Sunday, November 27, 2005
No easy answers as the pensions battle hots up
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

It is nearly 100 years since Britain first embraced the idea of pensions for all, with David Lloyd George’s Old Age Pensions Act of 1908. The new pensions were not exactly generous, payable only at age 70 and worth between one shilling (5p) and five shillings a week.

For comparison, a shilling in 1908 was equivalent to just over £4 now. Anybody back then with a retirement income of more than 12 shillings a week was ineligible, the new pension being means-tested. Even so, it was greeted with great enthusiasm. On January 1, 1909, when the first pensions were paid, there were street parties, fireworks and brass- band concerts across the country.

I cannot promise that when Adair Turner (now Lord Turner of Ecchinswell, which sounds like Dickens’s Eatanswill), reports this week it will provoke parties and fireworks. But in its way, the final report of his Pension Commission could be as important for pensions in the 21st century as Lloyd George was in the 20th century.

I use the word “could” advisedly. The government appears to be doing its best to scupper Turner’s proposals before they are published. Gordon Brown is doing so on the grounds of expense and their tax implications but also because they would be a break with his own approach, that of means-tested credits. Turner’s proposals for later retirement were holed below the waterline by Alan Johnson, the trade and industry secretary, when he agreed to a dodgy deal with the unions for existing public-sector workers to continue to retire at 60, although that may be revisited.

Having said that, let me sketch out briefly what we can expect from Turner and then try to answer some questions about his proposals. It seems certain there are two things we will not get — compulsory pension contributions and an admission that the commission may have got it wrong about the inadequacy of pensions saving.

In September, addressing the Trades Union Congress, Turner listed the disadvantages of compulsion, either applied to employers or employees. Barring a Damascene conversion on the road to Wednesday’s report, we should assume he has not been persuaded otherwise.

If the leaks are correct, however, there will be something that many businesses will find uncomfortably close to compulsion. This is the proposal for a British version of New Zealand’s “Kiwisaver” scheme. “Britsaver”, to which all staff would automatically belong (so the onus would be on them to opt out) might work on the basis of 4% of salary contributions from staff, 3% from employers and 1% from government.

Most business groups are opposed. The drawback, from their perspective, is that unless their employees choose to opt out, they will be forced to contribute. Turner will insist this falls short of true compulsion.

If outright compulsion will be rejected, so will the charge that Britain does not face much of a pensions problem. The commission has been attacked, since its first report in October last year, for overegging it. Central to this is the question of whether, as a nation, we save enough.

One argument, put forward by Tim Congdon, formerly of Lombard Street Research, is that because the cost of capital equipment is dropping (falling prices for computer and IT equipment), Britain needs to save less to maintain its productive base. Therefore, the halving of the savings ratio in recent years is not necessarily a problem in terms of the economy’s ability to generate the wealth pensioners will draw on.

This, it seems, will be rejected. However you cut the figures, the commission will say, we are facing a significant savings gap.

As for what Turner will recommend, it seems certain he will grasp the nettle of later retirement, with eligibility for the basic state pension rising to 67 (from 65) by 2030, and after that increasing by roughly a year a decade, in line with rising longevity. He will also recommend — and this is where he runs up against Brown — a more generous state pension, and one that rises in line with earnings rather than prices.

Now let me turn to a couple of those questions. The first is, why do we need a basic state pension at all? The basic state pension is £82.05 a week, £4,267 a year. Average (mean) male annual full-time earnings are £29,600. For some retired people the basic state pension is a matter of life and death.

For many others it is a bonus, a little bit of icing on the cake. These are the people whose private or company pensions provide the lion’s share of their retirement income.

Under both the Tories and Labour, policy for the past 25 years on the basic state pension has been clear. By raising it in line with prices it has “withered on the vine”, falling in relation to earnings. People have been forced into not relying on the state. Brown’s pensions credit has been another way — and not necessarily the most efficient — of providing targeted, means-tested help to the poorest pensioners.

This is fundamental to the debate. Do you target available state funds, or give everybody a more generous state pension (£110 or so, increased in line with earnings)? The disadvantage of targeting is that it cannot be done without means-testing. The disadvantage of a more generous basic state pension linked to earnings is expense, meaning higher taxes, and that it would act as a disincentive for people to make their own arrangements. Neither is very attractive.

The second question is, do we need to work longer? Yes, but with important caveats. The only leverage the state has over when people retire is the age at which they become eligible for the basic state pension. The TUC has figures that show most large-company directors can retire early with generous occupational pensions. Statistics from Cass Business School indicate that extending the retirement age to 67 would entail a £4 billion-a-year increase in sick pay — the inference being that elderly workers won’t be up to it.

The logic of later retirement looks inescapable, given rising longevity. The Pension Commission pointed out that in 1950 the average age of retirement for men was 67.2, but by the mid-1990s it had dropped to 63.1. Now it is slightly higher, 63.8, though 28% of men aged between 50 and 64 are not in work.

The challenge will be to align what employers want and what the pension system requires. Fat cats retire early but so, often, do the unskilled when they are no longer required by employers, and they are the ones most dependent on the state pension. Keeping them in work could be hard.

The government promises a great debate on pensions, although ministers seem determined to limit it. Brown, for example, remains wedded to his policy on state pensions, allowing them to rise only in line with prices.

Turner was appointed to come up with some answers. Through no fault of his own, we will be left with lots of questions.

PS: A week ago the interest-rate noises from America and Europe were aggressive, those from the Bank of England dovish. Now the Federal Reserve has suggested it may not have that many hikes left in its locker and the European Central Bank has signalled that its expected rate increase on December 1 should not be seen as the first of many. Meanwhile, members of the monetary policy committee here have been offering little hope of early, indeed any, rate cuts.

Let’s see what happens. The Fed’s problem is that clamping down on inflation is likely to require several more rate rises. The MPC’s difficulty will be that growth is likely to fall short of its forecasts.

From The Sunday Times, November 27 2005


I assume Tim Congdon's comments were in the course of debate rather than a genuine belief that there isn't a savings problem?

Having observed at first hand (as a pension scheme trustee) the mistakes of the last decade or so, ranging from excessive fund management charges, wholly optimistic actuarial assumptions, to Browns smash and grab, and more recently the move from equities to bonds at just the wrong time, I have observed a herd mentality (which I have also been sucked into) of riding the reverse roller coaster. Or put another way - equities crash so move into bonds, and house prices increase so property SIPPS become exciting - you know what I mean. Adairs forthcoming attempt to break the cycle and get some sensible thinking going is looking as you say like creating more questions than answers.

Savings are not enjoying a good press, and pensions in particular are viewed by a new generation as 'dodgy'. At ths same time we see property viewed as a one way bet, and a lack of understanding that in a low inflation economy debt will not erode but has to be repaid.

So what happens if we don't get to grips with saving, and the demographic time bomb explodes in our lifetimes? That is an interesing area for speculation, because then there really will be a new paradigm......some suggestions...

1) Inherited wealth will erode as it is needed to supplement retirement income. Equity release and similar schemes will become ever more innovative and competetive.

2) Renting will become the norm - the old model of buy, work to pay off the mortgage, and die leaving the house to the family will become redundant to many.

3) Where buying does take place lifetime mortgages will become more common instead of the current model (mortgage, pay it off over 25 years, and then take out a new MEW).

4) A new jobs market will open up for the over 50's (and increasingly over 60's) for those who are too burnt out to carry on with their current job but still need to work (at least part time) - a la B&Q.

5) The wealthy (ie those who save or have saved) will become wealthier and those with debt will find it ever harder to break the debt cycle.

Mere speculation. We live in interesting times!

Posted by: David Brown at November 27, 2005 06:04 PM

I’m with Gordon Brown on this one. The first priority is to spend any money available to keep the worst off above the poverty line. If that means the best off receive no state pension then so be it.

Prioritising certainly makes more sense than giving everyone exactly the same state pension and then trying to tax the rich and provide extra allowances for the poor.

What I’m suggesting is of course ‘means testing’. This is an emotive phrase because such a system was used during the 1930s depression. It was considered a humiliating system and the phase causes fear among today’s retirees.

But baby boomers do not remember the 1930s. And those in work today already live with a humiliating means test – it’s called the income tax system.

Anyone familiar with completing an income tax form to decide what they pay the state every year shouldn’t have a problem completing a ‘means test’ form to decide what they get from the state every year when they retire.

Now the rich will object to getting nothing. Well, tough – they should look on the state pension as an insurance policy, not a savings scheme. It’s what we mean by National Insurance.

How about the age of retirement? There are lots of people on invalidity benefit now that are effectively retired. These people could either decide to seek work and fulfil obligations to try to obtain work or decide to retire - at any age. The only difference is that their state pension income would be less than their unemployment benefit income.

The ‘age of retirement’ is just the upper age the government decides it will stop paying unemployment benefit and starts paying the lower pension benefit, if applicable. Anyone could retire when they like – it’s just that their pension benefit would be less than benefits they would get if they were really prepared to work.

The only tricky bit is: What do we mean by “means”? It should really be wealth, not income. There’s no excuse for a widow owning a million pound house complaining about having no income. But if people want a pension from the state they should be prepared to declare their wealth to the Revenue just is they declare their income for tax purposes.

Posted by: Sandid at November 28, 2005 11:40 AM


Posted by: sfdgjh at December 1, 2005 12:55 AM

Or, from the Chinese:

Bearing heater
oil filter machine

Hmmm, deep.

Posted by: Sandid at December 1, 2005 11:42 AM

The key to what Sandid says lies in his second sentence. It's easy to say that the "worst off" should be kept above the poverty line, but we also need to ask how the "worst off" got that way. Sure, some of them will have been on low wages all their lives. Others however will have earned good money but have been profligate and have no savings to live on. Trouble is, if the state is always going to provide an adequate pension to the retired there is no incentive for people to save during their working lives. How fair is it for means-testing to put someone thrifty in the same position post-retirement as someone who's p&*%$£d it up the wall (I speak as a person more likely to fall into the latter category)? Surely the fairest thing would be for the state to provide a fixed pension linked to earnings at a modest but survivable level. If we want to be more affluent during our retirement it's then up to us to put money aside while we're young enough to work.

Posted by: bears all at December 2, 2005 09:35 AM

I wasn’t suggesting that the state pension should provide any more than a dignified existence for those entirely dependent on the state. In twenty years time there will be so many people of retirement age that even that low level of state pension will be difficult to maintain.

But I think it will be wrong, in twenty years time, to give any state pension at all to people that doesn’t need it. By only supporting the really needy the burden will be less for those still in work. Yes, it really should be up to people to accumulate enough wealth to last until they die without needing a state pension.

But I’m speaking as a baby boomer. Pensioners today see things differently. Someone aged 70 today was born in the depression, just before the Jarrow march, had they childhood dominated by the war and went to work and raised a family at a time of rationing. The pre-war generation see a state pension for everyone as an absolute, essential right. They think today’s rich pensioners should still get the state pension simply because they’ve earned it – even though there could be more money for poor pensioners if rich ones didn’t get it. They supported the previous generation in retirement and they expect to be supported now. They don’t want a means test because they want the dignity of equal treatment.

People that are 50 today, the baby boomer generation, don’t see things the same way. As a boomer, I don’t agree with the pre-war generation’s view but I’m happy to go along with what they want because they deserve it and we can afford it. In fact I’m happy to give them a bigger state pension, just not one linked to wage inflation – better to raise the amount once and keep the link to price inflation.

But the last thing we want to do is give baby boomers the idea that their state pension will be the same as that for the pre-war generation. It’s not just better that we don’t depend on the state; it’s essential because of the numbers of pensioners and taxpayers involved.

Fortunately, I think boomers do understand that. We also don’t expect employers to arrange our private pensions in the way the pre-war generation did. The sooner we remove any link between employment and pension provision the better. There should be a tax concession for pension saving; then it’s up to the individual to do the rest.

As for people that won’t save and will p*ss it up the wall – that’s not boomer behaviour, it’s more likely to be someone from Generation-X, the 30-somethings of today. Boomers know very well that we can’t depend on Generation-X to do anything for us or, indeed, themselves. That’s another reason to get things sorted before we retire.

Posted by: Sandid at December 3, 2005 04:12 AM