I got quite taken in by speculation Iíve read in the press following Tony Blair mentioning pensions in his speech to the Labour Party conference recently, and Iím particularly 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 some to say 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 (which are sometimes referred to 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 future workforce. Even where people in some countries are able to meet the cost of such promises it still seems unlikely they would 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. 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 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. That it may be wrapped up for the modern generation as something called compulsion doesnít really matter. What does matter, though, is that the benefits promised or the money invested instead are aimed at providing worthwhile pensions for the millions of Britons today who are currently heading for a poor retirement funded by means-tested handouts from some future government.
First published in Retirement Planner, October 2005