David Willetts has his ideal job. He is one of the few people on the political right who has a thorough understanding of the complexities of pensions and state benefits. As shadow Secretary of State for Work and Pensions, he is the man who should give us an alternative view of what pensions – both state and private – would be like if the Conservatives won the next general election.

Once described as ‘young, brainy, earnest, pious, and confident’, so legendary is the intelligence housed in his domed forehead, he is nicknamed ‘two brains’. I asked him to turn this formidable mind onto Conservative plans for the future rather than criticising Labour’s faults in the past. He tried. But he did keep coming back to one policy – Gordon Brown’s £5 billion a year tax on pension funds.

Two months after Labour’s Election victory in 1997 the new Chancellor reformed company taxation, including the way that dividends were taxed. A side effect was that pension funds paid tax on their dividends for the first time. And David Willetts says that is one reason for the current crisis in company pensions.

"There is a pensions crisis. It is a bit like the film The Perfect Storm. You got a massive storm due to a whole range of factors coming together. Some of those are undoubtedly good things like longevity, low interest rates. But then there are Government decisions on the pension tax, £5 billion a year taken out of pension funds. That means the current generation of hardworking people face the danger they will retire on a much lower income from their funded pension than they hoped and that will come as a very nasty surprise to them."

So would a Conservative government give that £5 billion a year back?

"I would love to be able to say we could. But I can’t promise it. The money is already being spent. But it is something we have to look at as we move towards the next election. We have to be responsible, I am a practical politician. I would love to be able to reverse it but only if we can identify a practical answer."

Company raids
It was not only the present Chancellor who raided pension funds. Companies have also taken money out – a total of £19 billion since 1987 in what were called ‘contribution holidays’. As pension funds exceeded the amounts the actuaries said they needed to meet their promises, the law said the company had to take action to reduce the fund. Many did so by stopping company contributions into it.

"You are right there were contribution holidays of £19bn but not all due to statutory surpluses. In the good times when things were going so much better, everybody was round the honey pot and everybody took a share of it. Then of course the Labour government came in and extracted its £5bn a year and that took more than the contribution holidays. Government doesn’t control everything, but that makes it more important that the bits they do control they get right."

Mistakes
We talked in his small but smart room in the new parliamentary office building, Portcullis House, opposite Big Ben. The walls are covered with striking and colourful pictures by Sarah Butterfield – an artist who is also his wife. There is a lot of traditional oak in the décor of this two year old building which cost £234 million to provide new offices for 210 MPs. It is not just the walls that are oak clad – the pensions paid to MPs are pretty solid too. Most of them earn their pension at double the rate that applies to teachers and nurses. Such a scheme costs a lot: On top of a salary of £56,358 every MP gets £13,525 paid into his or her pension fund by the taxpayer. That is three times the pension we pay to every state pensioner. And when a shortfall and when a shortfall was identified recently by auditors, the Treasury coughed up £25 million without protest. Part of the extra cost is the new more generous pensions MPs recently voted for themselves. But not David Willetts.

"For me as Shadow Secretary of State facing so much human misery on pensions I could not look people in the eye if I was also taking this increase myself, so I did not vote for it and I am not taking it. I understand people’s concerns about it and I have not participated in it."

Good for him. But what responsibility did he take for the human misery that other people suffer through the pensions crisis? Some believe the crisis was caused by the previous Conservative government which encouraged people to save up for their own pension without explaining the dangers. It was a policy that led to millions of people leaving the relative security of their company scheme for the risks of a personal pension. That pensions mis-selling scandal cost £13.5 billion to put right. David Willetts admitted the Tories had made mistakes and this was their biggest.

"One reason the pension mis-selling scandal was so serious is that people had to leave their company scheme to join a personal pension. If you had been able to stay in your company scheme and take out a personal pension it would not have happened. You must also remember that back in 1979 we had about £50 billion of assets in pension schemes. In 1997 it was more than £700 billion. That is a great British success story."

State Pension
But what about the state retirement pension? No-one could call that a success story. At £77.45 a week, it is the lowest in the European Union and inadequate to live on even by official standards. What would he do with that? At the 1997 election the Conservatives proposed giving people the choice to opt out of the state scheme altogether, putting the money into a personal pension instead – an extension of the dubious policy that led millions to give up the limited security of the state earnings related pension scheme in the 1980s and 1990s and put their retirement income at risk on the stockmarket. Did he stand by that policy?

"I want to see people building up more funded pensions savings. What we tried to do in 1997 was the right thing. Now we are looking at a lifetime savings account, with a government contribution. It would be cash put into a separate account alongside the savings account, the same value for everyone. People would be free to withdraw and put it back and get the government contribution at pension age. We may have options which enable people if they wish to build up funded alternatives to the state pension. But at the moment I am putting all my efforts into the crisis of the funded occupational pensions and the mess and complexity of the state pension system."

When the Government’s new pension credit was being discussed by Parliament David Willets got together with Liberal Democrats and Labour backbenchers to propose an alternative – a higher pension for older pensioners.

"The British state pension system is absurdly complicated, with too much means-testing. The problem with means tests is that take-up is so low, probably only two thirds of those entitled get it. But poor pensioners tend to be older. On average an older pensioner couple over 75 has a weekly pension that is £70 less than a couple aged under 75. So if you give the money to older pensioners it is quite well targeted. You probably get to more people who need it through our way. That measly 25p you still get at 80 was introduced in the 1970s as our way of recognising that you have higher living costs as you get older"

So did he support the Budget announcement to introduce an extra £100 with the winter fuel payment for people aged 80 or more?

"I welcome it. But it is typical of Gordon Brown that it is so complicated. We will now have two separate payments for the over-80s – 25p a week and £100 a year – and two separate rates of winter fuel payment."

Before the 2001 election David Willetts proposed consolidating the winter fuel payment, the 25p a week, the over-75s free TV licence, and the £10 Christmas bonus into a higher basic pension with more at age 75. Saga readers voted nearly three to one against that plan (Saga Magazine November 2000) which formed part of the Conservative Manifesto the electorate also rejected. Would he take this £100 away?

"We will not take any money off older pensioners. I’ve still got the scars on my back from my previous proposals which were seen as taking the winter fuel payment away. Scrapping the winter fuel payment is most unlikely. It does not form part of our plans."

Ideally he would still like to raise the pension for older pensioners.

"The Government brought in the pension credit which will go to 60 per cent of pensioners. What we said was why don’t they put that money instead into a higher rate of pension for older pensioners. You could increase it at 75 or a larger amount at 80. That is what we would have done instead of a pension credit."

And how much would they have got?

"We did not put a figure on it. We left it deliberately vague because we were not in a position to take that decision. But it would have been the whole of the cost of the pension credit. A lot of people support this idea and the most ambitious of the plans would be a big increase in everyone’s pension to float quite a lot of people off means-tested benefits."

At the moment means-testing applies to people with an income which is less than £102.10 a week, or £155.80 for a couple. And several research bodies have suggested that you could raise the basic pension to around that level if all the complexities in the scheme were scrapped and pension age was raised in the future to 70. David Willetts would not support a plan quite that radical, though as a young MP he did propose raising pension age to 67 – an idea he came to regret. But would his plans mean that the pension credit would be scrapped?

"The last thing I want are scare stories that the Tories are going to take the pension credit off pensioners. Once these means tests have arrived, disentangling them is difficult. We have to watch and see how well it works."

Earnings link
One policy forever associated with the Conservatives is changing the way the state pension is increased each year. In the early 1970s Barbara Castle introduced a link with earnings. That was scrapped by the Thatcher Government in 1980 and now the pension is generally raised in line with prices, which rise more slowly than earnings. Would he consider raising the pension each year in line with earnings?

"That is something else which will have to be decided. I would hope any reformed state system would be as attractive and generous as possible and give people a firm foundation on which they can save more. But we have no plans at the moment to go beyond price indexation."

If the link with earnings had been kept, pensions would have been far higher now - £109 a week for a single person and £174 for a couple. Both those amounts are comfortably above the level of means-tested benefits. So if the earnings link had not been scrapped, no pensioner with a full working life would need a means-tested top up. If means-tests are the problem, is the cause the previous Conservative government which scrapped that link with earnings?

"Margaret Thatcher’s approach had two parts to it. OK there was linking the basic pension to prices not earnings. But there was also encouragement of funded pensions and the transformation of saving in pension schemes, What I’m sad about is what’s gone wrong. People are retiring both with a modest state pension and their funded pensions blown apart by the disasters since 1997."

Annuities
Three things have contributed to blowing apart our pension funds. The price of shares, where they are mainly invested, has fallen by almost half in three years. Interest rates are lower than they have been for a generation. And we live longer. The result is that pension savings are worth less and the pension you can buy with a given amount is also less as the annuities that pay the pension have fallen as interest rates have gone down as life expectancy has risen. To escape this double whammy many people feel they should be free to live off their pension fund as they choose – not be forced to buy an annuity. David Willetts supports that view.

"The obligation to buy an annuity is a widespread grievance. Provided people are not going to depend on means-tested benefits, you should treat them as grown ups. After all, if you can’t treat a 75-year-old as a grown up able to take responsibility for his or her own decisions how much longer do you have to wait? I accept that the freedom not to purchase an annuity can only be available if the person is not going to depend on welfare. We are not saying you can spend it on a cruise."

The other hot topic among Saga readers is the lower National Insurance Contributions paid by many married women. Letters still pour in to Saga about what many readers see as the injustice of millions of women who changed to the reduced rate without being clearly told the contributions were money down the drain which bought them nothing and meant they would get no pension of their own. David Willetts admitted he got a lot of letters on this subject too.

"I don’t think you can simply say to people in a contributory pension system that you will get a higher pension despite having paid a lower rate of contribution. But I am not against letting them buy back. I think buying back is an interesting approach as long as it is a good deal for the individual."

So was he saying he would consider letting women already in their sixties, who had made the choice to pay the lower rate, buy back at a fair price the contributions they missed and earn a full pension of their own?

"Exactly"

A small victory then – if the Conservatives are elected. But where was their big idea for pensions? How would David Willetts tame the perfect pensions storm?

"The purpose of being in opposition after being booted out as we were in 1997 is to have a think and not to abandon ideas but to rediscover a Conservative tradition of strong creative thinking on social policy and a better society. I don’t claim we’ve put forward a complete solution, a silver bullet to solve the crisis. We have put forward a constructive alternative to means-testing, twice put forward private members bills on annuities, and outlined an imaginative new scheme to encourage individuals to save flexibly. I think the vision of less means-testing and better incentives for saving is not only the mainstream view of most people in this country but report after report I read on the pensions crisis screams out at me that is what we should be trying to do."

June 2003

e-mail Paul Lewis on paul@paullewis.co.uk