Rainy day pensions nos 12 & 35
The Work and Pensions Committee report into the Future of UK Pensions
Well, after reading through shedloads of written submissions and taking oral evidence from thirty six witnesses, including yours truly from Scottish Life, the House of Commons Work and Pensions Committee has finally published its report on the future of UK pensions. And a hefty tome it is too. There’s a link to details of our submission and the hefty tome below, if you’re interested.
The United Kingdom Parliament
I’ve spent most of the weekend wading through it all and picking up on the press coverage it has generated and I thought I’d summarise it for you in this BeeLine and also make a few comments of my own while I’m about it.
The thing that has caught the headlines this weekend is what the report says about the so-called pensions crisis. The inquiry was undertaken against a background of fairly sensationalist and persistent press reporting that UK pensions were in crisis, but it has concluded that this is not really the case. The report does say, however, that while it does not think there is a crisis per se in UK pensions provision, there is a crisis of confidence in pensions that leaves the UK today at some kind of turning point where some key choices need to be made.
I think I agree with that, and it’s not far from what we said in both our written and oral evidence. It is the word ‘crisis’ that is wrong. Our view, as you probably know, is that we have a problem with distribution of pensions right now, mainly caused by the imperfect interaction of pension savings with means-tested state benefits, and the fact that, in practice, the 1% cap on charges includes the costs of distribution. The problem created by this could well turn into a crisis in future if it is not dealt with now. Again, exactly what we said to the committee and, again, just what they are saying in their report.
There has been some press coverage lately, and OPRA have confirmed this morning, that last year a very high number of final-salary schemes (684 of them to be precise) have either closed to new entrants in the last year, ceased ongoing accrual or even closed down altogether (that is the wind-up process has begun). This is seen as further proof by journalists that ‘the pensions crisis’ is deepening, and reading that has started me thinking.
If we are compelled to use the word crisis, whether or not we agree we are in a crisis yet or not, then I think we should use the term correctly. Everyone seems to be going on about ‘the’ pensions crisis, as though there is only one. But all of the many articles I’ve read so far this year about ‘the pensions crisis’ seem to be going on about completely different pension-related subjects. I’ve come to the conclusion this can only mean one thing. Either there is one big pensions crisis, a sort of Mother of All Pensions Crises kind of thing, or there are any number of mini ‘crises’ that are contributing to our downbeat view of pensions in general. You know, like what is it that journalists find so depressing about pensions that gets them looking no further into their dictionaries than the crisis word when they’re looking to describe the real issues confronting the pensions industry today? It’s getting a little too easy to say that, just because there’s a lot going on in pensions right now, and many important issues are being addressed, we must therefore be in deep doo-dah. Well, at least we’re looking at these things in this country. We’re not in a crisis of denial.
Using the crisis term, though, and trying to define the ‘mini crises’ I’d say funded defined-benefit pensions seem to me to have a crisis of affordability. That is, employers are struggling to meet the promises they have made to their employees, particularly as they are forced to account annually for the long-term costs of the benefit promises made. The whole issue of final-salary closures is closely tied up with the conflicting notions that, while pensions are long-term, company pension schemes now have to make short-term decisions. That can’t last, and will end up going one way or the other. It will either end with the effective demise of defined-benefit schemes, or companies will be allowed to fund their voluntary commitments in ways that suit their businesses. It’s not a crisis though. Employers are just reacting to the situation they find themselves in, that’s all.
The State system has a crisis of adequacy, if I can call it that. The Basic State Pension is constantly reducing in value over time and the State Second Pension (S2P) looks like becoming a poor shadow of SERPS, the scheme it is replacing. Reliance on the State is less likely to be attractive to us in the UK as the increase in reliance on means-tested benefits for millions now looks a certainty for a long time to come.
Individually regulated pensions and grouped pension arrangements subject to individual regulation are suffering from a distribution crisis. If things continue as they are with the spread of the means-test culture and the insistence from Government that price-capped pensions can be bought rather than sold, then we will soon reach a point, I think, where no-one will run the risks associated with widespread distribution of such products.
Defined-contribution pension schemes, on the other hand, have what I would call a crisis of credibility. For some reason people talk about DC pensions as though they are in some way inferior to ‘proper’ DB pensions. Granted they are different, but whether they are better or not depends, surely, on how much money is put into them compared to any other form of pension. A DB scheme with 10% of salaries going into it would be inferior, in my opinion, to a DC scheme with 20% of salaries going in. The demonising of DC by the press guys isn’t particularly helpful to anybody. It reminds me of the answer your man Bob Dylan gave once when he was asked by a journalist if he was left-wing or right-wing. In a typically Dylanesque response he said he didn’t really understand what the two terms meant and that, anyway, he thought people were either upwing or downwing. Adding that he preferred upwing people. Like a lot of his off the cuff, jokey comments, that answer had a lot of clever and profound stuff caught up in it.
I think that kind of applies to this pointless DB-good/DC-bad so-called argument. In an upwing frame of mind we should say we don’t understand those terms, but that more money - good/less money - bad is basically where we’re coming from. This is the sort of position I wish more journalists would take, and I’m sure they would if we could only properly explain the issues.
Now all of this comes out when reading the text of the Work and Pensions Committee’s report. They don’t use the same words I’ve used here. Or so few. They don’t quote Bob either (although I think that would’ve been good), but they’re acknowledging these issues need to be addressed. What they say in effect relates to a number of specific issues falling out of the vast amount of evidence they have amassed. I’ll just run through the headline topics for you so you’re up to speed with it if you ever need to discuss these things with other people.
The committee feels that, on average, current pensioners are enjoying reasonable incomes, particularly those who have retired recently. But they are concerned about the fact that older pensioners seem to be poorer and that new pensioners in the future may not be as well off if a trend for employers to reduce contributions to pensions gains momentum.
They think the Minimum Income Guarantee has helped to reduce pensioner poverty, but are concerned by the low take up rate. They have similar concerns about the soon to be launched Pension Credit. Their report goes on to say that, while these policies are effective at reducing pensioner poverty in the short term, they doubt they are sustainable in the long-term. They then go on to encourage Government to develop a consensus on pension reform for the long-term. This isn’t a million miles from what we’ve been saying about the imperfect way the means-tested benefit system interfaces with pension savings markets and I’m kind of hopeful Adair Turner’s Commission will pick up on this, (as those of you who’ve read my recent BeeLines will know).
The report sets out two broad policy options for the state pension system. Either to continue with the current system of means-testing targeted at poorer pensioners, with all the saving disincentives that come with that approach, or to raise the level of state pensions generally. While they think the state pension age should remain at 65 for the time being, they call on Government to widen the terms of the pension commission chaired by Adair Turner to include the question of long-term reform.
The committee also expresses its concern over the security of private pensions and, in particular, calls on Government to say what they are going to do about increasing the security of pension funds without imposing further burdens on employers. Again, those of you who’ve been keeping up to date with my recent BeeLines will know how difficult a nut this is to crack. There’s a link below if you’ve not.
In the report, it is also acknowledged that employer compulsion could be justified in some scenarios, but it does urge that a fresh look is taken at incentives and new ways to promote pensions in the workplace. Again, we’ll be looking with interest at where Adair Turner gets with the crucial issue of compulsion.
They are also convinced that pensions education needs to be improved if we are to build on the successes of the past and strengthen our pensions system and even that people’s notions of retirement may need to change with the idea of flexible retirement and the improvement of work opportunities for older people.
All in all, the report does not really produce a blueprint as such for dealing with all aspects of UK pension provision, but it does set out many of the issues and it really has gathered a large body of evidence. The main hope at the conclusion of this is that this will be an important contribution to the building of a consensus for the future direction pension reform should take. I think I agree with that too. Much now rests on the crucial interface between private saving and the state pension system. Let’s hope Adair Turner’s pension commission tackles this stuff head on.
Well, that’s about it for this (longish) BeeLine. There are loads of links bouncing off it to other stuff on the BeeHive if you want to read further or deeper on any of the issues raised. And, Oh, if anyone’s wondering what the title of this BeeLine’s all about. Don’t worry. It’s nothing. I just happen to have been listening to Bob’s Blonde on Blonde album while I’ve been writing it, that’s all. In fact he’s just finishing Sad-Eyed Lady of the Lowlands as I write this last bit. Perfect timing!
16 April 2003
The information provided is based on Scottish Life’s current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.