Rush job that fudges all the hard questions

by ALEX BRUMMER, City Editor, Daily Mail

Last updated at 10:26 26 May 2006


The pensions White Paper is a huge disappointment. Far from providing a blueprint for the retirement savings of future generations it fudges many of the most difficult questions.

The only thing which emerges with any certainty is that everyone will have to work longer and harder to enjoy a comfortable old age.

At the core of the proposals are two major reforms. The first is the promise to improve the basic state pension and restore the link to earnings by 2012. The second is to create a 'Britsaver' scheme for people on earnings ranging from £5,000 to £33,000 a year.

The difficulty with the earnings link is one of affordability, which explains why Gordon Brown as Chancellor and likely future Prime Minister has fought against it tooth and nail. Instinctively, Brown is a cautious politician and fears the huge costs of such a link.

It would have been affordable in recent times because of low inflation and modest wage settlements but if there were to be a 1970s-style wage explosion the earnings link would become impossible to sustain. That is why Mrs Thatcher scrapped it in the first place.

Even if earnings inflation did not take off, Brown would argue that it is more efficient to target the needy, through the means-tested pensions credit, than hand out generous state pensions to everyone.

The National Pensions Saving Scheme or 'Britsaver' has been welcomed by employers' organisations and trade unions alike as a means of bringing ordinary working people into the pensions net.

It sounds extremely sensible and indeed similar schemes set up from Sweden to Australia are showing a measure of success and stability. Yet the way in which Labour intends to run this scheme is still unclear.

Small and medium-sized companies fear it will mean the imposition of another layer of red tape and additional costs of more than £2.3billion a year. Lord Turner (who devised the scheme) favoured the money being collected by HM Revenue and Customs. Unfortunately, that would almost immediately taint it as a tax.

The alternative is to place the private sector in charge. The big insurers say they have the systems in place, having geared up some years ago for the Government's last failed pensions reform plan --the stakeholder scheme.

An advantage of allowing the private sector to administer the system, including the provision of regular statements, is that it has a proven record of delivering big financial projects. Unfortunately, it is deeply distrusted by the public as a result of scandals from Equitable Life to the very costly pensions misselling affair when millions of public-sector workers were wrongly sold private pension plans worth much less than the schemes to which they originally belonged.

Because the White Paper was hurried into print, it offers no clear guidance as to what course the Government intends to take - a huge lacuna in the whole exercise.

There is also the fear that far from encouraging the savings habit the new scheme will speed up the destruction of the final-salary and money-purchase pensions schemes currently offered by big companies. Many firms might decide to trade down to the national scheme, thus saving on employment costs but making for a meaner retirement for large swathes of the population.

There is a real possibility that the nation will end up with two-tier provision with the richest companies such as BP, Shell, Glaxo and the big banks offering wonderful pensions and the rest on minimum provision.

Our current pensions structure is complex, difficult to understand and leaves people working for smaller companies behind. The inescapable fact is that people are living longer so generous pension schemes are becoming ever more expensive to operate.

BUT at the same time that the wealth-creating sector of the economy is struggling to meet the retirement needs of workers, the Government has overseen a huge growth in the sector - and all the pension benefits enjoyed by its employees.

The future liabilities for public sector pensions amount to £530billion, with the Government paying out an estimated £23billion this year alone. Those in the private sector - and future generations - will have to foot this bill while their own pension provision deteriorates.

When Labour came to power, more than 60 per cent of the population were members of pension schemes operated by employers. As a result of the £5billion annual tax on dividends paid to pension funds, imposed in Gordon Brown's first Budget, that figure has fallen below 50 per cent and is still tumbling.

Forget the fact that Messrs Brown and Blair are at war over pensions, the danger is that the spatchcock proposals put forward yesterday - and proclaimed by Labour as the greatest reform to social provision since the creation of the Welfare State - will simply accelerate that decline.

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