Getting state pensions right is a prerequisite for any pension policy. Though money is tight, the Liberal Democrats believe we must restore the link between pensions and earnings at once. Both the government and the Conservative opposition have simply promised to do this within the lifetime of the next parliament – perhaps another five more years in which the basic pension will wither away. Stopping the rot on the basic pension has to be the first step towards restoring sanity in pensions.
Building on this, we need to restore confidence in pension provision. People need to know that a pension promise made is a pension promise kept. Any changes to pension rights, including those in the public sector, must be about future accruals only. People also need to have confidence that, in an age of financial turbulence, their pension will be safe, even if their employer goes to the wall. That is why we welcomed the setting up of the Pension Protection Fund (PPF). Our policy is that the government must stand behind the PPF, so that PPF members do not find that their pensions are squeezed if the lifeboat gets into financial difficulty.
On public sector pensions we believe there is a case for a second Turner commission, to look quickly but thoroughly at all of the issues. It would need to look at the differences between public sector schemes (eg some are funded; others unfunded, some have high employee contribution rates, others very low rates, and so on). It would also need to look at things such as how far better pensions were compensation for lower wages – perhaps more true in the past than in the present – and at things like accrual rates, scheme retirement ages etc.
The goal would be to produce recommendations that would be fair to public sector workers, and also fair to the taxpayers (many of whom have poor pensions themselves) who make substantial contributions into public sector pensions.
While we would not want to pre-empt the outcome of this review, there are two particular issues on which we think change is probably inevitable and where we would expect recommendations to be focused.
One is retirement ages, where there are still too many people who can expect to draw their pension at age 60 in a generation’s time, which is simply unsustainable. While there does need to be special rules for those who have physically demanding jobs that they simply cannot do beyond a certain age, there cannot be a reason why
those in office jobs can draw full index-linked pensions at age 60 when life expectancy at retirement might be touching 90 years.
The second area where we believe action is needed is on the pension perks enjoyed by top earners in the public sector. Too many local authority chief executives (and similar) have enjoyed big pay-offs in the form of early retirement benefits and ‘free’ years of additional service, all of which are funded either by other scheme members or the taxpayer.
On the taxation of pensions, the principal change we want to see is the abolition of higher rate pension tax relief for all. This would be much simpler than the complex government scheme, which only applies to the very highest earnings.
We would retain the tax-free lump sum and indeed would try to exploit it to allow early access to pension funds. Since most people take their tax-free lump sum and do not convert it into a pension, we do not see why people should not be able to take their accumulated tax-free lump sum at any point during their working life. One very important example of where this flexibility would be valuable would be for those facing mortgage arrears or repossession. Access to the lump sum could stave off repossession and help people retain a valuable financial asset.
On the decline of final salary pensions in the private sector, we do not believe there is a quick-fix solution. We do believe that governments should make it easier for firms who want to run such schemes – for example, by making available financial instruments that better enable them to match their scheme assets against their liabilities – but we do not want to overprescribe the structure of scheme benefits. My personal view is that the pendulum away from defined benefit will eventually swing back to some extent, but governments should not be trying to interfere too much in that process.
The key role of government is to provide a firm foundation through a decent state pension, good incentives to save (through lower reliance on means-testing), greater flexibility for savers (through early access options) and support for good occupational schemes. On all of these fronts, the present administration has failed and we believe the Liberal Democrat approach would deliver a better pensions future.
Steve Webb is spokesperson for work and pensions for the Liberal Democrats
