Labour’s Pension Challenge
Building a progressive settlement

By Neil Churchill and Michelle Mitchell

EXECUTIVE SUMMARY

1. Introduction

• Pensions are an issue of rising and widespread concern, as it becomes clear that on present trends tomorrow’s pensioners will be worse off than today’s. The government has yet to define a clear long-term strategy for reform around which a progressive consensus can be built.

2. Crisis? What crisis?

• The UK pensions system faces a crisis of confidence, exacerbated by state and employer withdrawal. Not enough is being saved, and the distribution of future pension entitlements is becoming increasingly unequal.

• The Labour government has protected most of today’s pensioners from absolute poverty, but pockets of poverty are deeper now than they were in 1997, as means-tested benefits go unclaimed.

• A large proportion of today’s workers have no occupational or private pension coverage. Women, workers on low pay or in small and medium-sized enterprises, younger and older workers, and some ethnic minorities are particularly disadvantaged.

3. Causes and consequences

• The “part privatisation” of the pensions system since 1980 has left the UK at the bottom of the international league of developed countries for state pension provision.

• Employers have also retreated from pension provision in recent years, with the result that too many working people do not have access to a good occupational pension.

• Pensions have been designed without taking into account the differences between women and men’s lives. Women are more likely to face poverty in retirement and have difficulties building up adequate provision.

• People need advice to take good decisions in a complex voluntary system. But financial advice is generally the preserve of an affluent minority.

• Tax relief has not been effective at encouraging those who most need to save more, instead benefiting the wealthiest sections of the population.

• The proportion of earnings that must now be set aside for individual pension saving are not realistic for many people on low or modest incomes.

• The risks involved in pension provision have been shifted from state and employer to the individual – with sometimes devastating consequences.

• Private pensions give a poor deal to people on low and modest incomes.

4. The way ahead

• Compelling employers and employees to contribute could have negative consequences in under-unionised or low-margin sectors. Compulsion through the state – ie, progressive taxation – remains the best way of sharing risks and incentivising savings, and is fairer for those on low incomes.

• A universal “citizen’s” pension would reduce means-testing, be cheaper to administer, and could better take account of contemporary patterns of work and family life. There are other ways of doing this through reforming the Basic State Pension so that more people get a full entitlement.

• A Second State Pension will need to be maintained to give carers, disabled people and others with broken working records the opportunity of a second pension.

• The government must not backtrack on its pledge to maintain the state pension age. Life expectancy varies by social class and raising the state pension age would penalise the poorest.

• Pensioners incomes must be linked to the rising prosperity of the nation in ways that are sustainable in the long term. An affluence test could be used to enable poorer people to enjoy rises linked to earnings, whilst wealthier pensioners would be linked to prices.

• A reformed state pension at adequate levels could provide the foundation for a new partnership on retirement saving between the individual, the state, employers, trade unions, and the financial services industry.

5. The boomer challenge

• The large babyboomer generation, now approaching retirement, is likely to be a potent electoral force The costs of doing nothing about the current savings gap are huge – economically, politically and socially.

• We need a planned response to pension reform that achieves widespread support across the political spectrum and among the population as a whole. Protecting the poorest, and achieving fairness for ordinary working people and their families, must lie at the very heart of this new consensus.

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