e-mail Paul Lewis on paul@paullewis.co.uk
Andrew Smith lives on the infamous Blackbird Lees Estate in Oxford. His mission is "to change things for the better" and to do that he has been a politician all his life. He became a local councillor at 25, Member of Parliament at 36, a Minister since Labour came to power in 1997, promoted to the Cabinet in 1999 and, since he took over from Alistair Darling nearly a year ago, he has been in charge of the Government’s biggest spending Department. As Secretary of State for Work and Pensions he distributes £120 billion a year to around 20 million people. But his Department is not just about state pensions and benefits. He takes responsibility for pensions as a whole – state, company, and personal. So if anyone can change things, and answer the critics of the Government’s response to the current pensions crisis, it is Andrew Smith.
His 168-page consultation document, the Green Paper Working and Saving for Retirement, was published just before Christmas and, it seemed to me, was greeted by an almost universal cry of disappointment. But when I went to see Andrew Smith in his office in the beautiful Richmond House opposite the Cenotaph in London’s Whitehall, he denied that the reaction had been negative.
"No, no that’s quite wrong. There was a lot of commentary that welcomed it. In something as complex as this where there’s a significant challenge facing the country it wouldn’t be healthy if it was received with uncritical acclaim. But a number of the measures we set out were welcomed. More flexible ways to moving towards retirement, which actually enlarges choice for people…"
Let’s stick there for a minute. He is proposing that state pension age should remain where it is – 65 for men and, currently, 60 for women rising to 65 by 2020. But people who want to work after that age will be able to do so and earn extra retirement pension. For each year the pension is deferred it would be increased by 10.4% when finally claimed. The extra could be paid as a lump-sum rather than a weekly increase – perhaps £20,000 after five years’ extra work. This change is a small improvement on the present rules – 7.5% for each year’s delay for a maximum of five years – but it was actually introduced by the last Conservative Government to start in 2010. Labour will just bring it forward to 2006.
Andrew Smith will not raise the state pension age. With life expectancy growing, several respectable organisations have said raising it to 70, perhaps by 2030, would enable us to get rid of means-testing and pay a higher pension to everyone, increased in line with earnings not prices. Why did he rule that out?
"As far as the state system is concerned there aren’t any quick fixes. I looked at the plans of the National Association of Pension Funds, the Institute for Public Policy Research, and the Pensions Policy Institute. What all of these had in common was putting up taxes and National Insurance contributions, or shifting a [tax] burden to a future generation…or…forcing some of the poorest workers, who’ve had some of the hardest working lives and might have on average the shorter retirement, to work longer."
Instead of radical change the government is committed to extending means-testing. The new Pension Credit will be a means-tested top-up to more than five million pensioners (Pension Credit). Why was the government so committed to means-testing?
"There aren’t…easy solutions…If we take the existing amount of money we spend, take away income related stuff and give everyone the same…you’d raise basic pension by about £10 and you'd take about £17 off the poorest pensioners. For a lot of the recipients of the £10 it would make a very marginal difference to their standard of life whereas those who'd be losing the £17 would be plunged back into poverty, which it was this government’s key priority to get them out of. So the arithmetic of those who argue against means-tested benefits doesn’t add up – unless they’re going to magic some money from somewhere."
The key problem with means-tested benefits is that a lot of people do not claim them and remain in the poverty the Government says it wants to end. When I asked him for his estimate of the proportion of people who could claim the Pension Credit who would actually do so, Andrew Smith made a surprising admission.
"We’re working on a presumption of 67% for budgeting reasons, but obviously I want the take up to be as high as it can be."
So was he telling me that one in three people – more than 1.5 million pensioners – will not claim the pension credit they’re entitled to?
"What I am saying is you have to budget on certain assumptions. I am also saying I want to get the take-up as high as I can. We are putting in place campaigns and processes to maximise take up. It is very important indeed that it is being delivered by the Pension Service. One thing we have had to…break away from is the entirely erroneous belief that this isn’t an entitlement but a handout. That is not the case and receiving something from the Pension Service rather than from the Benefits Agency or ‘the social’ is a very important step forward in tackling that stigma."
The new Pension Service will replace local Benefits Agency offices for anyone over 60 or approaching retirement. The new service should cover the whole UK later this year or next. Andrew Smith hopes it will provide a new, friendly, and stigma-free gateway to retirement pension and other benefits, including from October pension credit.. But will it work?
"If you're asking should we be ensuring that everyone who is entitled to the state pension gets it then yes we should."
Some people claim their pension only to find they have no entitlement. They are among the millions of women who paid the reduced Married Woman's National Insurance contribution or ‘married stamp’ which gives them no entitlement to pensions at all even though, from April, it can cost them £24.50 a week. They have to wait until their husband claims his pension at 65 to get the small married woman’s pension on his contributions. I wrote about these problems last year in Saga Magazine (November 2002) and since then hundreds of women have written to me to say that when they made the choice they were not told the consequences. The Green Paper does not even mention this issue, still less propose change. I read some of these letters to the Minister but he was unmoved.
"The truth is that people had to sign a form which said they read and understood it. Of course you can feel sympathy for people who feel they have missed out and made a mistake in the past. But equally a lot of people who took the choice to pay say ‘I chose to pay the full rate, they chose not to, and it’s not fair on me if you subsequently change the rules of the game.’"
But why not give people the choice now to make the contributions retrospectively? That would not be unfair – putting them in the same position, not a better one.
"Because that’s not a choice that was available to those who did pay. They had to pay then."
Would he review it?
"It wouldn’t be fair nor I think defensible."
So no significant changes to the state pension, no second thoughts on means-testing, and definitely no hope for the millions of women who say they were misled into paying contributions that got them no benefits at all.
Such clear decisions were in sharp contrast to the ideas in the Green Paper for company and personal pensions. Here the name of the game was consultation. And the more we talked the further away any significant changes seemed.
Take the most basic problem. As a nation we are not saving enough for our retirement. So why not make contributing to a pension compulsory? It is not a new idea. It has been discussed in Britain for years and in Australia they have already taken this radical step, accepted now by employees and employers. The Green Paper however proposed setting up a Pension Commission to look into it. How long would that take?
"Pension policy is by definition for the long term. I think progress on the implementation of our reforms is not something you can make an assessment of in a matter of months. So the first thing is a baseline assessment and I reckon that will take them something like 18 months and I'd have thought the first full report would be sometime early in the next Parliament."
It is what civil servants call ‘kicking it into the long grass’. You do not refuse to do anything, in fact you welcome further debate on this important idea – so important it requires careful and lengthy study. Meanwhile nothing changes for probably five years. Time during which people will continue to save too little.
Critics of the Green Paper were united on this point – there was nothing in it to encourage people to save more. The Minister told me there was "very radical simplification of the tax system" rules about how much you can save. The main effect of those changes, though, will be to limit the amount well paid people can save tax-free for their pension. And what about those people who have been saving, working their socks off, doing the sensible thing and who now see the money they have saved draining away in stock market losses and their pension prospects declining almost by the hour? Didn’t the current problems undermine their efforts and the savings culture?
"In Britain we’ve benefited from the partnership between state provision and private and occupational pensions. We are proposing a refreshing of that pensions partnership. I recognise the impenetrable maze of pensions regulation that is one of the barriers to making decent pension provision. The most important thing here is that we can make better information and simpler reliable products available to people so that they can judge the long-term savings they need in order to meet the expectations they have in retirement over and above the foundation the state provides. I accept it is very difficult to do this at the moment and that is why simplification as well as better information is of the essence."
The difficulties are well-known – falling stock markets mean there is less money to pay our pension and rising life expectancy means it has to be spread over a longer period. But there is another reason why pension funds are under pressure. One of the first things Gordon Brown did when he became Chancellor in 1997 was to change the way companies were taxed. Changes to the taxation of dividends paid to shareholders had the side effect of ending the tax relief on the income from shares owned by pension funds. It costs them £5 billion every year – already £25 billion tax has been taken out of pension funds. In 1997 the stockmarket was rising; now it is in deep trouble. Would Andrew Smith ask Gordon Brown to give this money back?
"It’s my own view that the pressures on pension funds come far more from stock market performance and longevity. I believe it was justified in the context. And if you are asking me about the money we took away, then you must also put the other side - the money we returned in reduced corporation tax which the country has benefited from."
The change did indeed reduce the tax companies pay. But most did not put that money back into their pension schemes. Indeed many of them continued to take so-called ‘contribution holidays’ withholding the money they should have paid, relying on stock market growth to boost the funds. Altogether companies have kept £19 billion from pension funds since 1988. Those decisions now look as short-sighted as Gordon Brown’s £5 billion a year raid. But would Andrew Smith ask the Chancellor to give it back?
"Of course not. It was the right decision. Even the Tories are not asking for that to happen."
One thing the Conservatives have demanded is fairer treatment of the way pension savings are converted into an income at retirement. At the moment you have to use most of your pension fund to buy an annuity. There have been demands for radical reforms to increase the freedom for people to use this money as they see fit, not as the Government tells them. (see Saga Magazine August, September 2001, March 2002). But the Green Paper rejected these changes. Why?
"Because it’s the only way of guaranteeing an income in retirement for as long as you live and because there are real aggregate gains to the pooling of risk."
In other words if people had the freedom to do what they wanted, overall they would be worse off, and some very much worse off. But what about the question of freedom to do what we want with the money we have earned and saved?
"It’s not just money people have saved – it is money saved through a pension with tax relief. It always has been part of the deal that you got tax relief to contribute to a pension that would have the annuity requirement. Don’t get me wrong I understand the dissatisfaction and anxiety people feel about annuities. In the consultation document there are additional products to give greater flexibility. But there’s no getting away from it. If we got away from pooling through annuities, on average people would be worse off. People underestimate how long they’re going to live."
More consultation will take place on those ideas, and on changes to company pensions, on flexible retirement, on clearer information, on age discrimination, on improving pensions for women, on tax regimes, on pension fund trustees. Thirty separate ideas are being consulted on until the end of March. This is the second Green Paper on pensions by Labour. It follows other consultations on investment, on pensions, on annuities and on financial services. It sometimes seem that this Government, despite its huge majority, is ducking important issues and postponing even minor changes with endless consultation. Six months ago Tony Blair told the Labour Party Conference in Blackpool "we’re at our best when at our boldest". Where was the bold radical idea to deal with the pension crisis in the Green Paper?
"The bold idea in this Green Paper is that we are making it, in quite radical ways, easier for people to make choices about their long term savings behaviour. It doesn’t sound very exciting when put like that but I’ve been very encouraged by positive reaction from people. These are big changes. As for our majority, it’s big because we didn’t take it for granted. We don’t take it for granted now and I listen very carefully to what people are saying about these issues."
I recalled Tony Blair’s conclusion "So far, we've made a good start but we've not been bold enough." Perhaps he had seen an early draft of the Green Paper.
March 2003
e-mail Paul Lewis on paul@paullewis.co.uk