The opdu Report - Issue 14, May 2003

Bulletin Board
Annual Meeting - Keynote Address:
A Secure Future in Pensions
Julian Brazier TD MP Shadow Minister for Work & Pensions

The following is the text of the speech given at The Annual Meeting:

You may download the text of this speech here (45Kb Microsoft Word file)

The Occupational Pensions sector has been a cornerstone of the self-sufficiency savings culture of this country for centuries. Occupational Pensions don't just provide millions of people with an income in their old age…it provides them with independence, dignity and above all security.

For that reason I am very grateful to have this opportunity to address the Annual Meeting of The Occupational Pensions Defence Union. It is your advice and the invaluable support network you provide to trustees and others handling the day-to-day running of pension funds that helps provide the stability that is so vital for both managers and investors.

Regrettably… it is that vital stability which has been so seriously threatened

I believe there is a cancer in this country, It's growing spreading to those who previously thought themselves immune and like all cancers unless it is dealt with promptly and, if need be, aggressively it will prove fatal.

And what is this cancer? Retirement Dependency, and unless action is taken it won't just affect those hitherto reliant upon the State.

The symptoms are all too clearly visible and not just to the pensions and savings professional. The latest opinion survey by YouGov shows that 59% of the UK public think there is a pensions crisis and many more think urgent changes are needed.

Only 1% think policy should stay as it is - and they probably work for the Treasury - well I'm afraid Chancellor no change is not an option.

We were once a nation secure in the certainty of having provided sufficiently for our retirement - many of us are now in danger of struggling to survive on derisory pension entitlements.

The British household savings ratio has collapsed. At 3.7% it is at its lowest rate since records began - barely a third of its level when we left office in 1997. When Labour took Office over two-thirds of those nearing retirement had a private or occupational pension scheme, and we had more pension assets saved than all the other EU countries put together. Today those at the point of retirement with second pensions have slipped to below three-fifths - and alarmingly that proportion is still falling.

Final salary pension schemes are closing at a frightening rate. A survey by the Association of Consulting Actuaries showed that over 50% are now closed to new members. The next danger is that schemes will close to existing members as well - it has already happened in a few cases.

Those workers without a final salary pension scheme can expect a retirement income typically one-third lower. The minimum
income guarantee will mean many of those who have been prudent enough to save are no better off than those wholly reliant on the State. That message may seem to be getting home. 12 million workers, that's 44% of the workforce, now have no personal or occupational pensions provision at all.

In 1997, the proportion of pensioners reliant on means-tested benefits was 38% and falling. The House of Commons Library estimates that by next year it will be 57%. If all things remain equal this can only increase as more and more of the workforce heads for retirement with little or no idea of how much they will have to live on -other than some vague belief that State Benefits topped up by meagre savings will do.

So, how did we get to this crisis situation?

Well, the causes are not entirely of the government's own making. They cannot be blamed for the unhappy fallout from an over-valued stock market nor do they have direct control over the happy increase in life expectancy, although worryingly the ACA forecasts, if right, means this is more serious than we think -However I am confident that by the time of the next election Alistair Cambell will have found some way to take the credit for the latter and blame the Tories for the former. What they do have control of are the incentives to save.

As we all know, in 1997 the new Labour Government cashed in on the healthy economy they had inherited and used it to justify introducing a dividend tax on pension's income. Since 1997 this has raised £25 billion (£5 billion a year). David Willetts has calculated that working from an estimate of the total value of company pension funds at the end of 1999 of about £725bn and an 11 percent fall since then to April... funds have fallen by about £80bn. This calculation puts the losses incurred by pension funds as a result of the tax dividend income into sharp relief.
Iain Duncan Smith challenged the Prime Minister over this and was told: "Yes, the stock market has fallen, but it is still massively up on where it was five years ago".

The truth -as I am sure you all know- is that the stock market is below the level it was when the Pensions Tax was introduced in 1997.

The Association of Chartered Certified Accountants could not have put it more clearly when they stated in a recent submission to the Select Committee on Work and Pensions 'The withdrawal of the tax credit is, in our view, the most important single contributory factor in the problems which currently afflict both money purchase and defined contribution pensions'.

If we combine this with the reduction in the value of contracted out rebates then we have policies, which appear designed to cause maximum harm to a private provision culture. Over the last few years the rebate has become less and less generous... it is now estimated that their overall level is about £1.5 billion less than it should be. This is a ludicrous situation. The rebate has to reflect the full value of the pension it is supposed to pay for or companies and individuals will simply contract back in to the Second State Pension.
Taken together the result of these two stealth taxes is the Government taking an average of an extra £530 each year from every individual contributing member of a pension scheme.

Pension providers have been hammered by a tide of increased regulation and bureaucracy. The National Association of Pension Funds has calculated that there are currently 1,300 pages of tax regulations and Inland Revenue Practice Notes relating to pensions.

Tax disincentives that penalise savers, extra layers of bureaucracy and aggressive regulation have strangled the life, dynamism and innovation out of the pensions and savings market.

However, we have had one success, David Willetts managed, after a great deal of effort, to persuade the Government to rethink controversial accounting standard FRS17. But we are by no means complacent…one suc-cessful engagement has not won us the war.

Unfortunately the twin evils of aggressive regulation and excessive bureaucracy do not confine themselves to the private pensions sector.

The state sector fares little better. Last Wednesday David Willetts called on the Government to do more to help poor pensioners receive the benefits to which they are entitled.

The latest report from the National Audit Office released on the 20th November and entitled Tackling Pensioner Poverty: Encouraging take-up of Entitlementsy. was truly damning. The benefits system is now so complicated that take-up of benefits is at catastrophically low levels. This is a crisis of the Government's own making. They keep on fiddling with the system and have ended up putting off the very people they want to help.

As the NAO make clear, poorer pensioners could be losing as much as £1.9 billion a year in benefits for which they are eligible (p.16). The main cause is the complexity of the benefits system and the intrusiveness and unpopularity of means-tests, for example:

• "it takes one and a half hours to fill in an Attendance Allowance form (p.35);
  
  
• "the new, shorter, Minimum Income Guarantee form has 5 supplementary forms (pp.35-36);
  
  
• "and Housing Benefit claimants are often asked to provide the same information twice (p.36).

Labour's decision to rename Income Support for pensioners the Minimum Income Guarantee has caused great confusion - only 24 per cent of poorer pensioners recognise the name of the benefit (p.37).

The Government says that the introduction of the Minimum Income Guarantee and the Pension Credit are designed to protect the more vulnerable in society. So let us take one of the Government's own examples from page 19 in their consultation paper. Ivy is a 66 years old and single, with a Basic Pension of £77 a week and a Serps pension of £40 totalling £117. The new guaranteed minimum income level will be £100 a week so Ivy will lose out on this free top-up of £23. To balance the situation and reward those who save there will be the pensions credit. As a reward for saving through a Serps scheme Ivy will receive 60 pence for every pound of her Serps pension - totalling an extra £24 a week. However the farce is that she will not get £24 more than the £117 but £24 more than the £100 minimum giving her a total income of £124. Her pension credit payout is therefore a mere £7 - whereas those who failed to save privately receive an extra £23.

It has been projected that those receiving the minimum income guarantee could rise to 2/3 of the retired population and who can blame them when you consider Ivy's scenario?

Yet the ineffectiveness of means-testing is shown to be more acute when one considers that last year 7.4% of Income Support payments were overpayments or based on fraudulent claims.

There is already clear evidence that the Government's increased introduction of means testing and annuity regulations are acting as a deterrent to saving. Their attempt to increase personal pension provision among low to moderate earners has fallen flat as the 12 million workers without pension schemes show. Indeed pension participation is falling. Not only are Labour's policies failing, their inability to see the reality is astounding. David Willett's discovery in February of a £100 billion error in Labour's figures - unveiling a trend of inaccuracy that went back 2 yrs - revealed the extent of their incompetence and confusion.

In just 5 yrs the Government have systematically destroyed the culture of saving by creating a situation where those prudent enough to save are little better off than those wholly dependent on the State. They have created an environment in which welfare dependency is accepted and encouraged. Eventually it will all become unaffordable and then it will be, as ever, the most vulnerable in our society that will suffer most.

So, we've done the easy part; we've spotted the symptoms and diagnosed the disease; what's the Cure?

There is an urgent need to reverse the negative impact of these ill thought out Labour policies. We have to get away from means-testing which encourages people to believe that their retirement is a long way off and state provision will be sufficient. That is why we propose in debating Pension Credits that the funds should be focused instead on the base rate with a top up available to the over-75s.

That is also why David Willetts has announced the imaginative concept of a life-time saving account into which people could put money in the good times and which attracts a Government contribution in an escrow account. They can withdraw the money on a rainy day, but will only get the benefit of the Government's contribution if they put the money back before they reach pension age.
The farce of annuity regulations, which penalise the responsible, need urgent reform to allow for increased flexibility. We have publicly committed ourselves to reform the laws that force pensioners to purchase an annuity. As long as pensioners take out an annuity sufficient to keep them above means-tested benefits, they should be able to make their own choices as to whether or not to take the remainder of their pension as a lump sum, which they can leave to their children and grandchildren.

Above all we must take the politics out of pensions and investments policy. It is the only way to prevent the short-term smash and grab policies that have got us into this predicament.

Of course that's easily said…but we have put our money where our mouth is. Before the last election the industry asked for pledges that we would not abolish stakeholder pensions and David Willetts happily gave that assurance. With regard means-testing, whilst we opposed the Chancellor extending it, the Works & Pensions team went out of their way to put forward a reasonable alternative with Steve Webb of the Liberal Democrats and Labour's Frank Field. In addition to this we co-operated with Alan Pickering's review into pension regulation.

Therefore, I am happy to announce that the Work & Pensions Team will be setting up a Pensions and Investments Advisory Group. This group will be open to anybody wishing to take part that has an interest in the future of long-term saving in this country. We will have regular meetings and those wishing to participate can turn up as they wish and bring to our notice those issues, which concern them or think we ought to be aware of.
We don't pretend, at present, to have all the answers but with your help that can change.
By doing this we are striving to ensure any cure doesn't produce side effects as disastrous as the disease. It is for that reason that David and rest of the Shadow Works & Pension Team are, at every opportunity, trying to forge links within the industry, pensioners groups, policy units and think tanks.

What the industry needs is a radical rethink, with increased flexibility built in to a less regulated industry. Government intervention has gone too far and the damage done catastrophic.

Unless action is taken and taken soon... for the majority of Britons when retirement comes... hopes of it being dignified, secure and independent of the state will be DOA...
Dead on Arrival.