Article for Pensions Management Feb 03

The Green Paper on Pensions: Avoiding the Big Issues

When he took over the job of Secretary of State responsible for pensions, Andrew Smith seemed to grasp that the Government’s policies developed from the last Green paper in 1998 are now untenable. Writing in the House Magazine, he said: "This government is determined to learn from the mistakes of the past, where reforms were undertaken with the best of intentions, but resulted in additional complexity and regulatory burden". Unfortunately, the determination was short-lived, no doubt because pensions’ policy remains firmly under the control of the Chancellor, who will never admit to any mistake. This has left the hapless Smith to do his best within the straightjacket imposed by his master, who has convinced himself that substituting the word targeting for means-testing removes associated perverse incentives. The consequential omission from the latest Green Paper of any measures to simplify the interrelationship between state and private provision undermines the potential impact of the many positive ideas put forward: to rationalize the tax arrangements for pension contributions; to switch from the Minimum Funding Requirement to scheme specific requirements; to remove age discrimination and promote flexible retirement; and to give a greater priority to employees when employers wind up schemes. Useful as these measures are, they will have only a marginal effect in achieving the ultimate aim of providing adequate and secure incomes for all tomorrow’s pensioners.

The Government wants to increase coverage of occupational pension schemes, particularly those with decent employer contributions, and halt the stampede out of final salary schemes into money purchase. However there is unease about the Pickering proposals that companies should be able to require workers to join schemes that are contracted out of the State Second Pension (S2P) without providing protection against inflation or benefits to surviving spouses. The phrase "the Government will not introduce changes unless coverage and contributions of occupational pensions would be higher than would otherwise be the case" pops up repeatedly in the technical paper accompanying the Green Paper and reads as a desperate appeal for easy solutions that Pickering, Sandler and their predecessors have been unable to deliver. The fact is that it is simply unrealistic to base policy on voluntary occupational and private pensions’ savings filling the gap between the present inadequate level of state provision and a reasonable standard of living in retirement. It is no use proclaiming as a virtue that public expenditure projections on pensions show stability at around 5% of GDP for the next 50 years if private provision does not grow to meet the shortfall.

One alternative that the Government is being pressed to look at is compulsory pension saving beyond the state scheme. This option is being kept open through the appointment of yet another industry worthy, Adair Turner, to chair a pensions commission. Compulsion would, of course, make no difference to those already well catered for, but unless employers were also forced to contribute substantially (well in excess of the 4% suggested by Pickering to justify employers being able to compel employees to join company schemes), the Government would be putting itself in the position of compelling people of modest means to make poor investments. There would also be massive enforcement problems, particularly with smaller employers.

The Government cannot just continue to dismiss the arguments that a basic requirement of any stable, continuing system must be to set the flat rate state pension at a level that will provide for basic needs and to maintain this as a fixed percentage of national earnings. Such a relationship would be easily understood and defended by potential beneficiaries particularly when the Government implements one of its better ideas of providing annual pension statements. The remit of the Commission should be extended accordingly. It should also look at the role for a state earnings related scheme and contracting out (or in) arrangements. Interestingly, one little-publicised Government U-turn is the proposal to defer indefinitely plans to make the S2P flat rate.

The Commission should also look at sex inequality in pensions. The chapter on women, work and pensions in the Green Paper, whilst highlighting the action the Government has already taken to help women, is very weak, offering only improved information. No action is proposed to outlaw discrimination in annuity rates which are commonly set at less than 90% of the rate for male retirees. Such a distinction would not be countenanced for other groups such as the wealthy, who also enjoy longer lives, but receive the same annuity rates. It should not be permitted for women.

The title of the Green Paper is simplicity, security and choice. The Government has a long way to go before it can say it has achieved these aims.




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