Tag: pensions

In praise of the triple lock

The ‘triple lock’ is the name given to a commitment to maintain and improve the value of state pensions.  The table comes from a recent report by the Institute for Fiscal Studies.

Table 1. Triple lock indexation since its introduction

In the course of the last twelve years, this has meant that pensions have increased by a nominal 60%, while if they had only increased by inflation, they would be up 42%. Putting that  another way, pensions have risen by 12.7% over inflation (that is, 160/142), which in real terms is 1% a year.

One might suppose that ratcheting pensions up, however slowly, was a praiseworthy thing to do, but the principle has come under fire from those who claim that it represents an unsustainable commitment. The criticism has been fed by the IFS report, which argues that it creates ‘uncertainty’ about the future value of state pensions, and that if it is left in place till 2050, it will increase the value of the state Pension from about 25% of median earnings to something between 26% and 32%.

The first of these arguments is, frankly, codswallop.  The benefits  system is in a parlous state: the main ‘uncertainty’ it is creating is whether or not people will be able to eat.  Improving the value of the pension does not increase uncertainty; it reduces it.   If we are genuinely concerned about the narrower problem of how people plan their pensions for the future, the main ‘uncertainties’ come from the govenment’s eccentric reliance on means-testing and the desperate problem of paying for social care.

The second argument invites the obvious retort – so what?  A modest increase in the value of pensions, relative to the median wage, is surely a good thing.  The UK’s treatment of pensioners is, by international statndards, parsimonious.  Consider this graph from the OECD.  It puts the percentage of GDP spent on pensions in the UK at 5.1%.  The Office for Budget Responsibility, which works on a slightly different set of definitions and takes into account a few extra benefits,  estimates that this year, the percentage will be – try not to be too shocked – 5.3%.

https://data.oecd.org/socialexp/pension-spending.htm

The  State Pension provides, at best, a modest basic income.  The (somewhat limited) success of the triple lock is something to applaud, not to denigrate.  One might wish that the the same approach could be taken for the painfully inadequate benefits offered to people of working age.

The WASPI women are going to have to be compensated, regardless of who wins the election

There is one fascinating exception to the failure of the parties to engage with fundamental issues: that is, the position of the WASPI women, two and a half million women who have had their expected retirement dates delayed and their pension entitlements radically cut.  This is yet another legacy of bad policy decisions taken in recent years.  It has led, however, to Labour and the SNP making a commitment to compensate the women for the loss of rights that have been earned through contributory benefits.

The current position of the UK government has some parallels with the behaviour of Glasgow Council, which persistently underpaid women who ought to have had equal pay.  Both of these problems have come about because the public authorities were looking for ways to save money, and they thought that it was easier to do that by taking the money from women, largely because women’s incomes are considered secondary to men’s.  In both cases, the injustice is obvious and palpable.  And in both cases, the main ground for resistance now is simply how much it will cost to set the issue right.

The WASPI women are set to appeal from the case they lost in the High Court.  They lost that case mainly because they tried to argue that their treatment was discriminatory; that argument failed because as policy intended to equalise the position of men and women is the opposite.  For what it’s worth, however, I think that ultimately they are going to win, because there are other, stronger objections to the policy.  The case has direct parallels with a human rights case taken in the Inter-American Court of Human Rights, in Five Pensioners v Peru.  The decision in that case centred on the suspension of pensions by the Peruvian government.  Disappointingly, the court did not attach much weight to the idea that social security was a human right; but they did think that there was a human right not be be deprived of one’s property, and that a contributory pension was the property of the pensioner, not the government.

The government can’t rely on its power to make the rules for social security.  The DWP’s rules are mainly determined through secondary legislation, but secondary legislation can’t trump human rights or property rights.  That has implications for any future government.  The bill to compensate the WASPI women is going to be presented in due course, and regardless of the political complexion of the government, it is going to have to be paid.

 

Who will get the new pension?

I’m indebted to Gareth Morgan for drawing my attention to a discrepancy in the figures for the new pensions scheme.  Gareth had drawn information from the Sunday Times, which had discovered from an FoI request that “Two-thirds of the people who reach state pension age in 2016-17 will not receive the full pension, according to the DWP.”   The Sunday Times had been told: “For most people who retire next year, the weekly pension will fall short of the headline figure by an average of between £35 and £55 a week … For those who retire in 2020, the average shortfall will be between £15 and £25. I was referring to different information from the DWP, which suggests that 45% of people will get the full rate (I’ve shown the graph here: the numbers are on page 35).  These figures can’t all be right.

NSP

Part of the explanation may be, I think, the apparent disappearance of large numbers of women from the figures in the second report (see figure 24, page 37) – and I’m not at all clear how as few as 20,000 women come to be counted as 27% of all those retiring.  I suspect that the Sunday Times’s figures are more trustworthy than the DWP’s.

Further note, 6th April:  I’ve had an explanation from the DWP.  The totals they presented were rounded to the nearest 10,000, while the percentages were left alone.  That explains how 20,000 gets to be treated as 27% of 90,000.   The huge approximation – on a figure of 20,000, plus or minus 5,000 is 25% in each direction – means, unfortunately, that the figures in the report don’t add up.  The main surprise is that official statistics can be presented with such little regard for the data. 

A small cut or two for pensioners

Today’s Autumn Statement reverses the decision to withdraw large amounts of people’s Tax Credits, but otherwise it doesn’t have much to say about benefits.  Most of the decisions  relate to changes in timing.  Apart from that, there’s a plan to make social renting subject to the same Local Housing Allowance rules as private rented housing and rules to stop some claimants spending more than a month abroad.

The effects of cuts or spending decisions generally appear in the tables of a Blue Book, on pp 112-3.   It’s surprising that two apparently minor tweaks to the ‘Savings Credit’, a complex addition to  the means-tested Pension Credit, are set to save £135m next year.  The Savings Credit currently costs £618m, and goes to 1.15m pensioners (an average of £536); the projected saving is more than 20%.   One of the two tweaks is a small adjustment in the rates:  Paragraph 3.49 states:  ” The Savings Credit threshold will rise to £133.82 for a single pensioner and to £212.97 for a couple (note:  this year’s rates are £126.50 and £201.80), which will reduce the single rate of the Savings Credit maximum by £1.75 to £13.07 and the couple rate by £2.68 to £14.75. ”  The other tweak, in para 1.135, is this:  “by adjusting the Savings Credit threshold, the Pension Credit awards for those currently receiving Savings Credit will be frozen where income is unchanged.”  If this means that people receiving Savings Credit will lose the value of the £4.40 increase in the minimum guarantee, it will affect about 723,000 claimants (the ones who get both the Guarantee Credit and the Savings Credit).  That  could add up to the size of cut the Treasury is talking about – but this money is not actually being saved, it’s just not being spent on some while it is being spent on others.

Richard Murphy on private pensions

In his blog, and in an earlier report, Richard Murphy makes a blistering attack on the private pensions industry.  Private pensions currently receive £38 billion a year in tax reliefs and subsidies – an amount so large that it pretty much pays for private pensions.  The private pensions industry does what it does at a staggeringly high cost, and it has lost a substantial bite out of money it was supposed to be safeguarding.  Murphy asks:

  1. Why are we investing pensions in this way when there are clearly better options?
  2. Why are we structuring pensions this way when it clearly allows the extraction of excessive fees for poor return from the system?
  3. Why are we subsidising this failure with so much state money – enough, in fact, to represent a third of our real state debt right now?
  4. Why are we tolerating the massive redistribution of wealth from many to a few that this system permits?
  5. Why are we allowing so many funds to be put to idle and non-productive use outside the mainstream economy?
  6. What can we do better?
  7. Why aren’t more people asking these questions?

The sixth question is, of course, the difficult one.  I’ve argued many times that, regardless of the mess caused when benefits are badly designed, setting them right is never an easy option.  Redistributing costs and benefits means that whenever some people are made better off, someone else has to be worse off.  The only way out of the bind is to spend more money, at least enough to protect people from the more serious anomalies; and reshaping the system of subsidies and reliefs will have to be done gradually, to ease the pain.

 

Is independence a threat to pensions?

I was asked by the BBC to comment on a poster produced for the independence debate, which suggests that pensions may be under threat.  My contribution is on the BBC website, here.  Basically, there are three types of provision for pensioners to consider – the state pension, occupational pensions, and further benefits, many of which are under threat anyway. Reorganising occupational pensions might be a nuisance (they’d probably have to be split into English and Scottish schemes to comply with European regulations) but I don’t think there’s a serious risk in any of these categories.

The constraints of the article meant that an interesting aside had to be dropped, but having a blog allows me the indulgence of dropping it in here anyway.  This is the question of what happens to upratings for people who get a pension from the UK but later go to live in Scotland.   The UK government has long refused to uprate benefits for pensioners who live in some other countries, including Australia, New Zealand, Canada, South Africa and some others such as Nigeria or Yemen; there’s a detailed report here.  They argue that the UK does not have a legal agreement to pay upratings in these countries. However, they do pay upratings in the European Union, Turkey and the USA.  Steve Webb, the Pensions Minister, has told a Holyrood committee that there shouldn’t be a problem – and it would be astonishing if the UK government imposed rules for Scotland that treated English pensioners in Scotland worse than Turkey or Israel.

Another scare story, this time about pensions

The Scotsman devotes this morning’s first two pages to concerns about private pensions after independence, under the title Scottish independence: EU deals pensions blow.  It’s prompted by an announcement from the EU that the rules on cross-border pensions will stay as they are.   Under EU rules, cross-border pension schemes have to be fully funded; many UK schemes (about 5000 out of 6300) are currently in deficit.

A scheme doesn’t become a cross-border scheme because it’s paid to someone abroad – many people live abroad now (for example, pensioners living in Ireland and Spain) and receive British pensions.   It’s a cross-border scheme if it is based and operated across boundaries, levying contributions from people in different countries.

There are some issues.  Some pensions firms will have to change the way they operate.   Schemes in deficit will have either to stop taking contributions from people situated abroad, or set up new, independent schemes for each country.  Some people will have to join new pensions schemes, as many people do now when they move jobs; and some of them will find, reflecting the current economic climate, that the terms are less favourable than their current scheme – typically the scheme will offer lower returns, it won’t be salary-related, and and the date of retirement will be later.   It’s a consideration, but it’s hardly decisive for the independence debate.

 

 

It's not quite the end of annuities

There has been some excitement at the thought that pensioners will be able to blow their pension pots on a Lamborghini, rather than buying an annuity. There may be some problems with this arrangement – no doubt the sharks will be circling at the smell of money in the water – but somehow the idea that pensioners will be lining up to buy cars that cost £300,000 and do 11 miles per gallon doesn’t quite square with the experience of most of the older people I’ve ever met.

I can make no great claim to understand the annuities market, but there are reasons to doubt that this week’s Budget has knocked the bottom out of it.  According to the Association of British Insurers, the numbers of people who take out large annuities is very small.  Most pots are limited; many annuities – more than 100,000 a year – are bought for less than £10,000; the median pot is around £20,000.  They explain that an investment of £5000 will typically secure an income of £20 a month.

Much of the trade seems to depend on the idea that someone who is looking for a range of investment options will be able to use part of that money to guarantee a fixed income.   On that basis, the most likely outcome of the change in rules is that, as workplace pensions grow, more people will use part, rather than all, of a pension pot to guarantee an income.  If they like the idea, they can start small and decide later to buy more income.

Pension age: a third of adult life

One of the most intriguing statements in the Chancellor’s speech was the suggestion that the government is moving towards a formula for setting the age of retirement.

“We think a fair principle is that, as now, people should expect to spend up to a third of their adult life in retirement.”

It’s difficult to make out just what this means, for three reasons.  The first is the question of when adult life begins.  Many of the people retiring at present began their working life at age 16.    The age of majority is 18, and in England the school leaving age is set to increase to that point.  People who go to college may not start their working life until they are 21.  The difference of five years could make a difference of nearly two years to the proposed age of retirement.  A background note says that the government is planning to take 20 as the start of adult life.

The next wrinkle comes from that expression, “up to” a third.  That might mean that people should be able to expect that third, unless they die earlier.  However, it could also mean that this is a reasonable target for the maximum period of retirement, so that relatively few people will get it for much longer.

Then it’s not clear when this expectation applies – when someone starts their working life, when they are making pension plans, or when they retire.  I’d plump for the last of those, because anyone who dies before pension age has had to pay to benefit those who didn’t; and in the background note, that’s also what the government has gone for.

On that basis, someone who has worked from 20 to 66 should be able to expect to live to age 89.  That seems to imply that 66 is late to retire; 64 would be more justifiable.  That, of course, is what we would have had if male and female pension ages had been equalised reasonably, instead of just jacking up the female retirement age.

Having said all this, a third is not a bad rule of thumb.  It implies that if people’s life expectancy on retirement goes up from 87 to 93, pension age should increase by two years, which I think is more or less what’s being proposed.

More on the Scottish Government’s Pensions Policy

Saturday’s press releases about pensions have been followed up by a detailed policy document.  The Scottish Government explains that  “For those in Scotland in receipt of the UK State Pension at the time of independence, the responsibility for paying that pension would transfer to the Scottish Government.”  What that means, for the State Pension is that

  • “The single-tier pension would be paid in full to everyone who reaches State Pension Age after the introduction date and has 35 qualifying years of National Insurance (NI) Contributions or NI credits.
  • There would be a qualifying requirement of 7-10 years of contributions.
  • All Additional State Pension rights accrued prior to April 2016 would be retained and paid to individuals on retirement.”

It looks as though Scottish Government is thinking of a  clean break: a country’s responsibility to pay pensions will be based on a person’s address at the time of independence.  Anyone currently in receipt of a State Pension will be passported to the new system.  If you worked in Scotland but now live in England, you won’t get a Scottish pension.  Conversely, if you worked in England but moved to Scotland, you will.  That should mean that there is no such thing, on the first day, as an English or Scottish expatriate; anyone who moves over the Border after retirement will carry with them entitlements from the nation they are coming from, regardless of where the contributions were paid.

The position of people who have not reached retirement age is not so cleanly defined.  It’s supposed to be dealt with by a transitional arrangement.

“For those people of working age, who are living and working in Scotland at the time of independence, the UK pension entitlement they have accrued prior to independence would become their Scottish State Pension entitlement.”

To make this work, the Scottish Government needs to know the UK pension entitlement.  The records, which are linked to the NI number, are not held in Scotland – they are the responsibility of the National Insurance Contributions Office in Newcastle, which keeps over 65 million National Insurance accounts.    The SG would need access to the UK records of most new claimants for the next 35 years.  It’s a big ask.  (It’s already the case that some functions in benefits administration, such as retrieval from storage, are cross-charged between agencies.  I don’t think the SG can assume that the UK government would not cross-charge for the service.)

There are some other issues to resolve.

  • The policy documents refers to people ‘living and working’ in Scotland.  If someone lives in Scotland but has only worked in England, what happens?
  • A person who works for more than 10 years in both countries would meet the qualifying requirement in both.  If the total is over 45 years, there is an entitlement to a full pension and enough further contributions to qualify for a partial second pension.  Someone who worked in two other European countries might reasonably expect pensions from both.  Would two pensions be payable?
  •  1.2 million State Pensions are paid to Britons living overseas.  Which ones will be paid by Scotland?
  •  Once payments to expatriates are accepted, can the government legally avoid making payments to expatriates in England?

None of these issues is a fundamental objection to the development of an independent Scottish system – they are examples only of the little knots that can trip governments up.  Partly in reaction to the scaremongering about independence and devolution, however, there has sometimes been a contrary tendency to pretend that there are no genuine problems to resolve.  In this case, there are.