Headlines such as “pensions in crisis” may catch the eye but maybe it is time to move on and make concrete proposals about how to deal with the fundamental issues of longer life expectancy and modest long-term returns on saving.
The Institute for Public Policy Research believes that a key piece of the puzzle is a simple, stable, flat-rate state pension to work effectively alongside private provision.
The Government is in the process of steering the Pension Credit Bill through Parliament. It represents a well motivated attempt to improve the position of older people with small pensions. Instead of setting off 100 per cent of their private pension against income support (like its predecessor, the minimum income guarantee) it sets off 40 per cent. This means that more people will be entitled to the pension credit than were entitled to the Mig.
Is that not a good thing? Yes – because it represents a recognition by Government that the state needs to make more generous pension provision. But also no – because the pension credit effectively extends means testing to half of the pensioner population in its first year alone – and a steadily increasing number thereafter.
What are the problems with means testing? Let us approach this from the perspective of a financial adviser with a client on a modest income. First, could the adviser explain the system to their client? I have yet to meet anyone who believes this is possible.
The Government argument is that this does not matter – it always pays to save. But would the adviser be able to tell their client even roughly what income they could expect in retirement from a particular level of contribution? What about the rate of return on those savings?
Remember if the Government's proposed system lasts until the client is retired, each pound of private income may result in the loss of 40p of pension credit. Of course, there are various thresholds, ceilings and rates for entitlement, all of which may be changed by future Governments. Still confident about telling the client that it always pays to save?
The question is not whether the pension credit is better than the Mig. The question is whether there is a better alternative use of the public resources which the pension credit requires.
The IPPR thinks there is. Raise the basic state pension to an adequate level, say the income support level for 2003/04 of £100 a week, and thereafter index it in line with earnings.
The state then withdraws from all other pension provision. No pension credit, no state second pension, no Serps and no rebates. The system is dramatically simplified and advisers can work in the confidence that clients' savings are not reducing their rights to means-tested pension benefits.
Why end all state second pension provision and abolish the rebates? Look at it this way – what is state pension provision for? When Serps was introduced it was designed as an earnings-related top-up to an adequate basic state pension.
The basic state pension is no longer adequate and the new state second pension is designed only to bring people up to the level of adequacy. It has a totally different function from Serps. By 2050, the basic state pension and S2P combined will be below the income support level. Why have two small, flat-rate state pensions? Why not one adequate one?
If the state ensures that all pensioners are brought up to the adequacy level, then the question arises of should it be in the business of providing earnings-related pensions at all? Serps was introduced in a very different environment to today, to provide a savings vehicle for those without company pensions. We now have low-cost, portable stakeholder pensions to fulfil that role.
Perhaps the most difficult aspect of our proposals for many in the industry will be the abolition of rebates. There are two reasons to do this. First, it would help to pay for the more generous basic state pension. Second, it has the right redistributive effect. Raising the basic state pension would especially benefit the better-off, who are not entitled to any means-tested support. These are also the people who get the biggest rebates.
There is no free money in the savings system – individuals would be compensated for losing their rebates by a much bigger basic state pension. Everyone would gain from a simpler, more transparent system with much less means-testing. Most important, we believe that the system we propose might actually last the test of time. Few believe that the current settlement will last a single change of Government.
The IPPR will be holding a major conference on UK retirement policy in London on April 15. Speakers will include experts from the industry and academia, representatives of employers and pensioners, and spokespeople from the major political parties.
The last few months have raised the public and political profile of pension issues. Now we hope to find areas of consensus and identify the remaining difficult issues for Government and the private sector. It is time to find a way forward.
Conference details and a booking form can be obtained email@example.com
Richard Brooks is a researcher at the Institute for Public Policy Research