The Blog

Ministers Must Come Clean on Pensions Changes

The government's two and a half year wrangle over the state pension has had another serious consequence beyond increasing uncertainty. It has led the government to neglect the other half of the pension equation: namely private pension saving.

Ministers have dithered and delayed for two years but finally, today the government will publish its proposals for a single tier state pension and a further rise in the state pension age.

The government's insistence on implementing this complex change over a short time frame creates big losers and cliff edges: thus the two and a half years of coalition wrangling followed by a rush to fill in the gap where a new childcare announcement was meant to be. And we have now found out that these plans will kick in a year later than the government had originally intended.

In line with the recommendations of the independent Turner Commission, the last Labour government favoured an evolutionary approach to this reform so as to avoid these big losers and steep cliff edges. None of the 12 million current pensioners or four million savers due to retire before 2017 will benefit from the government proposal for a pension of around £155 per week. That's 16 million pensioners looking on from the sidelines. Furthermore, millions more savers will suffer a big tax rise. The six million strivers who currently save for their future in a defined benefit occupational pension scheme will pay an extra 1.4% per year in National Insurance as their rebate is suddenly withdrawn in 2017. Still more will lose the opportunity to save into the state second pension and will receive lower state pensions than they would otherwise have done. At the moment there are two million such people who are getting state pensions over £150. People in this situation would lose at least £520 a year from the government's reforms.

So while we support the principle of moving to a single-tier state pension, we will examine the details of the government's specific proposals very carefully. The government points to low-paid women as potential beneficiaries of the single tier state pension. In government Labour did much to protect the interests of women pensioners. We passed reforms that recognised carers and allowed their activity to count towards years of contribution. Above all else, we tackled pensioner poverty, which was disproportionately female, by introducing the Minimum Income Guarantee and the Pension Credit.

Under the Labour governments from 1997, there was the single greatest reduction in pensioner poverty than under any other British administration. We will apply the same concerns when we examine the government's proposals. Especially since this government's record in pensions so far also includes a serious charge of acting unfairly against women. Its first attempt at raising the state pension age in 2010 disproportionately hit women in their late fifties, giving them far less than the recommended time of 15 years to plan for an uplift in their retirement age.

Labour agrees that the state pension age must rise as people on average live longer. But the government must proceed with caution, and so it must come hand in hand with a strategy to fight pensioner poverty. This is because the average age obscures the fact that the life expectancy of those at the wrong end of the income scale is rising - where it is rising - much more slowly than among the wealthy healthy. A perpetually rising state pension age will expose the depth of inequality in this country. As the brickie saves for 35 years to draw a state pension, he will draw for fewer years compared to the professor who pays in the same for the same period but can expect to draw out for 25 years. It's not just the fairness question either. There is a big question about whether those in lower paid manual work can keep doing this physical work as the state pension age disappears further into the horizon. Sir Michael Marmot, one of the world's leading health inequalities experts is clear that many cannot. If many older workers are literally unable to work to this new timetable this has major implications for the government's pension proposal. After all one of the main reasons for moving to a flat rate state pension is to reduce means testing.

The government's two and a half year wrangle over the state pension has had another serious consequence beyond increasing uncertainty. It has led the government to neglect the other half of the pension equation: namely private pension saving. The government claims that its state pension reform is designed to restore the principle of individual responsibility for retirement. Since savers will now know precisely what they are getting from the state, the government claims, savers will have no fear of losing private savings through means testing and as such the government suggests individual initiative will be set free to build a nest egg through private pension saving. The problem is that savers have little faith in private pensions companies and the government has done nothing to restore public confidence in this untrusted industry. The government's inaction is astonishing given the expanded role it envisages for private saving on top of the new state pension.

There are good reasons for the public's distrust of pension companies. Many of the industry's pensions are excessively costly, creating value for financial intermediaries rather than savers. The government needs to require full transparency of costs and charges, encourage scale, require all pension schemes to have independent trustees to act on the savers behalf, and, free-up the National Employment Savings Trust - so that private providers have to compete with a low-cost, high quality, not-for-profit pensions provider. It is yet to do anything on these fronts despite the objective in the Coalition Agreement to reinvigorate private pensions and despite Labour's offer of Pensions People Can Trust.

That's why this state pension white paper is only half a reform the government claims that a simpler flat rate state pension will encourage us all to save more into private pensions but the government has failed to tackle the public's deep suspicion of the private pension industry.