The contracting-out principle
Apropos nothing I thought it might be a good time to set down my thoughts on state pension systems and contracting-out.† Well, not really Ďnothingí I suppose.† Whatís got me writing this BeeLine is some of the speculation Iíve read in the press following Tony Blair having mentioned pensions in his speech to the Labour Party conference earlier in the week.† I covered the speech in a BeeLine yesterday, but Iím interested in what some commentators have read into what was said.
The PMís comments that in the modern world the state canít provide everything has led to speculation that the Government is considering developing a new secondary pension scheme of some sort that people may be compelled to join by having a percentage of their earnings redirected into it.† A sort of funded version of Serps or S2P if you like.
This isnít a revolutionary idea, something similar already happens in New Zealand, nor is it a new idea, the so-called Joseph Plan (the State Reserve Scheme) from 1974 had just this idea of creating a funded second-tier pension rather than one based on pay-as-you-go principles.† Pay-as-you-go schemes (brilliantly once referred to by my good friend Ros Altmann as Pray-as-you-go schemes) are under attack all over Europe.† Thirty years ago Keith Josephís idea was that pension schemes backed by money are preferable to pension schemes backed by promises.† I agreed with that then and still agree with that now.† Indeed, the pension problems across the whole of Europe today come down to the simple fact that generous pension promises made in the past to an ever-increasing number of those in retirement in the future will not be able to be met by taxes paid by an ever-diminishing workforce.† Even where people in some countries are able to meet the cost of such promises it still seems unlikely theyíd want to.† And thatís the point really.
Weíve had a pay-as-you-go approach to state second-tier pensions ever since the Joseph Plan was dumped in the history bin when the Conservative Party lost the 1974 general election.† The State Earnings-Related Pension Scheme (Serps) that took its place was not funded, but it did allow people to contract-out on a group basis through occupational pension schemes and most in those schemes did just that.† Years later in 1988 a new Conservative Government extended the right of contracting-out to individuals too, through what then were the new Personal Pensions.
What this has meant in practice is that although we have legislation that embraces state pensions backed by promises, our legislators have also been enlightened enough to have allowed us to switch to pensions backed by money if thatís what we want to do.† Thatís great and itís what Iíve always considered contracting-out to be all about.† Obviously there are secondary issues relating to the adequacy or otherwise of the amounts paid out by government as rebates for those contracting-out and the strange way that those rebates are structured as we get older, but that aside the principle of being able to have a get-out clause from reliance on state promises is long established in the UK.
The speculation now is that this principle will be further enshrined in future government policy through requiring people in the workforce to save at least some money in a funded pension pot.† Itís not clear whether those jumping to these conclusions think this will be in addition to the current State Second Pension (S2P) or instead of it, but my guess would be the latter rather than the former.† For my money, though, if this is the way the Government is considering going it would be just as easy, surely, to leave S2P as it is and simply require everyone to contract-out of it.† Either way, this line of thinking leads us full circle and right back to the idea that pensions backed by money are preferable to pensions backed by promises and thatís something Iím pretty relaxed about.
While Iíve got you, and before I wrap up this BeeLine, though, Iíd just like to mention something relating to the BeeHive website that keeps coming up every now and then as a problem.† Whatís happening is that some people have experienced problems when theyíve attempted to sign-up for automatic updates that are available every time I stick a BeeLine on the site.† As youíll know, I hope, anyone can sign-up for updates without having to have a password or any of that nonsense and without ending up on a marketing list or anything like that.† Thatís the way I want it and thatís the way the BeeHive has been set up from day one.† The problem relating to registering for updates is happening because there are now two registration links on the BeeHive Home Page.† One is for registering for BeeLine updates only and the other is for registering for Scottish Lifeís online services for advisers.† These services, which are brilliant by the way, do require a password and formal registration because they sit behind our secure firewall.
Both registration pages are accessible from the BeeHive Home Page these days (from the menu down the left hand side of the page) and thatís where the confusion has started to creep in.† To register for BeeLine updates the link you need to follow is the one in the top box.† Itís entitled ĎRegister for updatesí and sits between the links entitled ĎCartoon Galleryí and Ďe-mail Steveí.† The other registration link, the one for our online services, is in the bottom part of the links column and is headed up ĎLogin Statusí. †There are two options there; ĎLog-iní; and, ĎRegisterí.† Hitting the Ďregisterí button there takes you to a registration routine for our full range of online services.†
You can have a look at all this by following the link here to the BeeHive Home Page if you like.† Itíll all be crystal clear then I hope.† While youíre at it youíd may as well register for regular BeeHive updates if you donít already get them.† Thereís no charge and we wonít put you on a mailing list for anything else if you donít want us to.† On the other hand, if you do want us to, we can do that too.† Itís up to you.
29 September 2005
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