Government should set a target that the future value of state pensions will be around a third of average earnings and create a new independent body to oversee this promise, argues former Pensions Minister and Fabian Executive member John Denham MP this freethinking paper.
'Does it work for me?'; 'what do I get out for what I put in?' 'Is it fair - to me and to others? 'Will it reward responsibility and discourage irresponsibility? 'Do I understand it?' – these, rather than technical policy issues, are the questions which the public will ask and which a reform package must deal with', says Denham, arguing that 'National Pensions Day' on Saturday must open a 'new phase' where the focus must shift from the expert policy debate over Turner's proposals to the 'public tests' which will determine whether there will be enough political and public support to make a long-term reform possible.
Denham's plan seeks to 'translate' the Turner report's detailed reform proposals into a clear, comprehensible and attractive 'public offer' which make clear to everybody what the state can deliver and what individuals need to do for themselves, providing enough security while chiming with public instincts about a fair system by moving away from means-testing. It would also allow Turner's proposals to be adopted in a way which was consistent with overall economic stability, meeting Treasury concerns about the impact of restoring a direct link between pensions and earnings.
Denham argues that much of the debate about affordability 'ignores the central fact that there is no escaping the need to afford better pensions'. Denham says that 'more and more people are accepting the first message from Turner. Too many of them are heading for hard times – and it is going to get much worse. On average, without reform, the pension population will be 30% worse off relative to those in work than pensioners today' but warns that 'how we pay for it will determine the politics of the new pension system'.
'What sort of promise should government make to future pensioners? What working age people really want is some certainty about their retirement. They need sufficient knowledge about what they will get from the state to be able to plan their own additional provision. The earnings link provides this – but it is not the only way', writes Denham. Turner's proposals would see a median earner (on about £23,000 with a relatively full working life, would get about 31% of average earnings from the state when they retire. Denham writes: 'That's not a bad long term promise for the Government to make: to retire on nearly a third of average earnings from the state'.
As an alternative to 'rigid indexation linking pensions to average earnings every single year', Denham proposes that the Government could therefore set a target for the combined state pension (basic and S2P) to deliver between 30 and 33% of median earnings. Having done this, it could delegate the detailed work on indexation to an independent body, acting similarly to the Minimum Wage Commission. This would 'generate confidence and integrity in the system, while, as with the minimum wage, allowing the government to defer, reject or modify a recommendation in any particular year if broader economic decisions required it'. The independent Pensions Commission would also make recommendations over when the state pension age should rise, in line with rising life expectancy.
The Fabian Society freethinking paper Does it work for me? Winning the public argument for pensions reform by John Denham MP is published on Friday 18th March. The full text is published online.
John Denham is MP for Southampton Itchen and a member of the Fabian Society Executive. He was Minister of State for Pensions in 1998-99 during the publication of the government's 1998 Green Paper Partnership in Pensions, and has held a number of other ministerial positions. He is currently the chair of the Home Affairs Select Committee. He was co-author, with Fabian Research Director Richard Brooks, of the Fabian pamphlet The Politics of Pension Reform in 2005.
A new independent body should oversee a government promise to keep future pensions at an adequate level, argues John Denham MP. The paper builds from the argument of his earlier pamphlet on the politics of pension reform (Friday 17th March 2006).
Does it work for me?'; 'what do I get out for what I put in?' 'Is it fair - to me and to others? 'Will it reward responsibility and discourage irresponsibility? 'Do I understand it?' These are the questions at the front of many people's minds when thinking about an overhaul of Britain's pensions system. If pensions reform is to endure for several generations to come, we now need to open a new phase in the reform debate where these 'public tests' for reform take centre-stage.
There has been intense discussion among pensions policy experts, campaigners and interest groups over the last couple of years to anticipate and respond to Adair Turner's Pensions Commission. Turner's Commission has done its job of providing an authoritative analysis of the problems facing the UK's pension system. Its report sets out why the status quo is unsustainable in the long-term and presents the Commission's recommendations for reform. Because Turner arrived at broadly similar conclusions to most of those who have studied our pensions system in depth, his report has further strengthened a broad 'expert consensus' on the core principles which should underpin a successful and sustainable pensions reform. But an expert consensus and the right analysis of the problem, however strong, will not be enough. As Richard Brooks and I wrote before the Turner Commission reported, Richard Brooks and I had written 'even the best technical analysis will not guarantee that the right choices will be made. Only if we get the politics right … can the government achieve what has eluded its predecessors and achieve a pensions settlement for future generations' (The Politics of Pension Reform, Fabian Society pamphlet, 2005).
It is the public who will be the arbiters of whether reform is fair or not. And the government has acknowledged the need to begin to 'go public' with the options for pensions reform, including the initative of declaring 'National Pensions Day' involving deliberative events with a cross-section of the general public in several cities around the UK. Secretary of State John Hutton has said that government wants to 'reach as broad a national consensus as possible and believe the Pensions Commission's proposals are broadly the right framework for achieving this'.
But that ambition, and the Government's political judgement, will be well tested when the Pensions White Paper – their formal response to Turner – is published later this year. Making a comprehensive reform possible depends on negotiating two significant hurdles. The first will be to resolve the tensions within government about the direction and financing of reform so that the White Paper can propose a coherent and sufficiently radical package. The second will be to 'translate' the content of the detailed reform envisaged by Turner into a clear, comprehensible and attractive 'public offer', which can win because it individual citizens which provides for sufficient security while chiming with public instincts about the features which a fair system needs to have. This paper sets out an approach to reform which would address both of these challenges.
More and more people are accepting the first message from Turner. Too many of them are heading for hard times – and it is going to get much worse. We are not going to replicate the current situation where perhaps 20% of pensioners are pretty comfortable and 20% in dire need before receiving any additional state assistance - with the rest spread somewhere in between. On average, without reform, the pension population will be 30% worse off relative to those in work than pensioners today.
In the light of this, much that has been said about 'affordability' ignores the central fact. There is no escaping the need to afford better pensions. The only alternative would be to accept a future where most pensioners were much poorer than they are today. That is, of course, unacceptable for a Labour government (though a government of any political colour would face increasing pressure from shifting electoral demographics if it tried to pursue that). The amount we spend on pensions will have to rise, given an ageing population. But how we pay for it will determine the politics of the new pension system. And it will be politics, not economics that will sustain or undermine it.
Some of the sharpest exchanges have come around Turner's proposals for the state pension system. His aim was to modify both the basic state and second state pensions so that they provided an adequate and predictable base for additional compulsory and voluntary savings. The two core proposals were to link the basic state pension to earnings, and to extend its coverage much more widely.
Two angry responses were reported from Treasury sources. These briefers rejected the idea that such a large item of public spending could responsibly be committed, year in year out, without any possibility of adjustments in the light of contemporary pressures.
They also challenged the assumption that there was anything wrong or damaging in the growing predominance of means-testing of retirement incomes.
One of the most significant features of the White Paper will be whether there can be compromise reached between Turner's analysis and Treasury.
The political analysis of pension policy suggests that there must be.
There is a very big difference between adjusting working life incomes through tax credits, month by month, year by year, and providing for income in retirement. Families on low incomes need the help now, and aspire to a future when they will not need support. But people want to plan for their retirement because they know that, once retired, there is little prospect of taking any action to improve their income. Any pension system that is heavily dependent on means-testing makes personal retirement planning impossible.
As fears about pension security grow, governments will find it more and more difficult to tell working age people that they will simply have to wait until they are retired to find out what their income will be.
Leave too many people facing a means-tested retirement and they will stop saving rather than see their efforts clawed backed by a future Chancellor. And if means-testing is going to be extensive, people will not thank us for forcing them to save either. So a means-tested future probably makes significant compulsory saving politically impossible too.
There is a further reason why heavy dependence on means-testing will never be popular amongst retired people and their families. As politicians know from listening to our constituents, it cuts across a deep rooted sense of fairness in the public mind. Most people are happy to see help targeted at those in great need. But it is equally true that people widely resent the idea that there is little benefit to be gained from saving; from working hard; from playing by the rules.
The system needs to protect people from poverty in retirement but primarily this most be by enabling people to build up a decent basic state pension during their working life so that their own efforts are rewarded. In essence this is what Turner proposes. And he has recognized that this is particularly important for women. Women are the main beneficiaries of means-tested retirement incomes simply because their ability to build up rights during their working age is so much more limited. A future like the present in which men have pensions in their own right and women get benefits will not be politically sustainable.
The political case for reducing dependency on means-testing is overwhelming, so can the financial hurdles be overcome?
In the long run, the difference to the state between means-testing and good state pension rights is relatively marginal if, as Turner and most others assume, means-tested benefits continue to be linked to earnings. And if Turner's proposals for a rise in the state pension age are factored in, the difference begins to look vanishingly small. . By 2020 the Turner proposals would add £1.5BN – of 0.17% of GDP – to the existing share of wealth going to pensions. The Turner Commission's analysis shows that continuing current indexation arrangements would see 7.6% of GDP spent on state pensions by 2050, while the Commission's proposals would cost 7.8% of GDP (0.2% more) by that time. This is not an insignificant amount, but a small price to pay for a real improvement in pensioner security.
The bigger difficulty may prove to be the strict linking of pensions to earnings. Some Labour politicians feel that, having taken the pain of not restoring the link in 1997, it is foolish toe return to the issue today. Others argue that it ties the Treasury's hands too tightly year by year.
There is a way through both problems.
What sort of promise should government make to future pensioners? What working age people really want is some certainty about their retirement. They need sufficient knowledge about what they will get from the state to be able to plan their own additional provision. The earnings link provides this – but it is not the only way. There are several different ways of expressing a similar level of certainty.
Under Turner's proposals, a median earner (someone on about £23,000 with a relatively full working life, would get about 31% of average earnings from the state when they retire. (As the state second pension evolves into a flat rate scheme that is pretty much what anyone will get retiring half way through the 21st century).
That's not a bad long term promise for the Government to make: to retire on nearly a third of average earnings from the state.
(By comparison, today's basic state pension is worth around 15% of average full time earnings. Although, with the second state pension (S2P), total state pension on retirement for the average full time-employee is currently about 35% of average earnings,, S2P payments are projected to decline rapidly. By 2050 the combined value of the basic state and state second pensions will be just over 20% on retirement).
An important gain from a promise of this sort is that it makes it easier for the individual to understand what the state will provide and, therefore, what they need to do for themselves and, arguably, does so in away that is easier for the individual to understand than technical definitions of indexation.
In the long run, of course, the delivery of this promise would require indexation that would have to be pretty close to earnings. But there does not seem to be any reason why the link would have to be maintained with absolute rigidity every single year.
The Government could set a target for the combined state pension (basic and S2P) to deliver between 30 and 33% of median earnings. Having done this, it could delegate the detailed work on indexation to an independent body as it has done with the Minimum Wage Commission – a reform proposal which Brooks and I also made last year. This arms-length arrangement would help to generate confidence and integrity in the system while, as with the Minimum Wage, allowing the Government to defer, reject or modify a recommendation in any particular year if broader economic decisions require it.
The uprating decision would, of course, benefit the retired generation too. They might find the element of uncertainty undesirable, particularly if wage inflation was high, but it would deliver consistently higher incomes than with today's regime.
An independent Pensions Commission could also increase the transparency, clarity and fairness of decisions over the controversial issue of the future pension age, by making recommendations for the pension age in future, linked to rises in life expectancy, according to criteria set by Parliament.
The political challenge of pensions means that Labour must find a way through the tensions between Turner and the Treasury. Concentrating on the long-term promise that the state wants to make to its citizens may well be the way forward.
At the heart of the Turner report is the idea we can still live in a society in which we have enough stability, trust, and social cohesion – what European social democrats would call social solidarity – to make a decent pension system work.
The debate about Turner is between those who still believe it is possible to deliver long term policies based on a cohesive and inter-dependent society, and those who believe that this is may no longer possible in the modern globalised world.
The idea of a progressive consensus lies at the heart of any viable future for new Labour. A progressive consensus that does not include a commitment to each others' long term welfare in retirement is hard to imagine.
