Carburton Street, London -- Two Fools went to the Palace of Westminster to interview Frank Field M.P. on Tuesday afternoon. The idea was to get some idea of the thinking behind the Government proposals on pension reform. Mr Field is no longer in the Cabinet, but all sides of the house respect him for his thorough knowledge of the problems of poverty in old age. When this government came to power, he was charged by the Prime Minster to "think the unthinkable" on the whole issue of pensions and how they are funded.
Unfortunately, after he thought these thoughts he was demoted from the cabinet and his proposals have been sidelined. Nevertheless, we thought it worth talking to him to get a feel for how seriously the Government is taking the problem and what it thinks is achievable.
Field's initial plan for a universal stakeholder pension was envisaged as a breakaway from the personal pension model introduced by the last government. The combined effects of policies being sold to those who didn't need them and outrageous charging structures distorted these well-intentioned plans. The scheme as envisaged by Field was for a mandatory universal contribution to a large fund that would invest the receipts. He made it clear that this would not be a tax, because it would not go into government coffers. After a lifetime of contributions he envisaged that the fund would be able to afford to pay individuals a full pension well above the minimum income guarantee (MIG). That figure is currently £78.45 a week, or £4,079 a year, and is in fact larger than the state pension of £67.60 a week or £3,510 a year.
The scheme he proposed did involve some redistribution of wealth. Wealthier people would have had to pay increased contributions, but presumably he envisaged that they would get the same pension. His reasoning on this was that if society did not address the problem in this way it would have to deal with it in some other way. There is really no getting away from the fact that the rich have to pay in more into the benefit system than they get out. However, it was presumably this element that made the scheme a non-starter.
Much of our meeting was in fact taken up by discussing the effects that the MIG has on people's saving habits. To get anything like a decent pension through an annuity, an individual needs a pension fund of at least £100,000. For the vast majority of the population that figure is so large as to be beyond the remotest chance of achieving it. This, in his view, leads to total despair, and resignation to the fact that most will be condemned to live in poverty in their later years. Therefore, rather then even attempt this impossible task any money people do get will be spent on luxuries, or even the necessities of life.
Because the MIG is means-tested, this somewhat selfish attitude actually makes enormous sense. What is the point of saving £50,000 to generate a modest income in retirement if your neighbour doesn't but still gets an income in old age from the state that equals yours? And has had the life of Riley to boot, while you were diligently saving?
We asked him what sort of numbers, in terms of weekly or monthly contributions, he envisaged for the stakeholder scheme. However, he didn't answer that, saying instead that it would be up to the Government Actuary to determine the funding levels, using very conservative rates. Here of course is the problem, and why the scheme was never submitted to the Prime Minster. The concept of a mandatory subscription to a fund outside the Treasury and with rates set by someone other than the Chancellor was too much of a hot potato. It would have been labelled as a pension poll tax, and would have been an electoral disaster as well as anathema to the Treasury.
The revised plan for stakeholder pensions is much less ambitious and is really aimed at the middle class. And this is not the group that needs it. Surprisingly, Field was rather dismissive of the desire of many people to make their own provisions for old age through ISAs. I got the impression that he thought ISAs were mostly being used for school fees and such things as holidays. It is hard to judge, but I get the impression from the discussion boards that the majority of Fools are using ISAs for security in later years. Our poll on the ISA discussion board will help us check the veracity of that view. If you have an ISA, please take the time to vote.
