A few months ago I was chatting to some backbench MPs. Inevitably, the conversation turned to the ne...
A few months ago I was chatting to some backbench MPs. Inevitably, the conversation turned to the next general election. What will be the key issues, I asked? "The euro and pensions" was the answer. I have no reason to believe I would get a different answer if I asked the same question again today, except perhaps that transport and infrastructure might be added.
Is it good news for those working in pensions that our speciality has now risen so high in the political agenda? To answer that question we need to examine what has caused this rise in political importance, what is common ground among the parties, and how, if elected, each would change the pension landscape.
The main political driver for pensions is the grey vote. The population is ageing, so an ever higher proportion of the electorate sees pension issues as being of prime personal importance. This is not simply about the proportion of the electorate over age 65 or 60. A higher proportion of old people actually vote than is true for the adult population as a whole. Also, the closer people get to retirement the more they become concerned about the prospects for their own pension. So pensions are of increasing political importance for those in their 50s.
The rise of the grey vote is further increased in political importance by the clear discontent they currently feel about pensions. This discontent seems to be focused on state pensions, and in particular the basic state pension. The Retail Price Index increase of 75p for a single person this year must now be recognised even by Gordon Brown as a serious political error.
It has highlighted the decreasing role that basic state pension is playing, and by implication the increasing role of means testing for the poorest current and future pensioners. There is a sense of betrayal among grey voters which has at least two roots. One is that so many of them should need to claim means tested benefits to obtain even a very basic standard of living. The other is that those of them who made sacrifices during their working lives to provide themselves with a small private pension now find, through the application of the means testing rules, that they are no better off than someone who didn't save at all.
The government is currently consulting on the concept of The Pension Credit (TPC). TPC is intended to make sure that people who save for their retirement always benefit from doing so. The point is fundamental in the context of stakeholder pensions, which are required to be offered to employees earning more than the lower earnings limit (currently £67 per week) if they are not being offered a form of pension which involves an employer contribution. But for relatively low earners the proposal of a maximum of 60p of TPC for every pound of private pension purchased, which still leaves the individual below the TPC threshold begs the question "why should I not pay what I can afford into an Isa instead?"
The other increases for pensioners announced in the pre-Budget Statement are also intended to address the demands of the grey vote. Note particularly that, although Gordon Brown is still linking basic state pension to prices, his proposals to earnings-link the Pension Credit threshold, the Minimum Income Guarantee (MIG) and the tax allowance mean that poorer pensioners who claim have their income effectively earnings linked.
The reason why the Government has found itself in this pickle with the grey vote centres on its policy of concentrating the state's resources on the poorer in society, while encouraging the better off to make private pensions. It is hard to disagree with this, whether we are talking about today's pensioners or tomorrow's. But it does tend to increase the importance of means-testing, (MIG), and it is disconcerting that large numbers of pensioners do not claim MIG even though they are entitled to do so. Whether it is the stigma of means-testing or the complexity of it which deters people is not yet clear but what is clear is that the grey vote would prefer to get pension as of right than on a means-tested basis.
The Conservatives' big new pension idea from the last general election, Basic Pension Plus, has been reworked to remove the flaws which many of us identified and which Labour misrepresented to scare the electorate. It still involves contracting out of the basic state pension, but now it will be voluntary and aimed at the under 30s. They would get a contracted out rebate worked out on the same actuarial basis as is already used for State Earnings Related Pension Scheme (Serps) and the forthcoming State Second Pension (S2P).
This money would be used to build up a private pension along with the rebates from Serps/S2P and, hopefully, additional employer and employee contributions.
There would be a 'no worse off' provision for contracting out of basic state pension, and the means-tested safety net would still be available in old age.
The viability of the scheme would not depend on governments 40 years from now granting tax reliefs on pensions then in payment. The remaining fuzzy area of this policy is how the effect on the cash flow of the National Insurance system would be managed. Remember that today's state pensions are paid by today's National Insurance contributions there is no fund of assets, except for a small cash float. If there is a step rise in contracting out, the revenues from contributions are reduced and the money to pay today's State pensioners must be topped up from somewhere. This might involve raising overall National Insurance contribution levels, before contracting out rebates are deducted, or it might involve issuing more long gilts. At the moment the long gilts option looks particularly attractive because of the 'gilts famine' which has recently become such a problem for pensions in general, and annuitie
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