FOOL'S EYE VIEW
The Pensions Swindle Revisited

By Jane Mack (TMFJane)
December 23, 2002

Following on from last week's article entitled The Great Pensions Swindle, I've had a couple of queries from Fools who thought I was going a bit over the top in using the word 'swindle'. As they point out governments have to change the rules if circumstances change.

This is true but my beef with governments over the years is that the rules are changed so frequently and in such piecemeal ways that very few of us know where we are anymore. How can we sensibly plan for our retirement when the fundamentals are constantly tinkered with and the goalposts keep being moved? That's why I think it's a swindle.

When Sir William Beveridge laid the foundations of the Welfare State in his famous 1942 report, he envisaged a system that was "first and foremost, a plan of insurance - of giving in return for contributions benefits up to subsistence level, as of right and without means test, so that individuals may build freely upon it."

The 15-20 year olds who were starting out in the workplace in the late Forties when much of the Beveridge Report was implemented are among the men and women who are retiring now. But the State Pension that they were promised all those years ago is now below subsistence level, to the extent that about half of our pensioners have to be supported by the means-tested Minimum Income Guarantee – that's if they know to claim it. I can't help feeling that one of the reasons these people didn't save any extra for their old age was because they didn't think they had to.

Yes, I am aware that when Beveridge wrote his report, average life expectancy of a man after retirement at 65 was one year and that things look very different now. But my view is that the writing has been on the wall for a very long time and yet very few successive governments have had the courage to take the bull by the horns and do something about it. It's not politically expedient for them to do so, is it? And, yet, it's not as if they didn't know that there was a baby boom in the late Forties and in the Sixties, that people are living longer and that the birth rate is declining.

To my mind, a reasonable State Pension is a fundamental right for someone who has worked and paid into the system for nigh on 45 years and they shouldn't have to ask for extra to help them pay the gas bill when they come to the end of their working life. And if we all got a flat rate of State Pension that we could actually live on, it would also get round a little problem that has been mentioned by the respected MP and chairman of the Pensions Reform Group, Frank Field.

A couple of years ago he warned a Government select committee on pensions, of the potential for resentment among people who contribute to the State Pension system, when greater rewards go to those who do not. He said: "There is an inherent instability in a system which is asking people to contribute and then actually rewarding people, who do not contribute or cannot contribute, with more money than those who have contributed, and you can only get away with that in a world where the electorate is either very trusting or not very concerned."

Don't get me wrong. I have no objection to some of my taxes going to help people who don't or can't contribute. But if we all had the certainty of knowing that we won't have to ask for handouts and that we'll be able to manage adequately on the State Pension when we retire then there would be no reason for resentment. It would be a basic and accepted right for everyone regardless.

So, what's the solution? How do governments finance a proper, and guaranteed, State Pension for all?

Beveridge's plan all those years ago was for workers to pay enough National Insurance to finance an investment pot for future pensioners as well as to fund existing pensioners. It was supposed to have been phased in over a couple of decades but it wasn't. Instead NI contributions have always merely financed existing pensioners and yet if those baby boomers who started work in the Forties had been paying into an investment pot over the years, the money would be there for them now.

Perhaps this Government should re-read the Beveridge Report and agree a once-and-for-all long-term plan with the other political parties to keep the State Pension out of the political arena. They should set up a proper, separate State Pension Fund for future generations that no government is allowed to play around with. In the short term we'd all have to pay a little more in NI contributions but those who pay more could get more at the end.

It could also be funded by the £15 billion a year that the Government currently gives away in tax relief to people who save into pension funds – half of which goes to higher rate tax payers. The removal of tax relief on pension savings would be a radical step but at least governments would not be giving away money to people who can afford to save instead of those who can't. And we would all have the security of knowing that this £15 billion a year would be invested for all of us instead of just some of us.

Those of us who want to save a bit extra personally – especially if we want to retire earlier than 65 - can use an ISA. Since contributions to ISAs already come out of tax-paid income, no-one could object to the tax-free status of any profits. Knowing that the money we save is entirely ours and that it might mean an earlier retirement, should provide enough of an incentive for us to do so.

I have a tendency to be a bit simplistic in the way I think so I spoke to Frank Field this morning seeing as he's a respected expert on the topic of pensions. He didn't think it was a stupid idea not least because it's not far off the views of the Pensions Reform Group that he chairs. They also want Beveridge's investment pot plan to be introduced for future generations. But he didn't think any government would have the political courage to remove the tax relief on pension savings although he agreed it was worth discussing. Perhaps we should discuss it.

For the long-term future and security of the nation's elderly, it could be the answer. And then none of us would feel that we'd been conned by the system or that the goalposts were being moved every five minutes! Oh, and Frank Field didn't think I was out of order using the word 'swindle' either.

More: What Everybody Must Know About Pensions (a collection of recent TMF articles on pensions) | Pension Centre | ISA Centre | The Fool Meets Frank Field (from June 2000)