29 July 2005
Pensions policy is in a mess. The Pensions Commission is due to report in a matter of months, but there seems to be little agreement on how to proceed. If the deadlock remains, we're back to square one
This autumn, the Pensions Commission, headed by former CBI general secretary Adair Turner, will deliver its eagerly awaited final report. Many, including the government, hope its recommendations will help to foster some consensus on pensions reform. But how realistic is this in such a contentious policy area?
Given what we know at the start of the 2005 summer holidays, the honest answer to the question is 'not very'. Indeed, when ministers are told that there is real consensus among a range of organisations on some important issues, they are quick to point out how fragile it seems to be. They are right to be sceptical: there remains a great deal of disagreement among the 'experts'.
There is, however, one notable exception. A range of opinion, embracing the Conservatives and the Liberal Democrats, is in favour of significantly increasing the value of the basic state pension. This approach calls for pensions to be indexed in line with earnings rather than prices, as a means of lifting most pensioners above the poverty line without the need for so much means testing.
The great irony is that this consensus currently excludes the government itself, which in public continues to voice the concern that such a move would not benefit pensioners on modest incomes who currently claim Pension Credit.
There is clearly an active debate in Whitehall over the merits of reducing the need for means testing in the long run by having a more generous basic pension. Number 10 and the Department for Work and Pensions are interested in the concept, but the Treasury remains sceptical.
This is hardly a consensus. In particular, there is no agreement on how to pay for a significant increase in the basic state pension, which is problematic given the significant costs. However, the government is quite right to ask tough questions on this.
The strongest argument in favour of a significant increase in the basic state pension is that it would dramatically simplify the system. Not only could Pension Credit be phased out, but also the state second pension and the rebates associated with contracting out.
This in turn would allow for much greater simplicity when it comes to the way that private pensions are sold and regulated — which is why so much of the pensions industry is in favour.
But the industry is a lone voice at present. The Association of British Insurers, the Trades Union Congress and Adair Turner do not support the move. All want the state second pension and contracting out rebates (with all their associated complexity) to remain in some form.
Yes, they all want a more generous basic state pension, and the ABI is lobbying for more generous tax incentives too. Exactly how the costs of all this will be met is unclear. It is easy to see why the government is challenging its critics to spell out what they are prepared to give up to pay for the policy reforms they most value.
Of course, the Pensions Commission has not reached its final conclusions yet, but Turner has been floating ideas. One involves compulsory employee and employer contributions to a funded second pension.
The chances of consensus on this are precisely zero. The Conservatives have already said they won't support it. Frankly, neither will the government, as it would open up its flanks to attack on a 'stealth tax' basis.
Meanwhile, the rest of the pensions debate is bogged down in a series of disputes. Should an enhanced basic state pension continue to be based on a history of contributions and credits, or should we switch to a residence-based (or 'citizen's') pension? How should tax incentives and other forms of support for private pensions be rejigged, given the evidence that current incentives are ill understood and ineffectual? Should the government broach the possibility of increasing the state pension age at some point in the future?
There is no consensus on these issues. Indeed, disputes within pensions policy sometimes mirror scenes in Monty Python's Life of Brian. As the pensions community becomes bogged down in internecine conflict, like the Judean People's Front's face-off with the People's Front of Judea, the government, like the Romans, looks on in bewilderment.
Perhaps autumn will bring clarity. The Pensions Commission must see the logic of not arguing for the one approach that will never bring consensus. At some point, the government must see the dangers of holding out against the one policy on which there is broad agreement.
Everyone else needs to look seriously at what they are prepared to trade off. They need to do some basic fiscal arithmetic. If not, the national pensions debate will go precisely nowhere.
Peter Robinson is senior economist and associate director of public services at the Institute for Public Policy Research