Labour’s National Policy Forum has been consulting on its policy document A Modern Welfare State. The section on "dignity and security for every pensioner" acknowledges that the pensions system must be sustainable in the long-term, creating a durable framework for today’s workforce to plan ahead. Unfortunately, there is no acknowledgement that Government policies are unlikely to fulfill this crucial requirement.
Since 1997 reviews of the welfare state have come and gone but, under the influence of Gordon Brown, policies have largely developed in a piecemeal way with no consistent principles. The Chancellor is now remodeling himself as the heir of Bevan on the back of the welcome increase in funding for the NHS. Yet the logic of his position that a universal, publicly funded NHS is the most modern and rational policy is not reflected in policies on long-term care and increased means-testing in the social security system.
Following the debacles over lone parent benefits and the 75p pension increase, the Government did at least realise it had to make amends. Families with children and pensioners have benefited greatly from extra spending but the system is now so complex as to be vulnerable to erosion of benefits by less generous future Governments. Experience under the Tories, for example over SERPS, tells people they cannot feel confident in a system they cannot understand.
Despite the Prime Minister’s statement in Question Time on 20 October 1999 that "we are well on the way to formulating the right framework for pensions in the future" the pensions system is today seen as being in crisis. Final salary occupational schemes are closing and successful fight-backs by trades unions are only helping existing employees. Personal pension schemes are largely discredited as a result of mis-selling and other failings of pensions providers like Equitable Life. If nothing changes, in 2050 even more people than today will be retiring with a pension that is less than the means-tested minimum income guarantee (MIG, being renamed Guarantee Credit). The combination of the State Second Pension (SSP), no longer earnings-related, and the basic state pension (BSP) will have a lower value as a proportion of average earnings than the BSP alone when it was linked to earnings.
Neither the Pickering nor the Sandler reviews have come up with ideas that will allow the Government to come anywhere near achieving its aim of reducing the proportion of pensioner incomes coming from the State from 60% to 40%. (Though the flexibilities proposed by Pickering may help good occupational schemes to survive during the current period of low investment returns.) In any case, that target is purely arbitrary and, when challenged in Parliament, Government ministers can give no logical justification for it. 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.
One way of getting more people to save would be to make pensions savings compulsory but the Government was always reluctant to make Stakeholder Pensions compulsory for its target group of workers because of the lack of guarantees on performance which might invite accusations of mis-selling and value-for-money comparisons with state provision.
Instead we should recognise that it is essential to remove perverse incentives to save within a system that people can understand. This will require a basic pension set at least at the level of the MIG. Such a move would do away with the need for the Pensions Credit and flat rate SSP, simplifying the system at a stroke. Proposals to achieve this at no extra cost than in Government plans, provided the official retirement age is increased to 67 by 2030, were put forward by the Institute for Public Policy Research but were immediately rejected by Alastair Darling. Since then, however, further support for a more generous state pension has come from Tom Ross’ Pensions Policy Institute and pension advisers like WatsonWyatt and Mercer. We also have a new Secretary of State, Andrew Smith, who has spoken of the incomprehensible maze of current policy.
Smith has promised a Pensions Green Paper soon and this must surely be the last chance for Blair’s Government to bring some confidence into the pensions system. After the Labour Party Conference, boldness is apparently the order of the day. Sometimes the bravest action leading to the best outcome just requires a willingness to admit to past mistakes.
Lynne Jones MP
October 2002, for Pensions Management Magazine