Wednesday, February 22, 2006

Pensions Are Not Boring

Something remarkable happened last week. A government committee came up with a report which made sensible and workable proposals for dealing with one of the most intractable social problems of the age. Naturally, the government rubbished the Turner Report on the future pensions.
Or at least Gordon Brown did - even though he commissioned it. The Chancellor has form on pensions of course. Remember that 75p pension increase? Lone parent benefit? Now the Chancellor is opting to deny himself credit for a document which is being compared to the Beveridge Report in 1942, which founded the modern welfare state.
Running to nearly five hundred pages, “The Second Report of the Pensions Commission - A New Pension Settlement” is hardly bedtime reading. But its conclusions are relatively simple to understand. Lord Turner called for a gradual restoration of the value of the state pension, an end to means-testing, a very gradual increase in the pension age over thirty years and a state-guaranteed low-cost second pension into which all employees will automatically be enrolled. Simple, really.
Put like that it looks like plain common sense - but that’s what good policy should look like. The simplicity disguises the scale of the task the Turner Commission undertook - and Lord Turner’s courage in refusing to be browbeaten by a Chancellor who had already decided what he wanted hear.
Turner had to wade through the swampland of political rhetoric, scare stories and pleading special interests to locate the real problem - or lack of it. There is no pensions “time bomb”, he discovered. Increasing life-expectancy is not a crisis - it is an epic social and medical achievement which we should celebrate. Having more people able to function productively for longer should be seens as a potent new source of added economic value.
Pensions are, and should be, boring. Securing them should be a practical problem, an administrative exercise in managing public finances and encouraging people to save. In the cliché of the time, it’s not rocket science - it isn’t even domestic science.
There is no political issue here. Everyone accepts that security in old age is one of the defining characteristics of a civilised society. It is just a question of doing it.
Restoring the value of the state pension, and hence the dignity of its recipients, Turner rightly saw as the key to restoring the social contract on retirement. Means testing is not only demeaning, it is counter productive because it constitutes a disincentive to save.
Cutting through the nonsense, Turner showed how the basic state pension could be raised, over time, from #82 to #109 with only a marginal increase in taxation by combining the existing two-tier state pension (who actually knows what SERPS is, or cares?) and by rolling up the Chancellor’s expensive and complex pension credits.
But that isn’t all. We have to honour our side of the pensions bargain by undertaking to contribute to our own future well-being. Again, there is no politics here. Everyone agrees with this. But the main reason people aren’t saving is that they have lost faith in the willingness of government or the pensions industry to protect their savings.
By far the most radical element in Turner package is the National Pensions Saving Scheme. The idea is that everyone in work should be automatically signed up to pay 4% of their income into this “top-up” pension, with the employers paying 3% and the state I%. This would be invested in a wide range of private assets and funds and charges would be kept to only 0.3% of the fund’s value per year.
Again, deceptively simple. But some see this as tantamount to the nationalisation of the pensions industry. The lowest annual charges in private pensions are 1.5% and most charge much, much more. That may not seem much, but over the lifetime of a pension policy it could depress end value by as much as a third.
It’s hardly surprising that the pensions companies like Standard Life Prudential and the rest are up in arms. They say they can’t compete with this state-run scheme; that thousands of jobs will be lost in the financial services industry. But they brought this upon themselves. One of the main reasons no one saves any more is the appalling record of personal pensions. After the stock market crash of 2000, savers discovered the huge amounts in charges and commissions lost on personal pensions over the years. “With profits” turned out to be “without profits” - except for the insurance companies.
The pensions funds insist that they had only been making a reasonable return. But Adair Turner is a former head of the CBI, and he wasn’t buying that one. He has served notice on the entire sector that they will have to become more transparent, efficient and honest if they want to remain in business in future.
The Chancellor doesn’t seem over-enamoured of Turner’s National Pensions Saving Scheme and seems to sympathise with the pensions industry. But perhaps it isn’t too surprising. As this column explained two weeks ago , the Chancellor has himself been guilty of miss-selling on a grand scale by encouraging people on modest incomes to put money into private policies which will simply lose them entitlement to the means-tested minimum income guarantee when they retire.
The Chancellor tried to nobble the Turner Report even before it was published. A leaked letter from Brown warned that the numbers used by Turner were wrong. On the day of publication, the Treasury gave figures to the tabloids claiming that Turner had underestimated the cost of restoring the state pension by #15bn and that that his package would mean a four pence increase in taxation.
It was the politics of “black holes” that we are so used to from Labour election campaigns. The Chancellor is a past master at this kind of fiscal obfuscation. However, Adair Turner has been around the blocks a few times too. Furious about the pre-publication leaks, he resolved to take the Chancellor on over the numbers and turned to the offensive the very next day about the Treasury’s “porkie pies”.
The only way the Chancellor’s figures made sense is if pensions were to be raided in future by the Treasury. Turner’s figures were based on the assumption that the government intended to honour its bargain to pensioners and continue to increase the minimum income guarantee in line with earnings rather than prices beyond 2008. This was a perfectly reasonable assumption. To do otherwise, would be to plunge the poorest pensioners into the abject poverty from which they have only just emerged. Surely Mr Brown didn’t mean that.
Treasury spinners may be pleased at the way the Sun took the bait and attacked Turner as a tax-raiser. But the public reaction was much more favourable. Rarely has a government report won such praise from the opinion forming media and from professionals in the sector. You could almost sense the sighs of relief across the land that, at last, someone had got to grips with this problem in a way that was affordable, fair and above all comprehensible.
All the more foolish then of the Chancellor, Gordon Brown, to opt to remain on the wrong side of the new consensus. Pensions policy has been dogged by short-termism and political expediency - hence the Tories’ disingenuous cutting of the link between pensions and average earnings in 1981, which they sold at the time as a means of ensuring that pensions would be secure in value. Hence too the Chancellor’s cat’s cradle of reliefs and means-tests which may have helped get the very poorest pensioners out of poverty but at the cost of demeaning procedures which have destroyed incentives to safe and increased bureaucracy.
The Turner Report represents a real breakthrough - the possibility that the whole issue could be laid to rest for the next fifty years. Then pensions could become boring again.

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