Britain's pensions nightmare is putting the economy on the road to ruin

Telegraph

4 days ago

So the Government has announced another pensions commission. It's 20 years since the last one, and a lot has changed since then.
But don't worry. As on much else, nothing of significance is going to happen in this parliament.
The commission won't report for 18 months, and Torsten Bell, the pensions minister, has already ruled out any increase in mandated pension contributions for at least the duration of the current parliament.
And please don't mention the triple lock, which, whatever the Commission says, is non-negotiable.
Or for that matter, the age of entitlement to the state pension, which is the subject of another review that won't report until safely beyond the next election.
The commitment on contributions will come as a relief to employers already clobbered by increases in National Insurance and a much higher minimum wage. But it all makes you wonder why ministers want to be in government at all.
After 14 long years in the political wilderness, Labour is back in office – yet it seems to have not a clue what to do with it.
Like rabbits frozen in the headlights, ministers appear incapable of serious reform. Everything is either shelved altogether or, as in this case, played off into the long grass of interminable review and government introspection.
Bell insists that the purpose of the commission is not to prevaricate but to build a political consensus on pensions reform so we don't end up with things being reversed by the next government.
It's also the case that the last pensions commission, chaired by Lord Turner, was by general agreement a rare success amid the general ruin of what today counts as public policy. The Government would dearly like to repeat the achievement.
We'll ignore for now the fact that successive governments had in part created the problem Lord Turner was asked to address by undermining the pre-existing and remarkably effective system of final salary private pension provision.
Gordon Brown's abolition of the tax credit on dividends, a measure that raised £5bn a year for the Exchequer and was slipped through with barely a murmur of dissent in his first Budget, was the final nail in its coffin.
In any case, inadequate pension provision is again a burning issue. Many of us are not saving enough for a decent private pension, and nearly half of the working-age population is saving nothing at all.
The main recommendation of the last pensions commission – auto-enrolment, where the employer is obliged to contribute to some form of pension unless the employee deliberately opts out – has been remarkably successful at improving things, but it didn't go far enough.
This is in part because of the growth in self-employment and gig-economy jobs, where there is no full-time employer to match employee contributions and the incentives to save are therefore limited.
Pension saving is particularly poor among low-wage and part-time workers, among those who dip in and out of employment, and among some ethnic minorities.
By international standards, moreover, Britain has a generally low overall savings rate, a phenomenon that helps explain equally deficient levels of business and public sector investment in the wider economy.
But that's not the main reason for wanting better private pension arrangements. The low savings rate disguises big differences where some save a lot, and can therefore look forward to a comfortable retirement of travel and indulgence, but others make little or no provision for their old age.
Use of the triple lock to increase the relative value of the state pension has helped improve things a bit for those without private provision, but there is only so much the tax system will support, and we may already be close to the limit.
Cue Labour's announcement that it is bringing forward the statutory review of the age of entitlement. This is already going up to 67 between 2026 and 2028, and then again to 68 between 2044 and 2046.
But the further increase probably needs to happen sooner to mitigate the fiscal ruin Britain is falling into. A penny to a pound, Labour ducks that one too. In any event, the state pension alone doesn't buy you much of a life.
The problem of both affordability and generosity in the state pension could theoretically be addressed by means-testing, allowing fewer to be paid more, but even if that were thought politically acceptable, by doing so the Government would only further undermine the incentives to save.
This is what typically occurred in the old days before the advent of the triple lock. The state pension was so miserly that for those with no other source of income it had to be topped up with other entitlements under the so-called 'minimum income guarantee'.
If you'd saved for a private pension you would lose those benefits, so for many it made no sense to do so. Today's more generous, flat-rate state pension has made the situation somewhat better than it was, partially removing the disincentives to save.
Means-testing also tends to undermine wider support for the welfare state. Higher earners acquiesce to progressive taxation in part because they think they will get something back.
The universal state pension is fundamental to this contract. If those paying the bulk of the tax get nothing out of it, then the system quickly loses legitimacy.
There are some problems for which there are no solutions. How on earth you persuade the self-employed to save for a pension may be one of them. It may take some form of supercharged tax relief.
But for the rest, the Australian model is plainly worth considering. In Australia, employers are obliged to contribute a minimum of 12pc of earnings to the employee's pension pot regardless of whether the employee is also paying in or not.
This compares to just 3pc of qualifying earnings in the UK, with the employee obliged to pay a further minimum of 5pc.
Although still well worth it for the employee, you'd be amazed at how many prefer to opt out and take the cash.
The point is, however, that the amounts are too small to buy you much of a pension in retirement, and are nowhere near the level of contributions that used to go into defined benefit occupational pension schemes. If the relatively high level of compulsory contributions they have in Australia were introduced overnight to the UK, it would cripple many companies and lead to a big increase in unemployment.
But if phased in, say in lieu of pay increases over a number of years, it might be made to work. After all, pension contributions are only a form of deferred pay.
But first it would require something of a change in culture.
Saving for tomorrow, rather than living for today in the expectation that the state will eventually provide, requires a big change in mentality. Persuading the voters, and their employers, won't be easy.