportunity For All, concluded in September that “the proportion of pensioner&#39s living in households with relative low incomes fluctuated between 1996/97 and 2000/01 showing no clear trend”.

This failure to reduce pensioner poverty during its first term is the most important reason why the Government needs to rethink its pensions strategy.

Second, people have lost confidence in the system. Many current pensioners feel they have been let down by successive governments. Many people in today&#39s workforce simply do not understand or trust the pension system.

They are worried by the trend towards the closure of final-salary employer schemes. They mistrust the providers of financial services as a consequence of a number of unfortunate scandals. The providers of financial services are themselves voicing their unhappiness at the complexity of a system that makes it difficult to provide clear advice to people.

The UK public pensions system does not face a crisis of “affordability”. Even with the introduction of the pension credit, public spending on pensions as a proportion of GDP is likely to rise from about 5 per cent of GDP in 2002 to about 6 per cent in 2050. This will leave public pensions spending in the UK well below other European countries.

However, ironically, recent stockmarket declines have exposed the lack of “affordability” of many private sector final-salary pension schemes, which is why so many are being closed.

One consequence of these trends in public and private pension provision is that the aspiration set out in the 1998 Pensions Green Paper to reverse the 60/40 split of income derived from public and private pensions now looks completely unattainable.

It is unhelpful to describe UK pension provision as being in crisis simply in terms of households not saving enough and to pre-judge the policy response by jumping straight into “increased saving for retirement” as the solution.

At best, talk of a savings gap confuses means and ends. The objectives of pensions policy are to secure an adequate income for people in retirement while maintaining the affordability of public pensions provision and people&#39s incentives to make their own retirement provision.

People have to understand how the pensions system works and to perceive that it is equitable. Increased saving may be one means by which provision for retirement can be improved in the future.

However, by definition, increased saving by today&#39s working households cannot alleviate today&#39s pensioner poverty, so if that is the main policy problem, one should look elsewhere for a solution. It is also necessary, however, to ask questions about the role that increased saving might play in the raising of future pensioner incomes.

Getting these basic points right has to be the starting point for pensions policy. The most important reform the Government should consider is a simplification of the whole pension system. This should be accompanied by a wholesale review of how the tax system supports different forms of saving.

We should be wary at this stage of compelling all employees to pay into a funded second pension. Measures to increase labour force participation among the over-50s should be a priority and any increase in the state pension age should be seen in this context. The time is right for a rethink – but we really do need to be clear about why we need reform.

Peter Robinson is a senior economist at IPPR


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