Asking the low-paid to save? Are you mad?

1st December 2007
By Noel Whiteside

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Remember the Turner Commission — its three-year enquiry into Britain’s pension problems and its recommended permanent solution? Turner proposed a basic, universal state pension that did not require means-tested supplementation, phased in over time and paid for by longer working (and contributing) lives, plus a quasi-compulsory National Pensions Savings Scheme (NPSS). Subsidised by tax relief and enforced employer contributions, the NPSS offers a defined-contribution pension for workers not covered by an occupational scheme. NPSS is specifically designed to encourage the low-paid to save for their old age. All are to be enrolled, but opting out remains possible.

‘The biggest renewal of our pension system since Beveridge’?

Hailed by nearly all experts as a major step forward, these recommendations have now been put through the mill in Whitehall and the tattered remnants drafted into legislation. Last session saw the passage of a Pensions Bill to reform state pensions. The Treasury being the Treasury, any notion of a state pension at the level of pension credit (the current level of means-tested supplementation) disappeared.

Whitehall mandarins, themselves cosily endowed with guaranteed tax-funded pensions, announced that Turner’s new state pension was unaffordable. Parliament agreed. If anyone had bothered to lift their noses out of the paperwork to look across the Channel or the Atlantic (still more the North Sea), they might have noticed that every other developed economy manages to afford a decent pension for the elderly — even taking recent cut-backs into account. The insular mentality of the mother of parliaments beggars belief.

So the first Pensions Bill was passed: marginally more money is promised to cover what will be a much larger future pensioner population. Even the Treasury expects that around 30 per cent of these will still claim means-tested supplementation. Many experts put the figure well above that. Needless to say, the vast majority (then as now) will be women.

Out of the frying pan…

So, first blood to the Treasury. But the government is left with a problem. This session, Part 2 of pension reform will be introduced: the bit that sets up the individual savings accounts under the Personal Accounts Delivery Authority that constitute the NPSS.

The question arises: why would any low-paid worker in her right mind want to contribute to this scheme when the amount she can save will not raise her income in old age above the level of pension credit anyway?

Put another way, you cannot create a pension scheme based on voluntary savings alongside a means-tested state pension. The proposed system offers rewards to middle-income earners. Those on low incomes are encouraged to save, but their savings will have no impact on their income in old age. It really is quite scandalous.

The Conservatives have woken up to this fact at last (but better late than never). They say they will oppose the new Bill unless the government rectifies the anomaly. They have not yet said how they would correct the situation.

The choices are not attractive. The first, re-adopting Turner’s citizenship pension, re-awakens the Treasury dragon, renews debates on affordability and fits ill with the Tories’ dominant tax-cutting mantra. The second, making membership of NPSS compulsory, also provokes the dragon as it probably makes the public sector accountable for any future shortfall in the pensions produced by the NPSS scheme.

And the likely outcome?

Will be a fudge. The NPSS will probably be forced through. Low-paid workers will opt out. The future bill for pension credit will go up. Of course, this will only become apparent after this present parliament has dissolved. Then we will return to the pension crisis — and start the debate all over again.

Noel Whiteside is Professor of Comparative Public Policy at Warwick University. Britain’s Pensions Crisis, co-edited with H. Pemberton and P. Thane, was published by the British Academy in October 2006.

Filed Under: Pensions, Queen's Speech, Pensions Bill, Turner Commission
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