26th August 2010

Britain’s pensioners have been entitled to feel pretty fed up in recent years. Remember Gordon Brown’s measly 75p increase in the basic pension a few years ago? And the decision taken by Mrs. Thatcher’s Government in 1980 to break the link between the basic state pension and the increase in average earnings? That decision by the Conservative Government of 1979-1997 meant that those reliant on the basic state pension became poorer and poorer in relation to the rest of the population each year, and it helps explain why Britain’s basic state pension is one of the lowest in the “developed”, richer, world.

To help the poorest pensioners, Gordon Brown introduced a means-tested “pension credit”, but the problem with this is not just that people have to claim this benefit (and many do not), but also that it is a powerful incentive for many people not to bother to save. This is because people with smaller amounts of savings can discover that they are little better off saving for their retirement than they would have been if they had blown the money on some good holidays, and then relied on the means-tested benefits to make up the difference.

 

Means-tested benefits always have this risk – they deter people from working and saving.

I am pleased, therefore, that the new Coalition Government is going to put in place a better system for the basic state pension – starting in 2011. At the insistence of my Party, future increases in the basic state pension will not merely be in line with inflation, or even just in line with earnings growth (which will in some years be lower than inflation). Future increases in the basic state pension will be underpinned by a “triple guarantee”. This means that the increase will be the highest of either the rate of inflation, or the rate of earnings growth, or 2.5%.

Over time, that will make a real impact on pensions – significantly lifting their real level compared with the promises made by the previous Labour Government. And producing a better basic state pension will mean that pensioners will in the future be less dependent on complex means-tested benefits, which must be good news.

 

There is, of course, much more that needs to be done to ensure that Britain’s pensions system is delivering for all our citizens.

Sadly, in recent years, the provision by private employers for their staff has deteriorated very rapidly. Most private sector employers no longer deliver an earnings related pension. Instead, they often make a small payment into a “defined contribution” pension, the value of which can swing violently depending on how well the stock markets are doing. This means that pension risk has effectively been transferred from employers to employees, and the level of employer contribution has generally dropped significantly.

In the past, Government has done too little to keep good private sector pensions. Instead, new regulations meant that employers had to take a big “hit” to their accounts when the value of their pension funds went down.

 

Government needs to do more to make it attractive for employers to provide salary related pensions. This means that such pensions must be affordable. A recent Government decision to allow employers only to uprate future pensions by the CPI index of inflation rather than the higher RPI index might seem to be short-changing pensioners, but if it helps employers to keep hold of salary related pensions then it may be a very, very, good idea.

 

And in the future salary related pensions may have to be made more affordable by moving from final salary pensions to career average pensions, and by increasing employee contribution rates and cutting accrual rates. We are all living longer, and pensions cost a lot to provide. Sadly, money does not grow on trees and if we want good pensions we have to pay for them, or we have to accept slightly less generous pensions in exchange for keeping employers involved in delivering these pensions.

The same goes for all public sector workers, and this Autumn a Commission will report on reforms to these pensions. While protecting existing accrued rights, there will have to be changes in future schemes. These changes are crucial if higher quality, earnings related, pensions are to continue – as I believe they must.

Ever,

David.