As Malcolm Wicks, UK Minister of State for Pensions, acknowledges, the world of pensions has changed from a “rather dusty but worthy corner of business and public policy” to a “big issue” that regularly makes front-page headlines in UK tabloid newspapers.
“That can be uncomfortable for Pensions Ministers from time to time,” he notes.
Certainly Wicks and his colleagues at the Department of Work and Pensions (DWP) have had unsettling moments in the last year or so.
Firstly, UK pension funds were reported to be running deficits of ‘black hole’ proportions according to the most lurid newsprint banners.
Meanwhile, two high-profile occupational pensions scandals were breaking; one at Allied Steel & Wire (ASW), the other at Maersk, where thousands of scheme members faced hugely reduced or non-existent pensions after the companies shut their operations.
In addition, UK pensioner action group Age Concern released figures claiming that over two million retired people were living in households with income below the government’s official poverty line.
The report also revealed that less than half of the working population was currently contributing to a private or occupational plan.
The government’s response came in the latter half of 2003 through a new pensions bill aimed at improving state retirement levels while shoring up public confidence in occupational schemes.
Says Wicks: “The government had a number of different objectives, but I would sum them up as trying to get the word ‘security’ back into social security and old age.
The government’s new ‘pensions credit’ ensures that single pensioners will receive at least £102.10 (e150 approximately) per week or £155.80 for couples, although groups such as Age Concern still decry the principle of means testing which underpins it, as well as the continued decoupling of the pensions link to earnings.
“The pensions credit will benefit the poorest and most hard-pressed elderly people – of which two out of three are women who were not able to develop a meaningful occupational pension when in work.” says Wicks.
He adds that he is aware of the government’s critics, but counters that government action on pensions has been two-fold.
“The first has been to raise the basic state pension in line with prices and even higher than that in recent years. On top of that there have been other incentives such as free TV licences and winter fuel payments for pensioners.
“I understand what Age Concern are saying. It would be far simpler administratively if the extra monies that we are spending on pensions – and this will add up to £9bn more than in 1997 – just resulted in an increase to everyone’s pensions. But would this be just or fair?
“By definition that would mean giving the same to the better off pensioner with a good occupational pension as to the 86 year old widow who is trying to survive on something close to the basic state pension.”
Recent initiatives such as the proposal to pay a lump sum of up to £30,000 (e43,000) to people deferring their retirement age for five years, however, show that the government believes retirement ages will have to be more fluid in the future.
Wicks denies though that these suggestions are a political primer for an increase of the state pension age and suggests that speculation on the issue is a “red herring”.
“Personally I don’t think that is where the debate should be. The debate should be in recognising in Britain, but also across Europe, that with people living for 80 or so years on average, and with a large chunk of those 80 years spent in education and people not getting started in the labour market around Europe until their early to mid 20s and then facing retirement which could last 20 or 30 years, that we all have an interest in making sure that the possibility of a working life is exactly that – a working life for those who want to.”
The government is also conscious that if it’s pensions policies are to work then it has to reverse the trend of redundancy from the labour market of the over 50s, as Wicks acknowledges:
“What I’m particularly worried about is that only 70% of people aged between 50 and the state retirement age are in work.
“The employment rates for people over 50 have increased recently, which is encouraging because there was a long-term decline.
“What we would also like to do though is have much greater flexibility so that in future at the appropriate time people should be able to draw a pension from their company but if they want and are able to, carry on working part-time.”
Clearly the proposed policy requires a huge change in corporate attitudes to employment. At the same time, the call for a compulsory occupational pensions system to offset low state provision has gained greater currency in recent years – with even the CBI (Confederation of British Industry) saying it is open to discus the issue.
Wicks points out that the government is working with employers to answer both questions.
And while he doesn’t rule out the possibility of future compulsion, he is clear that the preferred path will be discretionary: “What we are pursuing and what we hope will be a successful pursuit is the voluntary pensions principle. We’re working hard on that. We’ve got an employer taskforce chaired by Peter Davis chief executive of supermarket group Sainsburys, which has leading business people on it as well as trade union representatives. The idea there is to develop sound employer practice so that more companies have good pension schemes. In an ideal world the voluntary approach would work because otherwise you end up in a more paternalistic situation, which I don’t think is ideal.”
The government has also appointed a Pensions Commission, chaired by former CBI head, Adair Turner, who is charged with a health check of the UK retirement system.
“They will report back in a year or so and we’ll have to look at it then. I very much hope the voluntary approach will work but we’ve got to test it and see. If it doesn’t work then we have kept the door open to compulsion – hence the Pension Commission.”
That the question of compulsion also makes an appearance in the government’s recent public consultation exercise: ‘The Big Conversation’, shows, says Wicks, that: “the door is open, but it would be best if we didn’t have to go down that path in the first place.”
The government is also working with upwards of 60 corporations on what it calls the ‘pensions forecast’; an actuarial projection for individuals of what their combined state and occupational pension will give them at retirement.
“This is being funded by the companies on a voluntary basis,” says Wicks.
A criticism that successive UK governments have faced since Maxwell is that occupational pensions policy has been dictated by crisis – often leading to the kind of counter-productive and expensive legislation that some claim has been the death-knell of DB provision.
Wicks rejects the notion that the 2003 reforms were driven by the problems at ASW or Maersk, but notes that as Pensions Minister he has to ‘take stock’ of what’s happening: “When you look into the eyes of workers who have been seriously let down and where the company is going bust and the pension scheme has been devastated and they tell you their stories about the effect on their health and their marriages as a result, then you think you’ve got to stop this nonsense in the future and that is what we intend to do with the pension protection fund.
“I think it will become an established part of the pensions architecture just as it has for the US.”
He acknowledges, however, that the fund will add to costs for company pension plans, but believes it is a small price to pay for pensioner safety.
“This is going to be a levy which is risk based so that the company who doesn’t look in any risk at all will pay a flat-rate levy and those where it looks slightly dodgier will have to pay more.
“Of course that imposes an extra cost burden on industry and I do recognise that. On the other hand I do think that many companies will be happy to say to their employees that the protection fund is a final guarantee of security.”