The Labour Party Manifesto 2005 says:

"We are clear about the goals of a reformed system. It must tackle poverty, provide everyone with the opportunity to build an adequate retirement income, and be affordable fair and simple to understand."

In my opinion this is wrong on two counts.

Firstly, "provide everyone with the opportunity to build an adequate retirement income" is stressing pension provision on an individual rather than a group basis. This involves:

awareness, confidence, choice, education, incentives, information, personal responsibility, markets and the savings-gap.

But there is also:

caveat-emptor, mis-selling, the Equitable Life scandal and so on.

Encouraging people to "build an adequate retirement income" is building a nation of pension punters. ^x Richard Brooks and John Denham MP also want to build a nation of pension punters. In their Fabian pamphlet The Politics of Pension Reform (2005) they say a reformed system "should clearly incentivise personal responsibility and saving". (page 45)

Secondly, "simple to understand" is again stressing provision on an individual basis. Understanding is certainly beneficial, but is only really necessary in the area of pensions if people make choices which depend on this understanding. Otherwise it is probably a waste of time. Thus if there is a problem, it is with choices in the first instance rather than understanding, since if there is no requirement to choose then there is no need for understanding.

"Build an adequate retirement income" and "simple to understand" is "conducting the debate on the insurance industry's terms", as the Consumers' Association said:

"The Government has allowed the debate on pensions to be conducted on the insurance industry's terms": ^x

I would replace the above goals by: affordable, efficient, accountable and tackle poverty.

2. Stakeholder pension believers

The TUC says:

"Employers and employees should be compelled to contribute to a second pension either as part of the state second pension, an existing or new occupational pension or other arrangement." ^x

"Other arrangement" means largely stakeholder pensions. Therefore the TUC is a stakeholder pension believer. Indeed it has its own stakeholder scheme, managed by the Prudential. Similarly the CBI is a believer since it says in the Fabian pamphlet "saving more through occupational or stakeholder pensions" is a "sustainable approach" (page 55).

3. Opinions

A substantial increase in the Basic State Pension is being widely advocated. Such an increase seems likely to result in S2P being phased out. In the Fabian pamphlet Scottish Widows says:

"There is widespread support for increasing the Basic State Pension to broadly the level of the current Guaranteed Credit. Scottish Widows believes this is highly desirable. .. Such a change would of course have to be paid for. That would almost certainly involve radical reform of the State Second Pension, and probably its phasing out."

There is therefore the possibility of a hidden agenda. Some people may be advocating an increase in the BSP, because they want S2P to be phased out which will promote the sale of personal pensions.

The Fabian pamphlet has a section written by representatives of various organisations giving the views of these organisations about pension reform. Three basic questions are:

1. Are you a stakeholder pension believer?
2. Should compulsion be introduced?
3. Do you think that the S2P should be phased out and the resulting funds used to increase the BSP?

Organisation	1.	2.	3.
Fabian pamphlet	yes	no	yes
CBI	yes	no	no
TUC	yes	yes	no
Scottish Widows	yes	no	yes
PPI	yes	no	yes
NAPF	yes	no	yes 1
Myself	no	no 2	no

1. The NAPF is in favour of replacing the Basic State Pension with a Citizen's Pension

2. I am not in favour of compulsion to save if sufficient incentives are provided to save with appropriate organisations, otherwise I am in favour of compulsion to save with these organisations.

The Pensions Commission is less of a stakeholder pension believer. In its First Report it asks whether there is a level of income below which sales are not worthwhile:

"There is a segment of the pension market, comprised of lower income savers and people working for small firms, to which the free market will never be able to sell pension products profitably except at RIYs that make saving unattractive." (page 224)

The DWP is also concerned about distribution costs:

"Given that individual savings products have fixed costs, is there scope for harnessing the power of the State through collective products run through central or local collection mechanisms to help secure lower charges for savers? Might such a product on an auto-enrolment basis help more people to save?" (page 18) ^x

A further problem with stakeholder pensions is that they are not cheap, and there are hidden charges outside the cap on charges, including bundled brokerage and soft commissions, about which the FSA is currently consulting. ^x

4. Phasing out the State Second Pension

The PPI says:

"37. If S2P ends then contracting out ends. This would make employer-based pensions easier to provide and individual saving easier to do. The selling process for personal pensions would be shorter and easier to do." ^x

Thus ending S2P promotes the sale of personal pensions, which are an inefficient way of providing pensions.

Ending S2P would have to be gradual because of existing accumulated rights. But it is apparently slowly being reduced. ^x

I have had my own pensions forecast from the DWP, which is about £80 a week BSP and another £80 a week from S2P. There is much talk of raising BSP to say £120 and paying for this by abolishing S2P. But under such a changed system, I would be £40 a week worse off.

5. Ending contracting out

I do not approve of phasing out S2P. It could even be extended to the self-employed. However I do approve of ending contracting out. The NAPF would like to end S2P and contracting out:

"Getting rid of contracting out would also reduce a lot of the administrative cost and complexity involved in running such schemes." (page 81)

Contracting out has been causing endless problems, as discussed on this website. ^x

6. An alternative to stakeholder pensions

On this website I advocate the establishment of new institutions. ^x

In conclusion, I am not advocating any change to BSP or S2P, and support the proposal of the EEF for a new funded national scheme. This is intended as an alternative to stakeholder pensions. Such an alternative is becoming increasingly urgent with the expected decline of S2P mentioned above. ^x

October 2005

Stephen Wynn