We need to take the politics out of pensions | Frank Field

Britain must find a sustainable plan to fund retirement that breaks free from political short-termism

Successive governments have failed to introduce sustainable pensions reform. Every few years changes are required as new population projections undermine previous schemes. To deal with escalating costs, the coalition government has followed a two-pronged approach. The 2011 State Pension Act raises women’s, and later everyone’s, state pension age more quickly than planned. The government’s other aim is to simplify pension provision by offering a pension paid above means-tested assistance levels (predicted to be about £144 a week). This is something I, along with the Pensions Reform Group, have long campaigned for, and the government will announce its plans by publishing a white paper.

I remain equally as resistant to means-testing as Beveridge was 70 years ago. Essentially, I believe, means-testing encourages dependency on the state. It discourages people from saving for retirement as the level of pension credit a pensioner receives takes into account what other income individuals have, including savings income. The government is to be applauded for seeking to overcome this issue.

Last year’s budget originally promised a white paper in spring 2012. The delay is significant. Not only is the introduction of a new pension system set back, but it has clearly been very difficult to gain consensus across Whitehall. The sticking point, I guess, was that the 2012 budget was explicit, promising that the new £144 a week pension “will cost no more than the current state pension system in every year”. This was simply undeliverable. The two funding options were therefore to use the accrued rights of working people who have paid into the state earnings-related pension scheme (Serps) or the second state pension; or raise tax or national insurance rates. It seems the government will opt for higher national insurance contributions.

It would have been political suicide to balance the books by removing accrued rights under Serps and the second state pension. Instead, about 1.4 million will lose out in the short term. These future pensioners – who have opted out of the additional state provision, enjoyed lower rates of NI as a consequence, and in so doing built themselves up a private pension – will now have to pay higher contributions, though they will still be eligible for the new state pension.

Labour should think hard about its response. The government’s proposals will fatally damage the principle underlying national insurance, as pension payments will not be based on a contribution record. A challenge therefore presents itself. Can Labour introduce a sustainable reform while at the same time reasserting contributory welfare, which voters support?

The only safe way to deliver a £144 pension that does not cost the Treasury more money is to build up a compulsory funded savings scheme. Its aim would be to pay a guaranteed pension so that all members would gain the £144 minimum once the scheme had matured.

All workers would make contributions and would get the guaranteed pension (thus re-establishing a system of contribution-based welfare), rising in line with earnings. It would be paid regardless of the individual’s savings.

A funded scheme, by allowing investment overseas, would have the additional advantage of allowing UK pension savings to benefit from economic growth elsewhere in the world, and diversify the risk. The disadvantage of such a reform is that governments cannot promise existing pensioners, or workers who will soon become pensioners, the guaranteed pension precisely because it is dependent on building up an adequate fund.

But a funded scheme does not open itself to crude political choices, as the promises of governments of the day that future administrations will not break their promises would no longer be relevant. Labour now has an opportunity to show it can deal with pensions once and for all.

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