From the TUC

The new government’s pensions policies

12 May 2010, by in Pensions & Investment

Much as it has been frustrating at times to keep out of the political events of the last few days and weeks, it’s not the TUC’s role to get involved in the detail of party politics (though we have been talking of little else in Congress House).

But as the coalition has now produced a policy statement – and we are a public policy blog – we are back in business. So I’m kicking off with a look at what they say on pensions.

There are four sentences. First:

The parties commit to establishing an independent commission to review the long term affordability of public sector pensions, while protecting accrued rights.”

This is hardly surprising as both the Lib Dems and Conservatives said this in the election campaign. But there are three things to note:

  • the emphasis here is on the long-term rather than short-term deficit reduction. Some critics have talked of immediate cuts making some immediate contribution to deficit reduction, but this does not.
  • “protecting accrued rights” is important. Arguably the law requires this as these are benefits that have already been acquired through an enforceable contract of employment, but some suggest that primary legisation could strip away accrued rights. At least it looks like this will not have to be tested in the courts. This knocks on the head any idea of making staff in the old public service schemes with a pension age of 60 wait until they are 65 before taking their full accrued benefits. The pension age is not the same as a retirement age, but an important part of the formula used in calculating someone’s pension. It is the age at which you can take your accrued pension at their full value. If you retire and start to claim your pension before the pension age, it is reduced. It would therefore reduce accrued benefits if the pension age for pension already built up was changed.
  • if this is a genuinely independent commission then unions should be confident that it will find that future public sector pensions are perfectly affordable, if on the other hand the membership is raffled at an IoD dinner then perhaps not.

The second sentence is undoubtedly positive, and the Lib Dems deserve credit for getting this pledge from their manifesto put in such clear terms:

We will restore the earnings link for the basic state pension from April 2011 with a “triple guarantee” that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats.

While all parties have signed up to restoring the earnings link from 2012 Labour had refused to put a clear date in to the relevant Pensions Act – and it is an obvious target for being quietly postponed beyond 2012 by a Treasury looking for savings. There has also been some ambiguity about whether the new link would be to just earnings, or the higher of the two. Earnings do tend to go up more than prices but it is no iron rule. The form of the pledge as well as the timetable are therefore both very welcome.

But we need to watch how this will be paid for.  Cutting means-tested benefits or the ad-hoc universal benefits such as the winter-fuel allowance would not be welcome. Possibly the third sentence provides a clue:

The parties agree to phase out the default retirement age and hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women.

Phasing out the default retirement age is now inevitable. While some union opinion worries that this is being used as an alternative for decent pensions, the majority view is that people should have the choice about when they retire and shouldn’t lose employment rights at an arbitrary age.

Increasing the state pension age however is not progressive. This takes money from poor pensioners with shorter life expectancy and gives it to better off pensioners who tend to live longer, and will simply redefine a huge number of economically inactive 65 year olds as unemployed rather than pensioners. I seem to remember someone called Steve Webb being very critical of this at the time.

The last sentence is:

We agree to end the rules requiring compulsory annuitisation at 75.

This is not an area where we have any formal policy, probably because it’s only really an issue for a tiny handful of rather rich people. But if it leads to some new thinking in general about DC pensions then it could be helpful.

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