User: Password

Top of Form

User: Password:

Bottom of Form

Home
Party political
Transport
Constitution and government
Devolved government
Foreign affairs
Justice and defence
Business and finance
Health andwelfare
Energy and climate
About PB
Our contributors
Our clients
Our readership
Advertise with us

»Home »Health and welfare »How will tomorrow's survivor'ssurvive?

Saturday 12th February 2011

How will tomorrow's survivor'ssurvive?

by NoelWhiteside17January2011

Ring out the old, ring in a new pension policy? An academic expert now occupies the ministerial chair. Austerity will hit university students, families and housing benefit claimants, but the elderly appear set to do rather better under the new regime.

Reform of the basic state pension (BSP) is on the cards. From April 2011, this will be upgraded in line with earnings, prices or 2.5 per cent per year — whichever is highest. Further, once BSP merges with the state second pension (S2P), it will be raised to £140 per week (at some date as yet unspecified). This, the minister correctly argues, will offer a proper incentive for all to save as it removes the high marginal tax rate suffered by small savers who currently lose means-tested pension credits for being prudent.

This higher pension will be funded by administrative savings (fewer means tests), the abolition of ‘contracting out’ and an accelerated rise in state pension age (SPA), according to proposals now under discussion.

Yet not everything in the garden is rosy. Recall the hullaballoo over the Coalition’s proposed restrictions on child benefit. Any family with a higher rate tax payer will no longer receive it. Under the last government’s pension legislation, non-working parents with children up to 12 years old can receive state pension credits (for both S2P and BSP). But only if that parent receives child benefit.

Therefore a stay-at-home mother (let’s face it, they will be women) whose partner earns over £44,000 p.a. will only be able to claim the full BSP / S2P if she clocks up 30 years of National Insurance Contributions (NICs) in waged work. Yet if he earns £40,000, she can claim a minimum of 12 years’ pension credits against this.

Is this merely an anomaly? Possibly. Or is this an official sleight of hand (to improve the profile of future state pension accounts)? Probably. The Coalition knows that, by the time the implications of this become plain, someone else’s bottom will be in the ministerial chair.

Even with a full state pension, life will not be easy. Who would want to retire on £7,280 p.a., even with a free bus pass? The Rowntree Foundation calculates c. £13,900 p.a. keeps a pensioner in moderate comfort. So supplementary saving remains vital. And 47 per cent of the working population is currently saving too little or nothing for retirement.

So what is to be done? Here the Coalition follows doggedly in New Labour’s footsteps. Employer-sponsored pension schemes, whose coverage has shrunk steadily since the 1960s, are to be encouraged by simplifying rules and regulations governing compliance. Personal pensions are promoted by reduced obligations to annuitize and by possibly permitting access to pension savings in advance of retirement.

More importantly, from 2012 all employers have to auto-enrol all employees in a pension scheme (although the latter may opt out). Employers without a pension scheme will register with the National Employment Savings Trust (NEST). Both employers and employed will make a minimal contribution (three per cent and four per cent of salary) to a personal pension pot accruing to each employee. NEST’s very low administrative charges are designed to force commercial providers to reduce their costs to compete effectively.

So all is well then? Sort of. On the face of it, NEST fills the gaps in occupational provision that cause so many to face retirement with inadequate pension savings. Yet these proposals have not been greeted by dancing in the streets.

British governments have long promoted private saving and occupational provision to supplement a state pension that is currently among the lowest in the developed world. NEST represents another step along a well-worn path. From Personal Pension Plans to Stakeholder Pensions, the statute book is replete with policies to lure low and middle income earners into the savings fold, to lessen the burden of means-tested supplementation on the taxpayer.

Whether this latest attempt will prove more successful than its forebears is, at this stage, unknown. Much faith is placed in the merits of auto-enrolment. Even so, the runes are not good.

So what is wrong? There are problems. First, the financial crash (2008) damaged pension assets and, with this, public confidence in funded schemes. Second, while the merger of BSP and S2P and the abolition of contracting out all simplify Britain’s extraordinarily complex state pension system, NEST adds another element to the alphabet soup of occupational schemes under state sponsorship. This exacerbates complexity and confusion.

Third, the whole idea behind personal pensions (and NEST promotes personal pensions) was to increase portability. A modern labour market is a mobile labour market. Occupational and company pensions (well over 5,000 in Britain today) were born in an era of labour shortages and were designed to attract and retain skilled staff. Times change. Other European countries rationalised occupational schemes decades ago. Britain did not.

Today, the mobile employee faces huge complications when (s)he retires. People work in both public and private sectors, or spend a few years overseas (within and without the EU), or move between firms with occupational schemes and firms without them. In a few cases pension assets can be transferred. In too many they cannot. The pension is frozen until its owner lodges a claim.

Unsurprisingly, large sums are left unclaimed — £3bn currently, according to the Pension Tracing Service. This is a fraction of the £20bn in ‘orphan accounts’ —unclaimed assets (bank accounts, life policies and associated financial savings whose owners cannot be traced. NEST will add to the pile. NEST claims that its pension pot can be transferred between employers. This works if both past and future employers run NEST schemes. However, the old problem of transfers between public and private and between different private schemes remains. The owner of a NEST account can keep it for voluntary contributions: but is this likely when she is contributing to another scheme (and is on low pay)?

How much will new savers save? The pensions industry’s fear that NEST’s competitive charges could damage business has resulted in annual contributions to the scheme being capped at £3,600 p.a. Even at current annuity rates, a pot of £144,000 could offer a pensioner a comfortable retirement. Once annuitized and added to the promised higher state pension, income would meet the Rowntree standard.

However, the likelihood of all newly enrolled saving £3,600 p.a. is remote. The new scheme stipulates a minimum seven per cent contribution from employer and employee, plus one per cent from the state. Small employers will not volunteer to pay more and, with average earnings around £25,100 in 2009, Joe Blow’s statutory pension saving rate will be under half the maximum.

Joanna Blow is even more of a problem. The vast majority of women move from full time into part-time work while children are young, hitting their earnings and their pension savings. The results are already visible (see figure 1, below).

This chart reflects a pre-NEST picture. The question remains whether the new pension scheme is going to change it.

To answer this we return to the broader context. Recent shifts from pension benefits calculated as a percentage of final salary (defined benefit — DB) to benefits based on an annuitized personal pension pot (defined contribution — DC) do not help. Regulation requires the former to provide a survivor’s pension at 50 per cent of pension value: the latter carries no such obligation.

In 2000, the major wobble in financial markets caused some employers (and their DB pensions) to face balance sheet problems. New accounting standards (FRS 17) required pension liabilities to be published on company accounts. In consequence, companies abandoned DB in droves in favour of DC schemes. Needless to say, NEST is a DC scheme: the retiree decides whether to purchase an annuity that includes a survivor’s pension.

The UK possesses a very sophisticated annuities market. Yet nearly two thirds of retirees choose a simple single life annuity — which pays most initially but offers no survivor’s pension, nor any protection against inflation.

Today’s very old and frail (two-thirds of whom are female, mostly widows) depend heavily on the DB survivor’s pension, which is due to disappear in future decades. Research shows the survivor’s pension offers more income for widows than any measly returns from a part-time pension.

NEST will not counteract the tendency for women to suffer a sharp drop in income on widowhood: a point when frailty requires it to rise.

But more women now contribute to a pension than ever before and NEST will boost this coverage? This is true. However, current coverage tells us nothing about long-term persistence: the shifts from full-time to part-time work and their impact on personal pension savings.

There are solutions but they are unlikely to be adopted. Instead of making NEST residual and quasi-voluntary, the government could make it universal and compulsory. Contributions could be attached to NICs and apportioned to one of a restricted number of savings vehicles (like the Kiwi Saver in New Zealand).

This will not happen. Both the financial service industry and employers would oppose it. Moreover, if the scheme were compulsory, it would raise serious implications for the public finances if it failed. The European Court of Justice rules that any compulsory form of social security is by definition public and thereby a public liability. Hence the significance of allowing employees to opt out.

As for the gender complication, Cameron has repeatedly stated he wants to restore the real value of marriage. Why not introduce a married couples’ pension plan, allowing the higher earner to write off additional pension contributions against tax? But we live in hard times. This won’t happen with Osborne at the Treasury.

So the UK occupational pension saga limps on, old policies disguised behind new labels. There could be a glimmer of hope. Steve Webb is a bold reformer of state pensions and, with that matter settled, he may prove equally bold in reforming private schemes.

However, opposition will be formidable: do not hold your breath.

Noel Whiteside is Professor of Comparative Public Policy at the University of Warwick and Zurich Financial Services Fellow. She currently heads a research team investigating funded pensions in the EU under the EC funded FP7 programme GUSTO

«
»
Show all
Show in pages

Pages

«
»
Show all
Show in pages

February 2011 edition

Also by Noel Whiteside

Savings and the poor: nice idea, shame about thetiming

12January2009