A pensions Bill that does not do what it says on the tin

The new Pensions Bill, now going through its last stages in the Lords, promises a brave new world to future generations on retirement. More women are to gain a basic state pension in their own right. Fewer years contributions are needed to access this pension and numbers of elderly reliant on means-tested benefits are set to fall — or so they say.

Yet the ‘biggest renewal of our pension system since Beveridge’ has won little public acclaim. On closer inspection, we can see that the ‘modernisation’ of state pensions involves spreading marginally more money over many more pensioners.

Help the Aged has calculated that by 2050 a 30 per cent increase in the proportion of GDP dedicated to state pensions will cover a 50 per cent growth in the pensioner population. This does not offer a secure old age for all; the reform does little more than rearrange the financial deckchairs on the Titanic.

So why no fracas in Parliament?

The mantra of ‘affordability’ has created consensus between Conservative and New Labour over pension reform. In many ways, this is desirable. Past tendencies to alter pension legislation every hour on the hour have created complexity, undermined public trust and discouraged individual retirement savings.

The Turner Commission, rightly, wanted to change all that. However, consensus has created a cosy deal between the two major parties, leaving the Lib Dems in half-hearted opposition with nowhere to go.

Hence the Pensions Bill went into committee to be picked over by the usual suspects, who had no intention of doing it any lasting damage. Thanks to their previous experience of pensions legislation, these MPs possess an understanding of the ins-and-outs of the issue quite beyond the ordinary Joe (or Josephine) Blow. All knew that pension reform is desperately needed — and that this Bill is the only show in town. So what is the problem?

The proposed legislation does offer real improvement and it would be churlish to suggest otherwise. Access to a basic state pension is going to become easier and the sum received will, at some time or other, be index-linked. This will help women, who are currently very badly served. Better guarantees are also given to members of occupational schemes.

Yet the legislation does not do what it says on the tin. It does not offer pension security. Amendments to Turner’s original recommendations are clearly visible with Treasury fingerprints all over them. At the end of the day, when the whole transformation is complete, Britain’s state pension will still be the lowest in the western world.

More importantly, it will remain below the level of means-tested pension credit. For the poorest, the disincentive to save remains.

Today there are 11 million pensioners. 50 per cent are on means-tested benefits. A further 1.5 million do not claim their entitlement to pension credit.

The Treasury wants to prevent the numbers of elderly reliant on means-tests rising to 75 per cent of pensioners (the current forecast) — not because means-tests are demeaning and unjust, but because they raise public expenditure.

The government claims its reforms will cut means-tested pension supplementation back to 30 per cent by 2050. At least one think-tank estimates a future trend nearer 45-50 per cent. If this is right, we are set to head back to square one.

Means-tests are deeply inefficient as they fail to provide for non-claimants, who frequently need the money most. They also create savings disincentives, particularly among the low paid.

The introduction of quasi-compulsory personal savings accounts (the future National Pension Savings Scheme) will not change this. An immediate sacrifice of foreign holidays or designer shoes will not be compensated by a pension substantially above the means-tested substitute, so what is the point?

There are strong incentives for both employer and low-paid worker to opt out of the new NPSS. In consequence, there is every sign that it will suffer the same fate as its older half-brother, the famous ‘stakeholder’ pension, and die of neglect.

Oh why can’t a woman be more like a man?

The heart of the problem is found among women savers — or rather the lack of them. Research shows that women stop saving after childbirth, not because they are spendthrift, but because they shift to part-time work and have more immediate demands on a lower income.

Urging them to save more is unrealistic; most women (who are the majority of both the low-paid and pensioners) will not sacrifice their children’s needs today for the sake of their retirement income tomorrow.

Finally, there is the issue of the generations. This government expects young people to start pension saving at the age of 23. Disregarding the 1.5 million NEETS (Not in Employment, Education or Training) in the 18-25 age group whose financial resources are a mystery, official expectation addresses young people still reimbursing their student loans and faced with burgeoning house prices that involve an exorbitant amount of debt. Not many pension savers here, one suspects.

The Turner Commission recognised the problems means-testing posed for savings incentives and aimed to restore state pensions to a decent level over the long run. The Treasury swept all Turner’s calculations aside. Whitehall is still dithering over the date when our tiny basic state pension (currently 16 per cent of median earnings and falling) will be index linked. The Bill, citing ‘affordability’, offers jam tomorrow (maybe 2012, probably 2015) but certainly no jam today.

If Mr Blair thinks for one moment that pension reform will become part of his much-vaunted legacy he is going to be badly disappointed.

Noel Whiteside is professor of comparative public policy at Warwick University. ‘Britain’s Pensions Crisis’, co-edited with H. Pemberton and P. Thane, was published by the British Academy in October 2006.