Whether or not a specific pensions pledge makes it into the Labour manifesto, pensions policy will be on the top of the agenda once the prime minister and his new cabinet return to work after the election campaign is over. Adair Turner’s pensions commission expects to issue its final report and recommendations in September, which will make difficult reading for ministers and launch a new debate about a progressive long-term strategy for pensions.
Attention is already being given to what ‘stage two’ of Labour’s reforms might be. Tony Blair, in his Beveridge Hall speech last October, included pension reform as one of eight new challenges for Labour and reflected that ‘incremental reform improves things but does not transform them’. The government has an excellent record of taking large numbers of pensioners out of poverty, but the incremental pension reform set out in the government’s 2002 green paper did not address the major challenges, which have arisen since 1997. The pension credit has been a big success at getting new money to the poorest in society but the work and pensions secretary, Alan Johnson, says it is ‘today’s solution for today’s problem’, and not necessarily part of a longer term strategy.
So what would be a progressive strategy for stage two of pension reform? John Reid gave a hint when he addressed the Progress conference last November. His theme then was security and opportunity, demonstrating how a Labour third term would seek to protect the vulnerable, and help make choices into realities for many more ordinary working people. Let’s examine what this would mean for pensions policy.
The introduction first of the minimum income guarantee, and then of the pension credit, has taken 1.8 million people out of poverty, reducing it by a fifth since 1997. Of those 1.8 million, nearly three-quarters have been women, helping to reduce one of the worst gender inequalities in later life. The second state pension has also given the opportunity of an earnings related pension to millions of carers, the self-employed and people working part-time, again the majority of whom are women. Policy has been highly re-distributive, with the poorest pensioners benefiting most, and under Labour, for the first time, the average pensioner is no more likely to be poor than the average working person.
As ever, however, there is more to do. Although poverty has been reduced, it is still very substantial, and income inequality has remained unchanged leaving pensioners without a fair share of the rewards of the country’s strong economy and rising prosperity. The pension credit has been linked to earnings since its introduction, but the basic state pension is being quietly eroded in value. And although most pensioners are better off under Labour, pockets of poverty are deeper now than they were in 1997. This is largely because substantial numbers of people still fail to claim the means-tested benefits to which they are entitled. About 1.2 million people entitled to the pension credit do not claim it (an average of over 2,000 for each constituency). Some of them do not claim the ‘guarantee’ credit, nor other benefits to which they are entitled, leaving them on an income below that which is necessary to meet day to day living costs. Think of an older woman living alone without the money to eat well, heat her home or meet friends and you get a picture of the most vulnerable who Labour has still to reach.
Labour’s achievement in reducing pensioner poverty clearly ranks with the achievements of the 1945 Attlee government. But the government could not have predicted all of today’s challenges to pension policy, such as the stock market crash which almost overnight slashed many people’s private savings. Stage two of pension reform now urgently needs to be brought forward, building on the successes of what has already been achieved.
This means that two of Labour’s assumptions do now need to be re-visited. First, incremental reform has added hugely to the complexity of the system, to the extent that only a very few experts now understand it. Labour has introduced the minimum income guarantee, the pension credit, the second state pension, the stakeholder pension and now a range of stakeholder products. This has left most people baffled, and confusion acts as a disincentive to save. Labour has also massively extended means-testing, which now includes half of the pensioner population and, under some independent projections, could rise to over 80 per cent. Again, the result has been confusion about whether it pays to save, and the result has been paralysis. As a consequence, assumptions that private voluntary savings would increase have been proven wrong, and there are thirteen million people who should be saving more for their retirement. In fact, the pension commission now insists that a huge shift in savings is now needed if we are to avoid a situation in which tomorrow’s pensioners have a lower income (relative to earnings) than today’s.
Labour’s third term, should it win one, must give ordinary working people – and their families too – much greater opportunity to build a decent retirement income. To achieve this, the party must tackle head-on some of the social injustices which are present in the system.
The government must forge a new partnership on retirement by introducing a radical route map for pension reform. The inequalities faced by women in retirement are an on-going scandal and should be the top priority for the Labour party. The first stage of reform – clearly identified as a commitment in the forthcoming general election manifesto – should be to improve women’s opportunities to build retirement income by implementing a universal state pension paid at the current basic state pension level or increasing the numbers who are entitled to a full basic state pension. This would involve some retrospective action to allow some women who currently do not qualify for a full basic state pension to do so.
A second stage of reform – which should be at the heart of a third term and a central manifesto commitment for the 2009 general election – would then be needed to increase over time the level at which the basic state pension should be paid to the poverty line – currently £105 per week. This is necessary to reduce the very significant levels of poverty which remain, provide a clear platform on which individuals can choose to save and reward low and modest income earners for saving. This will require additional investment and should be achieved through further compulsion to save through the state pension system, funded by taxation. This would be the foundations of a new partnership on retirement savings between the individual, the state and employers
In addition, Labour must give people meaningful choices about their own savings, by widening access to good, impartial advice. Choice is meaningless unless people are equipped to understand their options and make decisions. But independent financial advice is costly and essentially a preserve of the wealthy. That means that individuals often make poor decisions, for example over the conversion of annuities, which reduce their retirement income and often leave their spouses exposed when they die. Labour must do more to ensure that ordinary people get the information they need.
Rights and responsibilities exist in pension provision, as they do elsewhere, and individuals do have a responsibility to save to meet their retirement needs. However, people can only exercise responsibility if the incentives are clear. In pensions, that is manifestly not the case. The whole system needs to be simplified, and means-testing reduced so as to create clearer incentives and rewards for saving. Labour has extended means testing too far in its bid to help the poorest, and must now scale it back without undoing its good work.
Labour should not spend too long talking about stage two of pension reform, as the answers are already there. A long-term progressive settlement can be based on the foundation stone of a universal pension or reformed basic state pension, rising to around £105 a week to cover basic day to day living costs; a resulting reduction in means-testing to cover those who do not qualify for a full state pension, better information for people on modest and average incomes; and clearer incentives and rewards for saving. This is a position championed not only by older people’s organisations like Age Concern, but also by the private pensions industry which has been hampered by the extension of means testing.
This will cost money, but not as much money as you might think. For instance, the UK is in a much better position than our European neighbours, many of whom have had to take action to cut unsustainable systems. Treasury forecasts show that the costs of current pension policy are well under control. Adding to the cost of our state pension system is probably less dangerous politically than reducing the amount of money that the state spends on each pensioner, given the importance of the swing ‘baby boomer’ vote.
Changing strategy now is not a reflection of weakness, it is a reflection of strength. Labour has an excellent record of redistribution to the poorest pensions, of which it must be proud. But the challenges the government faces in 2005 are different from those it inherited in 1997. A different approach is now needed which protects the poorest and gives better opportunities for ordinary working people. And by grasping the challenge of pension reform, Labour stands to gain the support of millions of worried people who know the sums don’t yet add up to give them a comfortable retirement.
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