Tinkering with pensions is not enough

The demographic time bomb that awaits us means a serious overhaul is needed. Are politicians up to it? Julian Knight investigates

Forget about the deficit. The real elephant in the room in this election is how the UK is going to pay for its future pensions.

During the "three leaders" debate on Thursday, in all the barrage of body language and "spin alley", not a single question was asked about pensions and how we can cope with the demographic time bomb. "Politicians don't think there are votes in pensions, so they just pay lip service to sorting things out without making any real changes. Here we are again at another election and little is being proposed to reform something which will impact tens of millions of lives dramatically," says Ros Altmann, a governor of the London School of Economics and former government adviser.

The parties do have some policies on pensions, largely revolving around reforming the basic state pension. But many of these will take cash – quite a lot of it – such as the Tories' desire to reverse Gordon Brown's grab of dividend tax credits on pensions – and are little more than aspirations. "When you look at the parties' policies, there is little firm about them. They are all longstanding strands, such as raising the state pension age," says Ms Altmann.

One of the few rock-solid commitments comes from the Lib Dems – but it's not seen as a positive one by most of the industry. They plan to abolish higher-rate tax relief on pensions to push down the budget deficit. "If you want to kill pension saving further, this looks like a good way to do it," says Tom McPhail, a pensions expert at Hargreaves Lansdown. "What good is there in further undermining the money that people make from pensions?"

Labour has started down the route of abolishing higher-rate tax relief by getting rid of it for those earning over £150,000, but again this has drawn fire. "I can understand they are trying to ensure tax relief doesn't go to the very highest earners, but it would be far easier just to simply cap annual pension contributions, say at £40,000," says Trevor Matthews, the chief executive of Friends Provident.

The main Tory rabbit out of the hat is the plan to end compulsory annuitisation of pensions. Savers will not have to use their pension pots to buy an income for life. This will give them greater freedom in old age to spend and invest and is is supposed to answer the big criticisms of pensions: that they are too restrictive and don't recognise that annuity rates have been steadily falling or that some people prefer access to their cash at retirement.

"The traditional pension isn't fit for purpose any longer. Telling someone to hand over money to an insurance company for years, with the goalposts constantly being moved, doesn't work – and even some insurers realise this. I'd scrap the word pension for a start and call it a 'life-saver', with people able to access their cash when they need it. Think of the middle-aged people whose houses are being repossessed who could access their pensions to stop it," says Ms Altmann.

But the Tories are not, as yet, proposing such a lifetime saver, just ending the requirement to buy an annuity. However, some leading figures in the insurance industry are not opposed to the idea of greater access. "I agree we have to get away from the idea of pensions as a locked box. Some access is reasonable: allow some lump sums in situations of genuine hardship without allowing the whole thing to evaporate. A good example is what is happening with individual savings accounts. Interestingly, despite the fact that you can get money anytime out of an ISA, most of it actually stays in place. You have to trust people a bit," says Mr Matthews.

It seems that there is more uniting the parties on pensions than dividing them, although this unity is largely one of silence. "Take away higher-rate tax relief and the Tories' plans to end compulsory annuitisation, and the three parties have common ground. But it's just not enough to reform the state pension system and leave the rest alone," Mr McPhail says.

Two key reforms of private and workplace pensions are likely to go ahead, whichever party wins the election. First, is the proposed introduction of Nests – workplace pension accounts into which workers will be auto-enrolled. "These accounts are far from perfect, but it's better to get people saving now and fix problems down the line," says Mr McPhail. However, Ms Altmann sees Nests as a potential mis-selling scandal of the future: "Many of the people who save in these schemes will find that because of means-tested benefits, they are no better off. In addition, employers that run their own schemes will level down to the low contribution level specified under Nests. Today's politicians will not be around to be accountable for the mess they wouldhave created," she says.

The other reform is the setting up of a free network of financial advice – the Consumer Financial Education Body – proposed by Aegon chief Otto Thoresen. "Individuals need support and motivation to save for their retirement. Auto-enrolment into Nests doesn't provide enough advice and guidance for workers so their hearts and minds are behind the project," says Francis McGee from Aegon. "Whoever wins the election, it's essential they stop tinkering, so people can invest with confidence. Many talk about a cross-party consensus. What we need is cross-public – employers and individuals working together. The truth is the demographic time bomb that has been talked about is starting to go off," says Mr McGee.

Perhaps, taking the politicians out of the pensions loop will be the ultimate answer, says Mr Matthews: "We need a Pensions Commission with ongoing policy-making powers able to administer the system and provide a holistic approach." If Mr Matthews gets his way, pension questions may not feature in any future leaders' debate.