e-mail Paul Lewis on paul@paullewis.co.uk
Longer life expectancy and three years of falling share prices have brought to their knees many company pension schemes that promise a pension related to salary. The risk to the companies that guarantees them is now so great that at least a third are closed to new members and 25 schemes shut down altogether in 2002, abandoning the pension promises they made.
Without admitting there is a pensions crisis, the Government produced a Green Paper just before Christmas on how to deal with it. But instead of bold radical reform, the proposals will tidy up a few administrative loose ends, continue with plans to make half the retired population rely on means-tested benefits, tinker with pension ages, and give people in work better information so they can see how little their pensions will be. And it will not even do most of that without further consultation. The Green Paper was not so much the mouse that roared as the lion that squeaked.
How different it was twenty five years ago when Barbara Castle set out her dream for a future free from want for Britain’s pensioners. As Secretary of State for Health and Social Services she was Cabinet Minister with responsibility for pensions. Those in good private schemes would carry on paying into them. But everyone else would pay into a state earnings-related pension scheme which would be as good as the best private scheme – and better for some women and people who did not have one well paid job with one employer for life. Her Labour colleagues watered it down before it was introduced, two Conservative Prime Ministers cut the benefits in half and half again, and the new Labour government finally killed off SERPS in April 2002 just a month before Baroness Castle herself died at the age of 91. SERPS we were told would be too expensive, too great a burden on future generations, especially as population change meant that fewer people in work would have to keep more people in retirement.
In fact SERPS was not such a radical idea – most of continental Europe had a similar system even then. In work people pay taxes, quite heavy ones, and in retirement the state makes sure they have enough to live on. It is also a system which works well for millions of workers in the UK. Civil servants, MPs, doctors, fire fighters, nurses, judges, ambulance drivers, teachers, local authority workers, police officers, university staff, and many others all get state backed, earnings-related, inflation-proofed pensions paid in many cases at 60 or even younger. Most but not all of these public servants pay part of their salary into the pension scheme. But what they pay in is nothing like enough to buy the benefits they get. They are paid for either by hefty contributions from their employer – the state – or in some cases are just paid out of taxes – income tax or council tax paid by us all. One estimate is that the cost of the civil service pension scheme puts 2p on the basic rate of income tax. And many local authorities have put up council tax to pay the wages and pensions for the police or firefighters. Most important of all, behind every public sector scheme stands the state. If any of them could not meet its pension promises then the Government would step in with taxpayers’ money.
Many public servants do vital jobs for relatively low pay – often much less than they could get in the private sector – and no-one should begrudge them their pensions. But a state-backed, earnings related pension paid for life and protected against inflation sounds very like the SERPS that civil servants and Ministers, who have such a pension, told us was going to be too expensive if we paid it to everyone.
The private pension alternative has not worked well – even with a heavy state subsidy. From 1988 the Thatcher government encouraged millions of people to leave SERPS and put their contributions into a personal pension. To make the deal seem irresistible, the Government did not just pay over the National Insurance contributions that would have been paid into SERPS, plus tax relief, it added a bonus from the National Insurance fund – our money – into the personal pension. This year that will drain £2.5 billion from the fund. Even so, the personal pensions that will be paid to many people are going to be lower and less secure than the SERPS they replaced.
The dangers of moving from a state-backed guarantee to the vagaries of the stock market, where the value of investments can go down as well as plummet, seem obvious now after three years of falling share prices. But no-one considers the alternative. Mothers still get Barbara Castle’s child benefit paid to them in cash. We still wear the seat belts she made compulsory. The breathalyzer she introduced still stops drivers drinking. Women still use her Equal Pay Act to improve things at work. But there is not even a debate on whether we should have a decent, state-backed, earnings-related pension available to everyone. In 300 pages of Green Paper documents it is not even mentioned. I wonder why.
March 2003
e-mail Paul Lewis on paul@paullewis.co.uk