Proof of the pudding
When New Labour came to power 10 years ago, it had a clear idea of what it wanted to do as far as pension policy was concerned. The government announced its review of pensions on July 17, 1997, very quickly after the general election. It set out nine fundamental challenges that the review would address:
- To achieve a sustainable consensus on pensions policy.
- To agree where the responsibility for funding pensions should lie, and to establish the right balance between public and private sectors.
- To respond to demographic change.
- To respond to social and labour market change.
- To ensure resources devoted to pensions are used to maximum effect.
- To get the regulation of pensions right.
- To raise awareness of pensions and improve the level of financial education so people understand the importance of saving for retirement, and make the right choice about which pension product is best for them.
- To narrow the pensions gap between men and women so as to give women more security in retirement.
- To strike the right balance between the generations.
Pensions policy has always been an important issue for New Labour, and was explicitly mentioned in the seventh of 10 pledges (the ones allegedly drawn up by Tony Blair in his back garden) about their aims in this government: “We will help build strong families and strong communities, and lay the foundations of a modern welfare state in pensions and community care”.
But matching good words with effective action is, as we all appreciate, extremely difficult. We know now that one of the first actions of the new government was to introduce substantial stealth taxes to the accumulated funds built up for private sector pensions. With hindsight today, many people attribute the alarmingly fast decline of our private sector occupational defined benefit sector since to this approach to taxation. But that decline was probably already inevitable following the additional generosity required of employers by the legislation of the late 1980s and early 1990s. The effect of the additional taxation has probably made matters worse rather than better, but I don’t think it is right to say it is the cause of the decline of private sector occupational pensions.
Tony Blair referred back to the original principles in his address to the Labour Party Conference in 2005 (one of his extremely rare mentions of pension policy) when he said: “Only a Labour government would have stopped the scandal of pensioner poverty.”
This clearly related to the pension credit and was an endorsement of the overall concept of means-testing for the elderly which had been championed by the chancellor, Gordon Brown. We should not be surprised that means-testing has spread so far so quickly; it has always been a flagship idea that has been central to much of what has happened to meet the original pension pledges for most of the last decade now.
Means-testing has been highly effective at getting weekly cash to millions of the most hard-up pensioners in the UK, and it will clearly continue as a main policy of the Labour government into the future. The problem with means-testing is that while it undoubtedly helps those currently retired it acts as a disincentive to saving for those still at work at the same time. It is a double-edged sword, of course, but we all have to accept that the government is committed to means-testing because it works today. Tomorrow is still not as high on the agenda as today, even in these more enlightened post-Pension Commission Report times.
If future policy remains as it is now, with means-tested benefits skewing ever dwindling resources towards those most needy in retirement, the losers look to be those caught in the middle. These will be people who will be too rich to be classified as being poor, but too poor to be classified as being rich. They are also likely to be the losers as occupational pension schemes continue to decline.
The second thing Tony Blair said in his conference speech back in 2005 related to this group and to this problem. What he said was this: “In December, we receive the report of the Pensions Commission. Next year we will publish our plans for reform.
“There will be a proper basic state pension; and alongside it, because, in the modern world the state cannot provide it all, a simple easy way for people to save and to reap the rewards of their savings.”
Well, we are in the middle of that reform now – a full 10 years after those clear statements of principle. But we are also 10 years further down the road to the complete shutdown of our private sector occupational pension sector and dependence on means-tested handouts is ever-increasing. We clearly don’t have a proper basic state pension, nor do we look likely to get a simple and easy way for people to save and reap the rewards of their savings.
To quote from the petition for proper pensions that I recently placed on the No. 10 website: “We the undersigned petition the prime minister to drop the government’s proposal to auto-enrol millions of people into a national pension savings scheme unless it can first guarantee that every pound saved in the scheme will make savers at least one pound better-off than non-savers.” Those of us who liked what we heard on pensions back in 1997, and then again in 2005, cannot be happy with what we see happening as these reforms take shape; we still seem unable to match good words with effective action.
First published in the Professional Pensions Supplement "Pensions - The Way Ahead", April 2007