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Rule of attraction

Liberal Democrats Shadow Work and Pensions Secretary Steve Webb says early access to tax-free lump sums will make saving more attractive and warns of a pension vacuum if the Tories are elected. By Nicola York

It is perhaps slightly surprising that Liberal Democrats Shadow Work and Pensions Secretary Steve Webb is a politician, considering that he dropped politics from his PPE degree at Oxford because he “wasn’t very good at it”.

Retirement Strategy caught up with Webb at the Liberal Democrats conference in Bournemouth and he is clearly much more comfortable with his subject area these days.

The MP for Northavon launched straight into talking about his latest pamphlet on pension reform. He is lobbying the Government to allow early access to the tax-free lump sum in pension funds and says this would go some way to making saving in a pension more attractive.

“Then what would flow from that is that pension saving would be more popular but I think personal accounts would be more popular and I think that is critical because you are dealing with a set of people on aver- age on lower incomes, on average unpensioned or underpensioned who are going to be opted into something and think ‘do I want to lose 3 per cent of my salary?’”

Webb says he wants people to start seeing pensions more as a long-term savings vehicle. He says the “dead hand” of the Treasury is preventing this kind of flexibility because it is worried that people will blow their pensions and then fall back on means-tested benefits.

Webb says: “I think we are an awfully long way away from that. Anybody who is going to have a decent pension pot worth taking a quarter of, most of them are going to be clear of means-testing.”

But he thinks the key to increasing pension savings in the private sector is to increase the basic state pension and to roll the second state pension into it so people have a clearer idea of what they will be getting at the other end. The Liberal Democrats have floated the idea of a citizens’ pension in the past and Webb is very much in favour of scrapping the contributory principle altogether and giving people a full pension, subject only to a residents’ test.

Webb says the Department for Work and Pensions tried to build an online pension forecasting tool to estimate what people could expect in retirement from the state but the project had to be abandoned because they “could not begin to imagine” what the means-tested benefits regime would look like in the future.

“If they don’t know, how on earth is anyone else supposed to know? Wouldn’t it be more sensible if the deal was, in 24 years’ time, you will get a pension that is 20 per cent of national average earnings. What you do on top is your own business, it is your choice.”

Webb welcomes the Government’s changes to women’s pensions which allows them to top up their missing years of National Insurance contributions to build up a full pension.

“It is expensive but what it does is bring women up to the level that men have always been up to and, given that it is women that will tend to have small savings on average, they are the ones who will struggle most to get clear of the means test. So by focusing on women pensioners filling gaps in their National Insurance record, you give them more savings incentives.”

The LibDems began campaigning on the women’s pensions issue about 10 years ago and Webb says it really was “a Cinderella issue” back then but eventually people started to listen. He hopes that he played a part in bringing it to wider attention.

‘The worst salespeople’

He is worried that the current generation of retir-ees will be the “worst salespeople” for personal acc-ounts because they will tell their children that they wish they had never saved because of the impact of means testing. In his opinion, there is “a crying need” for financial advice in the retirement space and it is necessary to be a bit more creative about giving people access to it.

“We need to find ways of getting advice through channels people are comfortable with. There is a set of people who go direct to an IFA and who know what an IFA is and so on but there are a lot of people who probably only go to the Citizens Advice Bureau and the Post Office. You know how they do outreach sessions from the pensions service in libraries, perhaps there is some equivalent that could be done on the advice side.”
Webb is concerned about how employees will access advice on personal accounts and who will pay for it.

He says: “The difficulty is who is going to pay for it because obviously there is not going to be much profit to be made from a personal account with 8 per cent a year going in and the employers are not going to pay for it and the employees are not going to pay for it so that is the problem.”

Another policy that the LibDems have mooted on many occasions is the concept of a “Turner two” commission for public sector pensions.
“What I think a Turner two should do is start quickly, finish quickly, try and strike a fairer balance between the taxpayers who pay for public sector pensions and the people who draw them but also between the top and the bottom of the public sector where there are clearly some abuses at the top, where people are drawing fat pensions early. I would anticipate that we have to be talking about higher pension ages within the public sector for future accruals and I would want them to explore career average ideas as well.”

On the issue of the open market option, Webb is passionate that something has to be done to improve the current 33 per cent of people who exercise their Omo.

He says that perhaps a “nudge” approach – as coined by the book Nudge which is required reading for David Cameron’s Conservatives – could be adopted whereby people are put in a position where they have to actively choose something. He cites auto-enrolment as a good example of this, where people have to actively opt out of a pension scheme and will be automatically re-enrolled back in every three years.

“You could do that with the open market option, whereas the default being the pension provider where you get your annuity from, you actually default them to something else or default them to nothing and make them actively go and choose.”

Does Webb get frustrated at the fact that the other two political parties often copy LibDem policies and then claim them as their own?

He says: “The classic one was making the Bank of England independent. It was in our manifesto, it was not in the Labour one in 1997. So, yeah, it is a little bit frustrating but on the other hand, if you think that the policies you are coming up with are good policies, making for a fairer, more liberal, Britain, if somebody else does them, well, when I reach the grave, I will have achieved something, it will just have somebody else’s label on it.”

How does he think the Tories and LibDem policies on pensions fundamentally differ? He quips: “It is hard to compare yourself with a vacuum. I have no idea what the Tories will do in office. They are going to start off by having lots of reviews, I understand. Well, they have had 13 years to think about it.”
He says the LibDems believe in state provision as the foundation more than the Tories do.
“It is not statist, it is getting the state bit of the deal right so the market can flourish as well. The Tories would be much more sort of minimalist. Well, what did they do in office? They eroded the basic state pension for 18 years. That is what we know they do. They slag the Government off for means testing but, as it were, they started it. They set us down this track.”

Steve Webb

Webb’s background is in economics. He studied PPE at Oxford. He worked for nine years at the Institute for Fiscal Studies as an economist working on personal taxes, pensions and benefits. He also taught social policy at Bath University for a couple of years. He was elected in 1997 and has focused on pensions and benefits issues over the past 12 years as an MP.

The LibDems want:

  • To immediately restore the link between the state pension and earnings
  • To introduce a citizen’s pension which would be paid to everyone who meets residency criteria and would be set at the level of the pension credit
  • To allow early access to the tax- free lump sum in pension funds
  • Personal accounts to be more like a long-term savings vehicle
  • A “Turner two” commission to do a fast and thorough review of public sector pensions
  • To change the default option for annuities so that people have to actively choose an annuity providerWe need to find ways of getting advice through channels that people are com-fortable with

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