The present pensions system is wrecked beyond repair, but that doesn't mean that it can't be replaced with a system that is fair, equitable and workable
Last week we were led to believe that 1 million ill-treated local authority workers went on strike over the loss of (just one of) their pension rights. The event was heavily trailed and stage managed as "the biggest demonstration of anger since the general strike of 1926".
The loss wasn't the closure of their organisations' defined benefit pension scheme and their transfer to money purchase or personal schemes, as happened to many of the 9.8 million employees with private sector pensions. Nor was it the collapse and liquidation of their company and pension schemes, which has left 85,000 private sector employees and pensioners in various states of destitution. Nor were they considering the plight of 11.4 million people who have no private or personal top up and have to rely on the basic state pension.
The scandalous "loss" that justified the closure of thousands of schools, libraries and day centres was that if council workers retired before the age of 65, their pension would be slightly reduced actuarially, in accordance with normal practice. The real scandal is that the workers and their unions arrogantly expect private taxpayers who are struggling with their own shrinking or non-existent pensions to subsidise the public sector's pension extravagance.
Retirement saving isn't all bad news, however. Revenue & Customs' simplification rules, effective from yesterday, mean that you can save securely in schemes such as SIPPS, which are under your own control and so buy investments that will give you a much better return than the old insurance-based schemes. The Turner Reports suggestion of "new" National Savings-type schemes are another independent way forward, as are the similar employer-free, easy-to-buy-and-understand schemes coming from the financial services industry. They will be government approved, but the provider will be directly responsible to the savers (as with ISAs).
But how do we transfer the principles of more attractive, better value-for-money schemes to most retirement savers, and share the state subsidy of pensions more equitably across all sectors? By drawing a line under the old, discredited defined benefit schemes and starting again from scratch.
The role of the pension protection fund must be changed to one of actively managing closed defined benefit funds on a continuing, draw-down basis, until they are all paid out in 50-60 years' time. Then transfer all public and private sector defined benefit schemes into the fund, closing them all at the same time and prohibiting the formation of new ones. All the schemes that failed before the PPF deadline would be included to pick up most of the 85,000 disenfranchised failed schemes' members.
Solvent employers (including the government) would continue to make up their deficits annually into the fund and the PPF would pay full pension entitlements to everyone (not 80%, as at present).
The real scandal is that taxpayers are expected to subsidise the public sector’s pension extravagance
Any other topping up would come from the taxpayer.
Transition arrangements would be necessary to protect those within 10 years of retirement age.
Employers would continue to contribute to their employees' new-style private retirement savings schemes, either individually or as a group. The financial services industry would then be charged with developing much-improved schemes that provide proper value for money.
Such radical changes can only be achieved if we take retirement savings and pensions entirely out of the political arena. We must create an independent Pensions Board along the lines of the Bank of England's Monetary Policy Committee, thereby taking responsibility for pension-related matters from the Treasury and Revenue & Customs. The Pensions Regulator and PPF would be responsible to this board. As with the MPC, this will require cross-party consensus.
The responsibility for the rapid decline of our pensions system must be shared between the pensions industry, employers, but mainly the government, whose inept, sledgehammer regulation destroyed the previously successful voluntary system. Employees and tax payers are not entirely blameless. We have to take more interest in our own retirement saving, and we can start by pressing our constituency MPs to win cross-party support for political change.
Colin Harding is chairman of Bournemouth-based contractor George & Harding