Pensions crisis

Urgent action needed to reverse decline

Tom Cairns, Director of Corporate Affairs at Age Concern NI, reviews the current debate on the failure of both the basic state pension and pension savings to ensure that most people can live their retirement above the poverty line and recommends measures to address the crisis.

Pensions are important to all of us. We expect them to provide us with a decent income in retirement so that we will have enough money to enable us to stay healthy, sociable and active and that we won’t have to choose between food and warmth. Under current government policy, a high percentage of people who have worked all their lives and expected a decent standard of living in their later years will retire on incomes well below the poverty line. In the United Kingdom, over half the population have no significant pension savings and cannot afford to save the significant sums that are needed. This situation will not be helped by the decline in defined benefit pension schemes and we are already witnessing the backlash from government proposals to increase the age at which public sector workers can retire from 60 to 65.

Historically, Northern Ireland‘s economic structure and below average earnings have mitigated against personal preparation for retirement. A high incidence of self employment, declining agricultural profitability along with an increasing trend towards part-time and temporary employment such as in the catering, tourism and retailing sectors have adversely affected income and the capacity to make a personal pension provision for their retirement. These, combined with sustained high unemployment rates, especially long term unemployment, have all resulted in a high degree of dependence on state benefits in later life. Consequently, large numbers of pensioners in Northern Ireland are living in poverty and many more are struggling to make ends meet.

Promises not kept

In 1998, the government green paper ‘A New Contract for Welfare and Partnership in Pensions’ described its approach as one of building a modern and affordable system which would ensure the opportunity for everyone to achieve a decent income in retirement. It would, it said, ‘reward work and savings so that those who worked all their lives would not have to rely on means tested benefits when they retired.’ It is now pretty obvious that the government has failed to deliver on this promise and that the pensions system is just not working.

Since coming to office in 1997, the Labour government has introduced a range of reforms. These have included:

	the introduction of stakeholder pensions in April 2001 aimed at those on modest earnings;
	the introduction of the Minimum Income Guarantee (MIG), effectively an increase in Income Support for pensioners;
	the Second State Pension for low earners, carers and disabled people;
	the Pensions Credit introduced in October 2003 designed to reward work and savings.

Despite these policies, there is continued widespread opposition to government failure to address the real issues of an adequate basic state pension for all pensioners and restoration of the link with average earnings.

Almost ten years after the election of a government committed to greater social justice, one in five pensioners are still living below the breadline while many, many more are worrying about meeting their escalating bills and women’s pensions in particular are a scandal. Radical reform is needed and the government and politicians must listen carefully to what people think about the options for pensions reform and respond positively and quickly. If they do not, public faith in pensions will remain low, the current savings crisis will spiral out of control and the value of the state pension will continue to decline.

The Turner Report

The long awaited report from the Pensions Commission, chaired by Lord Turner, was published in November 2005. It made radical proposals on the future funding of the nation’s retirement. Turner says that the solution to the pensions crisis must be a combination of more tax, longer working lives and higher personal savings. The radical proposals included suggestions for changes in the state pension system namely:

	raising the state pension age to 68 by 2030;
	linking increases to earnings not prices from 2010;
	reducing means testing;
	basing the basic state pension on residency rather than on national insurance contributions and providing a universal state pension for the over 75s.

Also proposed is the development of a National Pensions Savings Scheme to be established by 2010 with automatic opt-in for those not in occupational or private schemes, which the self-employed would be able to join if they wish.
While these suggestions have been broadly welcomed by pensions campaigners in the UK as a possible longer term solution to the pensions crisis the reality is that, because of our economic history and poor health status, many older people in Northern Ireland will continue to struggle in retirement for the foreseeable future. It is also highly worrying that in his March 2006 budget the Chancellor failed to set out government support for the Turner recommendations.

Turner proposes that the state pension age needs to increase to between 67 and 69 by 2050. Longer life should not just mean a longer working life. Many of the least well off, especially low paid and manual workers, do not currently manage to work to 65 because of ill health. Any increase would force them to sacrifice a large part of their only too short retirement. This is particularly relevant in Northern Ireland where on average male manual workers only live to the age of 71 and research shows that one in five men now aged 50 will die before they reach 70. Age Concern Northern Ireland is supportive of efforts to encourage people to work longer if they are willing and able to do so and endorses legislation which will end age discrimination in employment so that older workers can do so. We do not believe, however, that people who do not wish to do so should be forced to work longer by raising the state pension age.

The National Pensions Savings scheme proposed by Turner is aimed at those who do not currently have adequate pension arrangements. Employees would be automatically enrolled into the scheme but could choose to opt out. The Commission suggests a minimum default contribution of about 8% of earnings made up of 4% employee contribution, 3% from the employer and 1% from tax relief. Self employed people could also join the scheme if they wished. While the principle of enrolling people into a national pension scheme is broadly welcomed the danger is that, unless it is properly controlled, it may lead to more employers withdrawing from running their own schemes.

A progressive consensus

The needs of today’s pensioners must be addressed now. Age Concern Northern Ireland believes that the only sensible solution to the blight of the poverty which affects the lives of so many older people is to up-rate the basic state pension to Pension Credit level of £114 per week and restore the link with earnings so that pensioner reliance on means testing can be dramatically reduced and they can feel secure and not fearful for their future. A state pension set at an adequate level will also provide reassurance for those on low incomes that they will benefit from any extra money they save for themselves.
There is an urgent need to address the low levels of understanding and awareness of people to make their own retirement provision and not to be reliant on the basic state pension as their sole source of support in their later years. Recent findings from the Consumer Council show that fewer than half of Northern Ireland consumers have personal pension provision in place and that half have little or no knowledge on pension issues. Levels of knowledge are worst among younger adults and the poor. Decisions are more likely to be effective if they are based on informed and independent advice on the options which are available. The government should issue annual pension statements giving forecasts of income on retirement to every citizen to help them plan for their future.

The current system does not work for women. It is based on an outdated model of men as the main provider and fails to recognise breaks for caring responsibilities which impact on women’s pensions. Just 24% of women retiring in the UK are entitled to a full basic state pension in their own right. The figure in Northern Ireland is likely to be substantially higher. Reforms to the system must tackle this bias against wo-men. One way of doing this is providing a universal pension based on residency rather than on National Insurance contributions as proposed by Turner.

The Pension Commission’s report has provided a launch pad for reform for which the government has currently failed to demonstrate any great enthusiasm or commitment to act on. It is now time for politicians to set out a programme for action on pensions if we are to address the needs of today’s pensioners and future generations of retired people.

Update: The government's White Paper has rejected the idea of a universal pension based on residency.

© Law Centre (NI) July 2006