If this is pensions reform, then back to the drawing board, Mr Brown

This summer’s much-heralded white paper on pensions promised ‘the biggest renewal of our pension system since Clement Attlee’s government implemented the Beveridge reforms’. Behind the rhetoric, sad to say, the government’s proposals prove to be nothing of the sort.

In particular, the trumpeted improvements for women offer far too little to correct the gender bias inherent in current British pensions. So what is the problem? Thanks to their longer life expectancy and earlier retirement age, two out of three pensioners today are female. Most of the frail elderly (over 80) are widows. Three-quarters of female pensioners receive means-tested Pensioner Credit; more have a right to it (claim rates stand at 75%). Worst off are divorced women who have neither contributed to their own pension nor retained a share in their previous husband’s pension. Average female pensioner income stands at around 57% of men’s.

The reasons for these discrepancies are relatively well known. A rising incidence of family breakdown, broken work (and pension contribution) records, a high incidence of part-time work — all combine to reduce women’s rights to both state and private (or occupational) pensions. This is particularly true for mothers and carers.

As a result, less than 30% of women today receive a full Basic State Pension (BSP) in their own right. Although as many women as men are covered by private/occupational schemes (around 30%), these are earnings-related and hence translate women’s lower hourly pay into lowly supplementary pensions — which may fail to raise old age income above means-tested levels. As Baroness Hollis shows in our book, Britain’s Pensions Crisis: history and policy, to be published this autumn, women currently command on average 75% of hourly earnings, 50% of income and 33% of the pensions of men. As our contributors demonstrate, the white paper modifies, but does not remove this long-established bias.

What has New Labour done about it?

To be fair, steps have been taken since 1997 to correct this state of affairs — driven by EU directives that require equal treatment between men and women and between full-time and part-time workers. Access to state pensions has improved. Home Responsibilities Payments (HRP) reward carers and mothers with children under 15 by giving credits towards a BSP and, for children up to six, towards the State Second Pension (S2P) as well. This last is the state alternative to an occupational/private personal pension. Even though carers are credited at the lowest rate, redistribution mechanisms in S2P make this source of pension supplementation good value for money for low paid workers — who are mostly women. Pension Credit has raised the standard of living of the poorest pensioners (largely women). At the same time, the introduction of a minimum wage and Working Families’ Tax Credit has benefited women workers by raising their take-home pay and encouraging single mothers to return to waged work. With rising levels of female labour market participation, politicians have believed that the problem will sort itself out in time as younger age cohorts with full pension records work their way through the system.

And the white paper?

The government’s white paper on pensions has made further concessions to women along the same lines. Its proposals shorten the number of years’ contributions and credits needed to claim the BSP from 39 years (44 years for men) to 30 from 2010, raising women’s entitlement to over 90% by 2025. The state pension will be linked to earnings, not prices, from 2012 — subject to afford-ability.

Further, the government proposes to modify (and rename) Home Responsibilities Payments. A mother will be able to claim a weekly pension credit for both BSP and S2P for children up to 12 years old. Thus she exchanges three years BSP credits under the current system in return for an additional six years of S2P. This is a small pensions gain.

In addition, credits can now be claimed for those caring for a disabled or elderly person for 20 hours per week, instead of the previous minimum of 35 hours. Again, this appears to make access to state credits more generous.

So all is well then?

Well, no, it is not. If the object of the exercise is to guarantee future women pensioners an income above means-tested levels, then reform will fail. The ‘simpler entitlement conditions’ of 30 years contributions/credits, so acclaimed in the press, is to the Basic State Pension alone. Currently this stands at about 17.5% of median earnings. The restored link to incomes should raise its value a little — the white paper estimates ‘about 20% of median earnings’ by 2030. In short, the BSP will still require means-tested supplementation for those with no other resources.

For a full state pension above means-tested benefit levels of £135 — the figure much quoted in the media (an estimated 30% of median earnings) all men and women will have to contribute/gain credits for 40 years at least. For a higher pension, women (like men) will contribute to the National Pension Savings Scheme, currently under discussion, designed to supplement the state scheme. This continuing official preference for a private solution to the problem returns us to the wider world of pension debates.

What is the wider world of pensions?

For decades, governments of all political stripes have sought to offload financial responsibility for pension provision onto the private sector. Time out of mind, tax concessions have encouraged employers to offer occupational pensions to their workers and, since 1986, workers to take out private pension plans. Both are entitled to contract out of the state earnings-related pension (initially SERPS, now S2P)

The saga of company fraud (Maxwell and the Mirror group, Enron), provider problems (Equitable Life) and pension mis-selling, pro-voked tighter state regulation. The downturn in global financial markets (2000-03) created deficits in occupational schemes, resulting in employers closing them down and offering personal pension (defined contribution) plans (including the state-approved Stakeholder) instead. As the white paper notes, there were two million fewer workers covered by occupational schemes in 2004 than in 1990, down from 5 million to 3 million.

Defined benefit occupational pensions offer a pre-defined proportion of salary on retirement and a survivor’s benefit (commonly at 50% of the pension). Their steep decline now means that they are confined to public sector workers or employees of ex-stateowned enterprise (e.g. British Airways).

Defined contribution (personal) schemes reflect the annuitised value of a personal saving pot, into which (to date) the employer need not contribute. The proporsed National Peniosn Savings Scheme aims to make employers contribute 3% towards the worker's pension pot. It remains, however, annuitised: there is no survivor's benefit.

The consequences of these developments are not gender neutral. Most obviously, fewer amonthe next generation of female retirees will be able to rely in their extreme old age on a widow's pension, as their mothers did. In many respects, this matters less today than it did yesterday. Marriage is increasingly unpopular among young couples (co-habitation does not endow any survivor with pension rights) and has only a 50% chance of survival. Translated, this means that, unless married securely to a public sector worker such as a civil servant or an MP (both of whom retain a tax-guaranteed pension at 70% of salary, plus survivor's benefits), the bereaved are in future unlikely to inherit part of their marital partner's pension. And men tend to die first.

But are more women working now? Yes. However, their ability to put money aside for a pension is open to question. Mothers pay a heavy financial penalty when they take time out from the labour market or go part-time while the children are at primary school. Gaps in earnings and part-time work reduce future earning power and occupational status.

- 66% of graduate mothers take time out when their children are under five years old; overall, graduate mothers lose 50% of their lifetime earnings. Much better to be a childless female graduate.

- 44% of women work part-time and overwhelmingly in low-paid occupations (the hourly gender pay gap is 41% for part-time workers. Many combine two or more jobs which fall outside NI regulations. Such jobs will allow employers to avoid the quasi-compulsory NPSS scheme. Overall, female part-timers have reduced rights to the BSP and most have no supplementary pension cover at all.

- Currently, of all women with a child under 16 at home, fewer than 40% have ever contributed to a private pension. There is little in the white paper to alter this state of affairs.

While trying to secure a working trajectory to provide for her own pension, the mother remains liable for guaranteeing school attendance (problematic for many children over 12) and controlling after school behaviour. If a single mother, she may not be receiving any financial help from the father, thanks to the failings of the Child Support Agency. In short, pension saving comes very low on her list of financial and social priorities.

If child care improves, could that help?

Child care is far from the whole story. Taken that the woman in her 50s returns to work full-time, she is then faced with the problem of ageing parents, whose growing frailty requires an increasing amount of time and care.

The retirement age for women is due to rise to 65 during the next decade and then, in line with that of men, to reach 68 by 2044. During this time, care of parents is likely to become urgent but new retirement regulations laid down in the white paper will prevent the younger retired from taking care of the very old.

If the 60+ daughter is fortunate, her mother will develop a debilitating illness and be registered as disabled, enabling her to claim state credits. If she is not fortunate, mother may develop partial or labile dementia (when her certification will depend on her state of mind on the day of assessment), or become simply lonely and confused.

Again if the daughter is fortunate, her parents will not have divorced and remarried — and will still be living together. If she is less fortunate, she may have to cope alone with a widow and a widower, or two divorcees, in separate households, both unable to cope but neither officially certifiable.

And what about incentives to save?

The white paper makes minimal concession to the reality of a woman’s working life, dominated at both early and late stages by unwaged duties of care that save the social services billions of pounds, to the detriment of her own earnings and her future pension.

Translated, this means that she has minimal incentive, or opportunity, to save for her old age. Taken that she has the time, inclination and energy to inform herself of the myriad constantly-changing regulations governing her situation, she will probably (correctly) conclude that it is perfectly rational not to attempt the impossible.

In this way, she banks on the certainty of a state means-tested pension against the uncertainty of her variable (and unknowable) future capacity to invest in a market-based one.

The white paper concludes that, by 2050, one third of British pensioners will still require means-tested Pensioner Credit or its equivalent. Currently this figure stands at 40%: reform will secure only a marginal improvement. The government must know that these pensioners will, then as now, be predominantly female.

So what should be done?

The current orientation of pension policy creates manifest injustice. It punishes women for staying away from the labour market. It is peculiarly harsh on single mothers struggling to bring up families on low wages.

On the one hand government wants to encourage women — particularly middle class women — to have children in the face of growing demographic imbalances between generations. On the other, it offers them minimal guarantees in old age if they choose to do so.

We need to abandon the notion that pension rights should depend totally on deferred salary disguised as contributions. The Turner Commission recognised the cost and complexities associated with a contributory state pension. The reduced stamp for married women, the variety of credits, the opting in (and out again) by the self employed, the record of contributions, the constantly changing regulations — all increase complexity, raise administrative costs, confuse the contributing public.

Turner advocated a citizenship pension payable on the basis of residence, as found in Denmark and the Netherlands. Combined with S2P, this would, over time, allow a guaranteed old age income above means-tested levels. This would sustain incentives to save and remove the complex and costly machinery of means testing. What a good idea. Yet the white paper rejects it.

Which brings us to the question of affordability. This question has been addressed many times (not least by Turner). Currently, the NI fund is running a considerable surplus that the Government Actuary estimates will reach £60 billion by 2009. Used by the Treasury to buy bonds for other government projects, we might argue that it is better employed to improve state pensions.

The NI contribution ceiling could (and should) be raised to make higher income earners pay the same percentage of their earnings into the common pot as the low paid. Tax concessions on private pension savings benefit those in higher tax brackets (overwhelmingly men) far more than other income tax payers (mostly women).

Moreover, there is a point at which this dominant aspect of the question becomes simply irritating. The real problem of British pensions — and there is a real problem — stems from the way that pension policy is determined solely by the profile of the public accounts.The Treasury knows best. Following consultation with experts from the financial services industry and associated vested interests, official solutions are imposed on a bemused contributing public. In no other developed country are the citizens so successfully held at bay from decision-making processes that determine how their contributions should be apportioned and their pension rights determined. It has been this way for generations. The result is a mess.

The complexity of pension policy stifles public debate. It allows the government to disguise another set of minor amendments to an already incomprehensible system as a ‘major overhaul’.

If this government can afford to go to war in Iraq and Afghanistan (in the teeth of public opposition) it can afford to do better than the paltry pension reform put forward by the white paper. Particularly for women.

Noel Whiteside is Senior Fellow at the Institute of Governance and Public Management and Professor of Comparative Public Policy, University of Warwick. ‘Britain’s Pensions Crisis, history and policy’, eds. H. Pemberton, P. Thane and N. Whiteside, is published by the British Academy in October 2006.