Why not abolish the state pension altogether?

COMMENT: 'The effect during the years of transition is that we will pay twice - once through our taxes for those already in retirement and a second time by paying the funding costs of future pensions for those joining the workforce'
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The Independent Online
To misquote a famous advertisement for lager, "It's bold, but not that bold". Billed as the Government's big election idea, the planned pensions shake-up is not, when examined closely, as radical as it seems at first flush. Nor are its effects on the public finances as great, either in the short or long term, as might be thought.

What the Government could and perhaps should have done was to abolish the state pension altogether for those under the age of 25 and made the provision of private pensions compulsory, subject, of course, to the usual safety net. What is proposed, notwithstanding Labour's siren warnings, falls a long way short of this uncompromising but eloquent and rather more realistic approach to the problem.

The essence of these proposals is not an abolition of the minimum state pension at all, but a privatisation of it; the money still comes from the government but the pension becomes funded rather than paid out of current government revenues.

The effect during the years of transition from a pay-as-you- go to a funded minimum state pension is that we will pay twice - once through our taxes for those already in retirement and a second time by paying the funding costs of future pensions for those joining the workforce.

According to Andrew Dilnot of the Institute of Fiscal Studies, the accumulator effect of this phenomenon on the public finances would be approaching pounds 2bn annually after 10 years, equivalent to 1p on the basic rate of income tax.

This will, to some extent, be offset by the proposed reversal in the tax treatment of pensions. The Government wants to make voluntary pension contributions payable out of net income, rather than gross, the quid pro quo being that pension income would be tax free. In itself, this is a reasonable enough thing since it will put pensions on an equal footing with other forms of savings like Tessas and PEPs. But the real benefit of it from the Government's point of view is that it provides a very considerable cash flow benefit, a one-off boost to tax revenues.

Even so, it is not going to be enough to offset the paying twice phenomenon. So the net effect of these proposals is that tax and spending are going to be higher, not lower.

The real difficulty with this big idea, however, is that it only partially addresses the true problem. This is not, as widely thought, some great demographic explosion in Britain's pension costs, for if the present arrangements were left as they are, national insurance contributions would actually fall. No, the problem is not that we cannot afford the present system, but that it provides a level of benefit that falls a long way short of our expectations. In that sense Britain faces the very reverse of what our European partners are grappling with, where the difficulty is very generous state and company pension arrangements but not enough money to pay for them.

Funding the state pension goes some way to solving the problem, for at least future generations of pensioners will get the benefit of an accumulated investment return. Even so, the state pension will fall a long way short of the decent living wage people expect in their old age. The fundamental problem of how to force people to save adequately for their declining years is not being addressed at all.

Tobacco deal is still a long way off

The tobacco companies put their finger in the dyke 40 years ago and have held back the flood of litigation with relative ease ever since. They have had a good run when you consider the overwhelming weight of evidence against cigarettes, but it was never going to be possible to shore up the defences indefinitely against the might of the US legal system.

Yesterday's admission by BAT's chief executive, Martin Broughton, that the company would consider any "sensible proposals" from the lawyers queuing up to sue can be seen therefore as a pragmatic assessment of a lost cause. Sooner or later a case will go against the industry and when that happens, legal costs of $100m a year will seem a minor irritation compared to the crushing financial costs that will follow.

Any deal, however, will remain elusive as long as there is such a yawning gap between the expectations on both sides. The American tobacco industry makes a profit each year of about $6bn and the lawyers aren't minded to settle for much less than that. BAT hints it might be prepared to pay as much as $100m a year - which is what it spent last year on legal fees - in exchange for immunity from all present and future litigation. It's a big gap.

Two further problems remain. Assume a deal is struck between the tobacco giants and the plaintiffs whereby a proportion of profits are paid each year into a fund from which victims would be compensated and states reimbursed for their outlay on Medicaid. For such a levy to have any meaning, restrictions would have to be imposed on the companies to prevent them simply passing the cost on to consumers. Such a level of state intervention is simply inconceivable in America and it would never get Congressional approval. A deal is a way off yet.

Sir Bryan follows a well-trodden path

What are we to make of the appointment yesterday of Sir Bryan Carsberg, former head of the telecommunications watchdog Oftel, to the board of Cable & Wireless Communications?

BT was full of indignation. What? Sir Bryan on the board of a competitor company so soon after leaving the sensitive post of regulating the telecoms industry? But perhaps in all the excitement of merging with MCI, BT's corporate memory has become clouded.

Wasn't it the then Norman Tebbit who joined the BT board in the very same year as he quit the Cabinet and only two years after leaving the post of Secretary of State for Trade and Industry where he was directly responsible for the telecoms industry?

By contrast, Sir Bryan's period of quarantine seems positively epic. It is now five years since he left Oftel. If, after all that time, there is still an element of the old boy network in operation, it is in the way Cable & Wireless was awarded a mobile telephone licence in the late 1980s. Lord Young, who was then in charge at the DTI, says it was Sir Bryan's decision. The rest of the world assumes it was down to Lord Young himself who, of course, went on to chair C&W.

There is a very simple way of resolving these difficulties. Ban all politicians, senior civil servants and regulators from taking up sinecures with companies they have previously been responsible for. That, however, really ought not to be necessary. Experience should teach companies and their investors to steer well clear of ministers and civil servants seeking a comfortable berth. British Steel, British Gas, NFC and, of course, BT have all underperformed the market after employing the services of former ministers. Could C&W Communications be the one to buck the trend?

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