View more on these topics

Simple solution is radical pension reform

The Government needs to rev-erse its strategy on pensions by significantly raising the basic state pension and restoring the earnings link.

Old left rhetoric? Simplistic? Unworkable? Unaffordable? No, this is the conclusion of a major research project carried out over the last 18 months by the Institute for Public Policy Research in partnership with universities, pension providers and PricewaterhouseCoopers.

Since the 1997 election, Labour has devoted much time and effort to pensions and long-term care reform and the Government has characterised its reforms as a new contract for retirement – a settlement for the long term.

Yet retirement policy has not proved to be a source of political capital for Labour and has generated much industry criticism.

We have investigated whe-ther the Government&#39s current settlement should continue to be pursued or whether a change of direction is necessary. We have firmly concluded the latter.

The pension environment has become more complicated since 1997. This complexity makes planning for retirement very difficult for individuals. It is also makes it more difficult for advisers and companies to give their customers the advice they need.

Means-tested retirement benefits cause other problems. First, many people miss out and live in poverty as a result. In addition, they cause severe incentive problems as private income causes loss of entitlement to benefits.

The new pension credit does not resolve these incentive problems. Instead, it spreads them out over a much bigger group of people.

According to Government statistics, in 2003, around half of all pensioners are expected to be eligible for means-tested support. By 2050, up to 70 per cent of pensioners will be means-tested. The pension credit will also bring additional complexity to the pension environment.

The state second pension will replace Serps and will give extra help to those on the lowest incomes. However, its long-term purpose is unclear. By 2050, anyone with income only from the basic state pension and the state second pension will retire at the age of 65 with an income which is already below the income support level.

Someone who works all their life and makes contributions to the state second pension will not have a nonmeans-tested income in retirement that will lift them above the poverty line.

We have examined a number of options and assessed which meet the objectives best. Our key objectives were to ensure that all pensioners have an adequate income in retirement to lift them clear of the poverty line.

We want people to be adequately rewarded and incentivised for saving for retirement and to ensure that tax and benefit regimes do not interact to undermine incentives. In addition, the policy settlement must be both fair and seen to be fair, ensuring good levels of public support. Crucially, the pension framework needs to be as clear and simple as possible so that people can understand their entitlements and plan for their future. Policy needs to be workable and it needs to be affordable.

The package of policies which best supports these objectives is to raise the basic state pension to the level of the Mig and index it in line with earnings.

This will help to end pensioner poverty and will reduce unpopular means-testing. It will dramatically simplify the environment and improve incentives to save.

Setting the basic state pension at £100 in 2003/04 prices will give all those with a full contribution record a non-means-tested income at around the “low-cost but acc-eptable” benchmark for the incomes of the elderly.

It will satisfy the objective of securing adequacy, albeit at a level of income few will regard as overly generous. With nearly everyone retiring in future with entitlement to a full basic state pension, we get round the problem of the inadequate take-up of benefits and provide a significant boost in income to the very poorest pensioners.

We would pay for these reforms by phasing out the state second pension and associated National Insurance reb-ates. Under our proposal, the basic state pension would be higher than the Government&#39s planned level for the combined basic state pension and state second pension. The opportunity then arises to simply close the state second pension, which simplifies the pension system considerably and rem-oves the cost of rebates.

As discussed in this column two weeks ago, we should also increase the official retirement age to 67 by 2030. This means that (along with the abolition of rebates) the policy is affordable but also reflects the fact that people are living longer.

Our proposal scores highly in terms of improving the clarity and transparency of the overall pension settlement. The proposed new settlement would make it much easier for advisers and companies to give their clients advice.

In terms of the impact of the proposed reform package on incentives, the greater clarity and transparency of the system and the reduction in the prevalence of means-testing should give better incentives for people to save for their own retirement. This is particularly important for small savers, many of whom are making their provision through small company schemes.

The overall reform package favoured here also passes the affordability test, as we have tried to make the package broadly revenue neutral.

The overall costs to the Exchequer rise from 5 per cent today to around 6 per cent of GDP by 2050, which is the same as the projected costs of the Government&#39s currently proposed settlement, including the pension credit. This is radical reform which is attractive, workable and affordable.

Richard Brooks is a researcher at the Institute for Public Policy Research


Lamensdorf founder Williams leaving firm

Lamensdorf co-founder and operations director Lorraine Williams is leaving the business a year after its acquisition of Maddison Monetary Management.Williams&#39 departure was agreed at the time of the deal with MMM, which saw Lam-ensdorf double RIs to around 50. Lamensdorf Group has undergone rapid expansion in the past year, with the acquisition of Flexible Mortgages […]

10% of IFA firms may have to change name

One in 10 IFA firms face having to change their name if they want to continue to be paid by commission under the FSA&#39s depolarisation proposals.Research from IFA Promotion shows that 1,080 of its 10,061 registered firms have “independent” in their name, and many other names include words that suggest independence, which could fall foul […]

£1.2bn of benefits left unclaimed

More than £1.2bn of pensioner benefits is lying unclaimed because up to 3m pensioners are not claiming all the state benefits they are entitled to, according to new research from Prudential. It says pensioners could be missing out on £127 a year by not claiming the three main benefits – income support, housing benefit and […]

New splits row as BFS shareholders reject rescue plan

The split-cap sector was thrown into further turmoil this week as BFS Investment&#39s geared income trust failed to implement a proposed rescue package after breached its banking covenant.The fund, which invests almost entirely in other splits and is one of the most highly geared funds on the market, is owned by many other split trusts.The […]

Why prevention is better than cure

Quoting the famous adage, prevention is better than cure; there are many proactive benefits that can improve wellness in the workplace, decrease stress, increase staff morale and reduce absenteeism, as well as attracting and retaining employees of a higher standard. With a recent study showing that employees in Britain are working below peak productivity, preventative benefits can ensure you address potential health issues or causes of stress at their source and ensure productivity in the workplace remains at an optimum level. With this in mind, how are you using preventative benefits to help keep your workforce happy and healthy?


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm