Frank Field argues that a radical reform of Britain’s pensions policy could enrich both pensioners and the exchequer
Ten years of austerity must deliver the country a radicalism that ten years of abundance has failed to achieve.
The Prime Minister’s economic war council must decree that the necessary budgetary strategy also forges a radical agenda. Every secretary of state should be instructed to bring forward one major reform which, while cutting the size of a departmental budget, also begins to transform the political landscape. Combining these individual initiatives would lay the basis for a five-year reform programme, comparable to the models of 1906 and 1945.
The most obvious and necessary welfare reform is the one that seems the most expensive: the transformation of pension provision. No government has yet set itself the objective of abolishing pensioner poverty. That should, however, be the cornerstone of the next government. But how can this be achieved, and in a way that cuts the Work and Pensions budget?
We need, first, to understand why pension schemes that were the envy of Europe are now fast disappearing. State pensions were never paid at a generous enough level to break the link between poverty and old age. Politicians hit on the idea of encouraging employers to provide supplementary pensions at ever more generous levels. This strategy worked until Nigel Lawson and Gordon Brown came along and taxed pension surpluses and abolished Advanced Corporation Tax.
Politicians covered up their wicked meddling by making it ever easier for pensioners to claim means-tested help. The bills for pension credit, housing benefit and council tax benefit for those of pensionable age soared from £4.3 billion in 1991 to a truly staggering £15 billion in 2009, and they continue to rise. The age in which ‘it doesn’t pay to save’ was well and truly born.
There is a radical alternative. A bold government could deliver a universal protected pension (UPP). Pensions are intergenerational contracts. They cannot therefore be established overnight, so it’s the direction of travel that is important. The UPP’s aim is for all citizens who play the game by contributing to society to earn a minimum pension that lifts them out of means-tested benefit.
Currently, almost everyone ‘earns’ the state’s pay-as-you-go state pension. The aim of the UPP is to build up a second pension so that, together, both pensions provide everyone with an adequate minimum income. To avoid interference from future governments, the governance of the scheme would become a duty of the Bank of England. Trustees would manage the fund through a mixture of in-house and competitive tendering.
The scheme would build up over 40 years, but trustees would be duty-bound to start paying small additional pensions in the second parliament. Once a commitment to the new scheme had been made, people of modest means would know that it again pays to save.
The scheme must be compulsory. Everybody in employment would have to pay additional contributions building up over time.
A new head of the DWP must struggle with a new chancellor to agree what should be done with the current £40 billion tax subsidy to private pensions. Why subsidise when everyone will earn a minimum pension and when, as is now the case, most of the subsidy goes to those who already have considerable savings?
It would be fair for this subsidy to be phased out over ten years. The chancellor might therefore take £30 billion over that period to write into the bottom line of the national accounts with the additional £10 billion redistributed to help fund the new universal scheme.
The new administration would be establishing the broad principles of a new radicalism. First, it would provide a minimum floor while ensuring that people themselves can build on this minimum without restrictions.
Second, it would provide a new model for collective, non-state provision. By establishing the governing body of the UPP at the Bank of England, the government will be building a new form of collective provision independent of the state.
Third, the reform would rebalance risk and clarifies where it should be apportioned. Most of us do not have the necessary skills to buy a minimum pension so that taxpayers do not fund an ever-increasing means-test bill. The risk in delivering this pension should therefore be spread over the whole community. The risks beyond this level must lie with the individual.
The reform also clarifies a new dividing line in what should be provided by the market. Anything beyond the UPP should be the exclusive concern of the private sector and the UPP trustees would be forbidden from paying above the minimum pension.
Such reform also sets the boundaries for a limited redistribution from richer taxpayers so that it includes all responsible citizens, like carers and low wage earners. In return, working and middle-income groups gain a guaranteed pension underpinning their own savings which they could not buy in the private market other than at a prohibitive cost. Self-interest, a positive force, would work in favour of this specific act of altruism.
The advantages don’t stop here. Once the scheme begins operation, the welfare budget is capped. This proposed reform would see this £15 billion means-tested budget reduced to zero, therefore abolishing pensioner welfare as we know it, and transforming the DWP budget. Savings on this scale are enough to abolish income tax on pension income. At this point, critics will ask: ‘What about the double costs?’, i.e. of contributors having to pay for an existing state provision as well as providing the extra funded scheme to take them off means-testing. There are double costs now in paying that growing means-test bill.
Fifty-year bonds, for example, would spread double payment costs inherent in any mega pension reform. The debate should start with how the biggest long-term savings decision of anyone’s lifetime can be embedded into an intergenerational contract. Courage will be required to make the first commitment. But the gains financially, socially and in terms of votes, are enormous and ready for the taking.
Frank Field is the MP for Birkenhead.