More on Pension Reform - 4th July 2011

In the event only 42% of the members of the most militant of the striking unions –the Public Services Union- obeyed last week’s strike call. In total well under two fifths of civil servants were out on strike. The impact of the strikes was greater on schools with about half of England’s 21,000 schools having to close or partially close. It the longer term the teaching profession has sustained further lasting damage: the status of teachers is undermined when they adopt the mores of the shop floor. Teachers should be treated as professionals, so it is clearly a mistake to ‘down tools’ as if they were production line workers. Ultimately I think the response to the strike call was muted because most people accept the need to adapt public sector pensions to the reality of increasing longevity. It is important to maintain reasonable -even generous pensions for public sector employees- but they have to be affordable and fair to taxpayers.

For exactly the same reason it is important to reform not just public sector pensions but also the basic state pension. When it was set up in 1908, the average life expectancy was only 41, but by 1981 an average 65-year-old man could expect to live for another 14 years, today it’s over 21 years, and by 2050 it will be over 25 years. We cannot provide an affordable basic state pension while people live ever longer lives without either reducing the benefits or asking people to retire later. We have ruled out the first option of reducing the benefit, on the contrary, we are improving the benefit: on 1st April the Government put in place a triple lock which will ensure that the basic state pension will be increased every year in line with average earnings, prices or 2.5 per cent – whichever is highest of the three. This guarantee restores the link between the pension and earnings. It will mean that someone retiring today on a full basic state pension will receive £15,000 more over their retirement.

We can only afford to do this by accelerating the already planned raising of the retirement age, and also speeding up the planned equalisation of the retirement ages of men and women.

 The Government will speed up the pace of state pension age equalisation for women from April 2016 so that women’s state pension Age reaches 65 in November 2018. The state pension age will then increase to 66 for both men and women from December 2018. Clearly this will adversely impact most people who have yet to retire but the impact will be most noticeable on those who are closest to retirement when these ages are raised, but you have to start somewhere. The consolation for working longer is that it enables us to afford a better pension.

Putting the decision off for a few more years will simply make the adjustment more painful for future pensioners.

There is currently a consultation taking place on the possibility of increasing the pension to £140 per week up from the current £97. It would be a ‘citizen’s pension' based on a residency qualification rather than on a record of national insurance contributions. This would greatly assist women with an incomplete contributions records because they took a career break to raise a family. The primary purpose, however, is to end the perverse incentive which discourages saving for retirement because social security benefits currently build up to the minimum pension guarantee of £136 per week anyway.

Some pensioners have written to complain that, if implemented, this would only apply to new pensioners and not to existing ones. My answer to them is to be careful what they wish for. This is because no new money is being provided. It would be funded by reallocating the government contributions to what is the state second –earnings related- pension, much of which is contracted out to occupational pension schemes. Clearly there will be losers, particularly those who will then have to find other ways of making up the contributions to their occupational schemes. Of course, you couldn’t possibly do this to people already retired because you cannot take back the contributions that were made to either their state second pension or to their occupational scheme.

In conclusion it is important to see all these things in the round. From 1 April this year most pensioners will pay no income tax at all because the personal tax allowance was raised by nearly £1000 for the over 65s, and by nearly £2000 for the over 75s.