Pensions – half way to somewhere not too bad
Today’s announcement on state pensions is important and welcome. There will be winners and losers in the short term and the long term, a combination of factors that clearly baffled John Humphries this morning. Whilst various interests will be tempted to focus on the losers I hope they – particularly the Opposition – think twice. There are few areas where the need for cross Party consensus is more important than pension policy.
Beyond the financial calculations, the big plus about the new frameworks is behavioural. Not only will the new system be simpler but also, by removing the means tested pensions credit, it will reduce disincentives to save (although interactions with other entitlements – particularly housing benefit – mean some will remain).
Providing a subsistence safety net for all and making it simpler and more rational to save is half an answer to a sustainable and decent pensions system. But today’s announcement also marks the death knell of the attempt to create a state backed system which would guarantee anything more than basic subsistence. Many may regret this outcome but it is the inevitable consequence of population ageing and funding pressures, another consequence being the gradual increase in the pension entitlement age.
Most people would like their pension income to be at least half of their working income but at current rates the universal state pension will offer less than a quarter of the average wage. So we need to put money aside for our retirement and, as innumerably surveys have highlighted, we are collectively falling woefully short of saving what is needed to fulfil our aspirations for our income in older age.
This is why the other half of the equation needs to be a series of reforms that improve the value of work-based and private pensions saving. Fortunately, the RSA’s own Tomorrow’s Investor project has highlighted the key points of such a package. They include:
Much greater transparency and efficiency in the charges levied on workplace and private pensions; something to which the Association of British Insurers –promoted in part by RSA research is at last attending
Raising the saving limit allowed in the state backed workplace pensions scheme NEST. This has been strongly recommended by the Work and Pensions Select Committee and is subject to a current DWP consultation
Allowing the development of collective defined benefit pensions schemes which by sharing risk and providing flexibility could improve pensions yields for individuals by as much as 50%
Pensions minister Steve Webb is to be commended for the way he has methodically and purposively set about his task, today’s announcement should be welcomed and the Coalition should be given every encouragement to take the further steps needed to give us a pension system which, while not generous, is probably as good as it can realistically be.