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Pensions - the crucial interaction between private and state provision...

I wrote the following article for the Parliamentary Monitor in July 2004

State spending on pensioner-specific benefits is currently around 5% of GDP. The Government is planning for this to rise only marginally, to 5.3% of GDP by 2050, despite the number of pensioners over 65 being expected to rise by half.   The shortfall is expected to be made up by reversing the balance of retirement income so that 60% comes from private saving and only 40% from the state.  But the current level of private pension contributions (an average of 7-8% of salary a year) is not even enough to provide most future pensioners with the level of retirement income achieved by today’s pensioners.

Therefore, as well as being concerned about the adequacy of the incomes of present-day pensioners, the All Party Group on Pensioner Incomes is focusing on how state spending can be structured to encourage younger people to save more.  We are very mindful of the need for political consensus on the framework for the pension system in order to provide some certainty and security for people to plan for the future.

In its first seven years of office, the Government has done much to improve the incomes of the poorest pensioners.

Means tested benefits for pensioners have never been more generous. No single pensioner’s income after housing costs should be less than the Government defined subsistence level of £105 a week – the Guarantee Credit, currently linked to 22% of national average earnings (NAE). The new Savings Credit to “reward” pensioners with modest private pension savings is worth an average of around £8 a week on top of this.

But even this level of income is at the lower end of what might be considered decent.  Age Concern and Help the Aged presented evidence to the Group suggesting that the income needed by a single homeowner aged 65 – 75 for a “low cost but acceptable” living standard is around £160 a week.  What’s more between a quarter and a third of pensioners do not claim their entitlements.

The Government argues that by targeting state support towards the poorest by increasing means-tested benefits rather than the basic state pension (BSP), they are keeping costs down.  But with the growth in pensioner numbers, the cost of a system that alleviates, rather than addresses the causes of poverty, cannot be contained because the amount paid in means tested benefits depends on the amount of non-state income pensioners have.  We know that the affluent will always provide for themselves well in excess of state provision so the real task is to ensure that the interaction between state and private provision is such as to encourage those of modest incomes to save more.

The complexity of the pensions system (there are 23 different potential entitlements for pensioners, with 36 different linkages between 16 of them) makes it difficult for people to make informed choices.  According to research by Virgin Money and PricewaterhouseCooper, young people, seeing final salary occupational pension schemes closing to them and the results of their parents’ hard work in tatters through mis-selling and other failures at pensions providers like Equitable Life, are increasingly deciding not to bother.

Almost all the organisations interested in pensions, an eclectic group covering the pensions industry, pensioner organisations as well as “think tanks” from the Adam Smith Institute on the right to Catalyst on the left, are saying to us that the basic state pension (BSP) is too small.  It should be raised to at least the Guarantee Credit level, thus substantially reducing means-testing.  The role of the state should be to ensure that people have enough to live decently in old age, leaving personal and occupational pensions to meet individuals’ own ambitions for total retirement income.

Such a broad consensus should be a very powerful message to Government.

Various ideas as to how to pay for a substantially higher BSP have been put forward, the most radical advocating the amalgamation of the basic and state second pension and the abolition of contracting out (the cost of rebates paid by the state towards schemes contracting out of state second pension is around 1% of GDP) and a linking of the age at which state pensions become payable to longevity.  There is also scope to redistribute some or all of the 1.5% of GDP the Government spends on tax relief on private pension saving, 55% of which goes to the 2.5 million people paying the higher rate of tax.

The other issue under discussion is whether a universal pension should be payable to all pensioners who pass a residency test, removing the need for a national insurance system to keep track of entitlement based on contributions made during working life. This would be particularly beneficial to women.  The Pensions Policy Institute has put forward workable proposals for a Citizen’s Pension worth 22 to 25% of NAE based on the system in New Zealand

The Government has appointed the Pensions Commission, chaired by Adair Turner, to look at ways of increasing private pension saving.  Crucially, however, their remit does not officially extend to the interaction between private and state provision.  The Commission is expected to report next spring, by which time the All Party Group intends to produce its own report pulling together all the lessons we have learned from our meetings.  Hopefully this will help inform the debate and ensure no issues can be overlooked.

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