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Verity&#39s view

Is there really a pension “crisis”? Or, to put the question another way, why is there a pension crisis now rather than at any other time?

Final-salary schemes have been closing down in their thousands for over a decade. The stockmarket is delivering its poorest returns since the early 70s – but that has been true for nearly two years.

The dreaded accountancy rule, FRS17, which works out the cost of pension schemes based on the current market value of its investments, has been known about since 1999, and does not come into force until next year.

In fact, nothing in particular has happened in the last few weeks to trigger a pension “crisis” – apart from the fact that a few influential newspaper, radio and TV editors have all suddenly become obsessed with it.

A combination of factors, from the Enron scandal to Iceland&#39s closure of its final-salary scheme to existing staff, together with frightening warnings of a later and later retirement age, have given a youthful facelift to a tired old story.

But even if that pension crisis has no substance in reality, the widespread reporting of it does create an opportu-nity. If Alistair Darling, the Social Security Secretary, deci-ded on a popular reform that addressed these long-term worries, then the political climate would support him.

If the reform was bold enough to improve matters, and popular enough to be worth a few votes, it would be much harder than usual for Gordon Brown to resist it on grounds of cost.

What a shame then that exactly such a reform was proposed two weeks ago, only to be dismissed by Darling without any serious thought.

The Institute of Public Policy Research, a centre-left thinktank, proposed scrapping the state second pension, the successor to Serps, in exchange for a boost to the basic state pension,and relinking it to earnings. And the normal retirement age would be raised to 67.

The reform would end pensioner poverty by lifting the basic state pension to a level regarded by Help the Aged and other agencies as an adequate minimum.

That considerable achievement would be protected against inflation because the basic state pension would be uprated in line with earnings. And it would pay for itself through the billions saved in National Insurance rebates, and the higher retirement age.

It would also do more to simplify the pension system than any reform in memory. Even before the proposals were officially published, Darling was briefing journalists against the IPPR. There was no question, he said, of scrapping the state second pension.

Why so narrow-minded? The public knows little about the state second pension yet so scrapping it could hardly be worth a great number of votes. To a politician keen to make his mark, perhaps the state second pension was one thing he could potentially look back on and be proud of.

The state second pension is also, at least in theory, more redistributive than Serps, in that more of the benefit goes to the poorest and less to the wealthy.

Both Darling and Gordon Brown have said they think the relief of poverty should be targeted (that is, means-tested) – whereas the IPPR reform would give the same to everyone regardless of their wealth. If those were the reasons for rubbishing the reform, they were short-sighted, for a very good reason that lies at the heart of Britain&#39s pension problems.

Pensions are long-term creatures. In comparison, politicians will always be short-term. State pensions in particular are a long-term contract between the person contributing to the pension and the state.

But because in the UK we have no written constitution, the decisions of Government and Parliament today cannot bind a government in future.

So the state can break that contract whenever it likes – or at least whenever it is politically possible. Every time the Government does that – witness Thatcher&#39s reform of the state pension in 1979 or Serps in 1986 – it wrecks the previous Government&#39s plans and adds another layer of complexity to the system.

The only way to get a reform of pensions to stick is to make it so popular that a Government would not dare to get rid of it. A reform like that would have to be simple, obviously beneficial and worth something to everyone.

The IPPR proposals nicely fit that mould. State second pensions, National Insurance rebates and pension credits most certainly do not. As reforms, they are far too complex ever to be appreciated by more than a few.

They will never be popular for the simple reason that almost no one understands them. And for that reason they will never last.

Andrew Verity is per-sonal finance correspondent at the BBC


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