Green with envy
We really do need something bold, not more tinkering at the edges of the problem, something we are too often dished up with in a misuse of the word reform. The great pension thinkers of the past, whose ideas have transformed the UK into the most pensioned country in Europe over the last forty years or so, did a good job. Beveridge effectively ended the reliance we had on means-tested benefits and built an environment where pension savings had real value. Sir Thomas Phillipsí vision of universal occupational scheme membership which led to the reforms in the 1956 Act, generated enormous growth in company pension schemes, which are still unmatched anywhere else in Europe. This, together with proposals from influential Fabians, happened in conjunction with the creation of a state second-tier pension to encourage earnings-related savings from those not covered by occupational schemes.
In the 1950ís, the big pension ideas were joined up. What resulted was a pensions environment that worked in the mutual self interest of all parties involved: government, employers, employees and pension providers.
If we ever needed joined up thinking again it is now. The means-test, in the form of the Pensions Credit, is back with a vengeance. With, in some estimations, an alarmingly higher number of people in the current workforce likely to be relying on means tested benefits at some point in their retirement, it shouldnít surprise anybody that pensions distribution is the flashpoint of the current crisis. Because we are unable to say to people generally that every pound they save in a pension will make them a pound better off than those who do not save, we now have some worrying fault lines developing across our pension landscape. The most obvious is the fact that over a third of a million employers have recently gone to the trouble of establishing pension schemes in the form of stakeholder pensions, but with no stakeholders in them.
Employers and their advisers need to be able to stand up in front of the employees in these hundreds of thousands of companies and tell people they recommend they join these schemes and that they are advised to in their own best interests. They canít, because pensions are no longer suitable for everybody in the workforce. This is just plain crazy.
The trend from defined benefit to defined contribution is also worrying many people these days. The transference of risk from employers to employees is one thing, but much more worrying are the respective levels of contribution made to these different forms of pension. If pension schemes in general end up with less money going into them in the future then people will get lower pensions when they retire. Itís as simple as that. In this respect, the emergence of occupational stakeholder schemes which can be established with no employer contribution is clearly unhelpful and sends out the wrong message.
This green paper really must address these important issues. Pensions must be constructed in a way that means they are suitable investments for everybody in the workforce. The future environment needs to encourage an increase in pension savings from both employees and employers and recognises that people and companies who are good enough to commit themselves to voluntary pension saving should not be tied up in red tape for their trouble.
Our pension thinking needs to be joined up again and work to the mutual self-interest of all parties involved in the process as it once did. If pensions legislation could be simplified at the same time, that would be nice too. But simplification on itís own, without the structural changes we desperately need, will be of little use to us at all.
First published in Pensions Week, 04 November 2002