When Ludwig Wittgenstein completed his first major work, his new publisher
wanted to know what to tell the reviewers and was desperately keen to find
out what it was all about. To his utter dismay, the 20th Century's greatest
philosopher replied that what was really interesting about his
ground-breaking study of the nature of meaning was – “what it doesn't say”.
It was a bit like that with the Pensions Green Paper. The two issues which
are now blindingly obvious to everyone looking at the situation were,
first, should the state retirement age be raised and, second, should
private pension contributions be made compulsory? It was what was not said
about those two issues that spoke volumes.
In fairness to Work and Pensions Secretary Andrew Smith, he did state in
his speech to the Commons why it was he felt that raising the state
retirement age would be wrong. He made one salient point somewhat neglected
by the well-paid pension gurus who normally pronounce on these matters.
His point was that it would unfairly affect those with tough working lives
whose jobs take a serious physical toll on them. Some of the least pleasant
occupations get negligible wages and, more pertinently, are much more
likely to be incapable of carrying on their jobs beyond the age of 65. To
put off the date when they can draw their state pension would simply turn
hard-working people into income support claimants.
Smith also had a good reason for not scrapping Serps and making private
pension contributions compulsory. As every IFA knows, the arithmetic of
contracting out, especially on the current National Insurance rebates,
shows clearly that those on the lower end of the income scale are almost
always better off contracted in to Serps rather than contracted out to a
private pension. The lower the investment returns from the stockmarket, the
more clearly that is the case.
As Smith pointed out, scrapping Serps and converting it into a higher basic
state pension for all would hit those people at a time when it is clearer
than ever that private pensions for those on lower incomes give poorer
value for money than the state.
It would also be profoundly regressive in the sense that the higher basic
state pension would spread money that is now targeted at the less well-off
(a state second pension for those who can't afford to fund their own
private pensions) to an untargeted handout for all.
So Smith did give his reasons for dismissing calls for a higher state
pension age, a higher basic state pension, scrapping Serps and introducing
compulsory private pensions.
But what was startling was what was missing from this Green Paper. If there
is such a thing as a pension crisis, it has to do with employers cutting
their contributions at a time when they must be increased.
There was also nothing about stemming the tide of employers cutting their
contributions as they switch from final-salary to money-purchase schemes.
The unions had called for something to be done to stop it. But,
interestingly, they did not choose to protest when the issue was postponed.
Instead, they seemed more than content with the Government's promise that
the issue of compulsory employer contributions would be looked at
continually by the new Pensions Commission led by former CBI chief Adair
We should also avoid being churlish about the Inland Revenue proposals to
simplify pensions. The new £1.4m lifetime limit on tax-free pension
funds will genuinely simplify matters and the Pension Schemes Office should
be praised for breaking habits formed over decades, since which rules about
pensions have been written but never erased.
Unfortunately, what was really missing from the Green Paper was any attempt
to address the real nature of all pension problems – that pensions are
incredibly – ludicrously – long term. With many people being contributing
members of one pension scheme or another for 40 years and drawing their
benefits for a further 20 or 30 years, they are the longest piece of
financial planning anyone gets involved with. It is that fact that causes
all the problems.
The issue of pensions has, according to some political reports, been on the
agenda at meetings of the Cabinet and Downing Street's policy committees
every week for months. But the Government's hesitation in delivering a
convincing solution to these serious, long-term problems is the Green
Paper's big omission and it will lend support to critics who say that as
far as the pension “crisis” is concerned, the Government, even now, simply
does not know what to do about it.
Andrew Verity is a personal finance reporter at the BBC