In the week the Conservatives proposed dramatic new tax breaks to encourage those earning below £38,000 to save more for their retirement, Malcolm Wicks, the pensions minister, dismisses claims that there is of a pensions crisis and even argues that current pensioners have never had it so good.
Speaking in his constituency office in Thornton Heath at the heart of Croydon North – a safe Labour seat – Wicks says: “I do not think in general that we have a pensions crisis but pensions are a very serious challenge facing the country. The only crisis is for people who have lost both their jobs and pensions.”
He says the more general pensions crisis, if there is one, will not hit the country for another two decades. “Over the past few years every cohort of people retiring have done so on higher incomes. But with increasing longevity we are building up problems for ourselves in 20 years time.”
Labour’s has increased the weekly income of the poorest pensioners with the introduction of the pension credit in 2003 which aims to ensure all pensioners have a minimum weekly income of at least £109.45 (in 2005-2006). Critics argue that say means-testing is over complex for claimantsand that it is a barrier to increasing occupational pension provision because many employees are concerned they will fear losing out on state benefits if they save privately. Employers and advisers have also expressed concern about inviting employees to join a scheme when they might lose access to the pension credit as a result.
But Wicks firmly refutes such claims. “I think there’s a fair amount of nonsense talked about the pension credit. I don’t think many people are saying that it’s better not to join the company scheme because of the pension credit and, as more people do join company schemes, the demand for pension credit will decline.”
The complexity of the means-testing system is matched by the complexity of the contracting-out rebates. The When the Conservative were in power they government made it very attractive for employees to contract out of the state earnings related pension scheme (Serps). Rebates of national insurance contributions (NICs), which were paid into the employee’s own private or occupational pension, were worth far more than the value of the state benefits given up.
Under Labour, the rebates have come to be considered unattractive and financial advisers and insurance companies have been advisingurging employees to contract back into the state second pension (S2P), which replaced Serps in 2002.
Wicks is very aware of the reversal of a policy that was intended to shift part of the burden for state pensions to the private sector. “I do recognise that the decision to contract in or out is a difficult one. Right now the Government Actuary’s Department is looking at whether the rebates are adequate and will report within the next year.”
As a social scientist, Wicks is also very aware of the rapid increase in longevity highlighted last October in a the first report of by the Pensions Commission – an independent body set up by the government to that investigates the low levels of retirement savings in the UK. The Commission’s chairman, Adair Turner, effectively said that if we want to avoid pensioner poverty we must save more, retire later and/or pay higher taxes.
Labour’s decision to delay the publication of publishing the commission’s final recommendations until after the election has angered the opposition parties and pension practitioners, some of whom argue Labour is entering the current election without a firm pensions policy.
Wicks, however, is adamantthat this was the right decision. “Are we going in to the election weak? No, I don’t think so. We need a period of relative calm after the election when all parties can sit down to debate Turner’s recommendations to determine the way forwards.”
Cross-party consensus on pension reform is essential, he says. “One day there will be a Conservative or Liberal Democrat government and we don’t want the pension consensus to be unravelled.”he says.
Rather than looking forward to Labour’s future pension policy, Wicks prefers to focuses on the government’s track record. “We have achieved a great deal over the past eight years. In particular we are helping to restore confidence in occupational schemes through the Pension Protection Fund (PPF), which opened its doors for business this month.”
The PPF replaces the pensions – up to a cap of about £25,000 a year – of employees whose employer goes bust with an underfunded pension scheme. “I feel very confident that this will be regarded as a landmark initiative. Two or three years ago the MG Rover workers would have lost their pensions as well as their jobs. Now pensioners will receive 100 per cent of their pensions, while current and deferred members will receive 90 per cent.That is very significant.”
But there has been speculation that some employers or would-be acquirorsbuyers of companies might have been waiting for the launch of the PPF before announcing their insolvency, in order to shift their pension scheme debts off the balance sheet. Wicks says he will take a tough line with such abuses. “It wouldn’t surprise me if one or two employers have the timing of the PPF in mind – it would be naïve not to recognise that – but I am determined that the PPF will not become a vehicle in which smart company lawyers can dump their pensions liabilities.”
He stresses the fact that the new Pensions Regulator, which also opened its door for business this month, has far more power than its predecessor, the Occupational Pensions Regulatory Authority. “The new regulator will investigate if it suspects jiggery-pokery” on the part of employers and their lawyers. “This is the message I am giving to employers,” he says.
The board of the PPF has the power to raise the levy on occupational schemes if the calls on the fund are in excess of expectations. “The board can raise the levy by up to 25 per cent a year without seeking government permission, although it will need permission if it wants to take the levy over 100 per cent [of its current level].”
Unlike Labour, the Conservative Party has issued a clear pensions policy offensive. The party has said it will legislate to increase employee tax breaks and to ensure employers are persuaded to contribute to employee’s staff pensions. It has also pledged more money to the Financial Assistance Scheme (FAS) to help those who lost their pensions before the introduction of the PPF in April. Wicks will not be drawn on the detail but merely comments, “We are very dubious about these plans. Where will the money come from? The arithmetic doesn’t add up.” He is aware of the criticism that the £400m assigned to the FAS will not cover all the benefits lost. “It is not fair that these people have lost their pensions but it is always difficult to do something retrospectively. The FAS has to be less generous than the PPF although it will be considered again in the next spending round.”
But on one thing all three parties agree: the 4m employees who have no pension but do have access to an employer contribution if they join their company scheme must be persuaded to join.
Auto-enrolment – where employees are automatically in the company scheme unless they opt out – is one way to achieve this and it looks like a dead cert if Labour stays in power.
It’s what Wicks calls the “middle ground – the halfway area between a voluntary system and compulsion. This is a very interesting area for debate but for auto-enrolment to work it needs an employer pension contribution,” he says. Perhaps, he suggests, suggesting perhaps that employers that currentlymake no contribution might be persuaded to do so if Labour wins the election.