Britain's pensions mess won't be resolved by the latest stab at reform

Telegraph

a day ago

It's the absence of ambition that really gets me. Labour may be trailing badly in the polls, yet there are still four years to go before the Prime Minister has to call another election, and for the time being he commands the sort of majority that would normally allow him to do truly radical things.
But he doesn't. Instead, ministers sit on their hands, seemingly frightened of their own shadows, and allow Reform UK, with just a handful of MPs, to make all the running.
Nigel Farage is probably right to claim that without Reform snapping at its heels, the Government would not have about-turned on the winter fuel allowance.
Yet it is not just on entitlement spending that the Government appears incapable of doing anything of significance. On wider pension reform too, there's little sign of the resolve needed for meaningful change.
The Government's Pension Schemes Bill – published last week – is more notable for what it doesn't do than the changes it seeks to bring about.
This may seem a little unfair. There are few areas of public policy where the old joke that 'you wouldn't start from here' more aptly applies than pensions.
Decades of meddling has left the UK with a hopelessly confused array of different pension arrangements that collectively fail to serve the country as they should.
It is also fair to say that there is no silver bullet likely to deliver optimum outcomes.
Let's take gold-plated, final-salary public sector pensions, widely thought to be unfair on the great hinterland of taxpayers who don't enjoy such perks but are required to underwrite them.
These are left completely unaffected by the new pensions legislation. Richard Tice, Reform's deputy leader, said last week that the party would consider moving all public sector employees out of their 'Rolls-Royce' defined benefit pension plans and into the defined contribution schemes common to much of the private sector.
Sadly, this is much easier said than done, which is why successive governments have – beyond trimming benefits a little – steered clear of significant reform.
Putting public sector workers on the same basis as those in the private sector might sound fair enough in principle, but it would be hugely challenging in practice, and not just because unions would throw their toys out of the pram at the mere whiff of it.
Public sector pensions have been compared to a Ponzi scheme, in that retirees are paid from the contributions of those still in employment. But actually the two things are quite different.
In a Ponzi scheme, the existing investor doesn't know that their promised return is being paid not from investment gains but from funds collected from new investors. The arrangement is therefore fraudulent.
But with public sector pensions the process is completely transparent. What's more, these pay-as-you-go arrangements conform much more exactly with the founding principle of occupational pensions than the defined contribution model – namely that the employee pays for the retirement income of his predecessor rather than saving for his own pension.
Go back to the origins of the modern-day pension, and in some professions the individual job would be sold by the incumbent to the new entrant as a way of funding retirement. Alternatively, the newcomer would agree to pay his predecessor a proportion of his income for a set number of years. If you were lucky, the old codger would quickly pop his clogs.
These days, workers can expect to live 20 years or more in retirement, making the arithmetic of pay-as-you-go pension arrangements much more challenging.
The last set of 'Whole of Government Accounts' showed the total present value of public sector pension liabilities at a jaw-dropping £1.415 trillion. This was down from £2.639 trillion the year before, a fall accounted for largely by the fact that owing to higher interest rates many local authority pension schemes have swung into surplus.
For unfunded public sector pensions, however, there is still a massive and rising liability.
If this had to be paid all in one go, it would pretty much bankrupt the country. Yet in practice, it is spread out over decades, and ought therefore to be manageable assuming contributions are raised in line with outgoings.
The more important number is perhaps therefore the difference between what employees and employers are paying into their schemes and what is being paid out in retirement benefits.
This has been in negative territory for some years now – more money going out than in – making public sector pensions a net cost to the taxpayer. The shortfall is expected to be around £1.6bn for last financial year. But the Office for Budget Responsibility forecasts a swing back into surplus from here on in, reaching a net positive of £3.6bn by 2030.
Where it heads after that is anyone's guess. If the Government succeeds in cutting the public sector headcount, it may well turn significantly negative again.
But the point is that this is hardly an emergency for the public finances. If on the other hand all public sector workers were put, as Tice suggests, on defined contribution arrangements – where contributions are invested into a personal pension pot – it would quickly become one, as there would be no money coming in to fund those already in retirement. Taxes would have to rise significantly in the short to medium term to fund the gap.
Furthermore, to properly compensate public sector employees for giving up their present, very favourable pension arrangements, you would need significantly to increase their pay, further adding to the travails of the public finances. As on much else, Reform doesn't seem to have thought things through. Best, perhaps, not to poke that particular hornets' nest.
Of course, the Government's Pensions Schemes Bill doesn't touch on these concerns. Rather it is about private sector pensions, and in particular it is about attempting to get them to invest more in productive UK assets, forcibly if necessary.
Personally, I see nothing particularly wrong with this objective provided it is not pushed to extremes. The UK is almost unique in how little its pension funds invest in home-grown equities and infrastructure, and indeed in the lack of coercion currently applied. Given the tax breaks this form of saving enjoys, it's reasonable to expect investors to give something back.
But there is also a good reason why trustees are as reluctant as they are; it is because relative to the alternatives, the returns on British assets are low. It's chicken and egg, and perfectly explains why the London Stock Market is dying on its feet. It's not lack of a big stick; it's lack of opportunity.
Breaking this vicious circle of decline requires not Labour's go-to solution for all challenges of this sort – strong-arming investors into doing what they don't want to do – but making the UK an attractive place to invest. Much work to be done on that front, I fear.