Reforming pension schemes

Probably the most uncomfortable socio-economic truth that politicians, government and the financial services industry have to date preferred to ignore is that in their present form, public as well as private sector workplace pensions are no longer sustainable. The dearth of value-for-money products from insurers and the ineffective and poorly drafted government regulation of the last 20 years has destroyed our once world-beating system (see Building 20 July). What we’re left with must be the biggest “government-approved” pensions miss-selling scandal of all time and has to be completely reformed before it permanently damages our economy.

The replacement system should be the very best our siege economy can support, applying without exception to all employed people in the public and private sectors, the self-employed, and especially to politicians. The benefits must be shared equitably and proportionately between all these groups through an affordable universal workplace pension.

Control of the system must be vested in an independent board that represents the interests of all pensioners rather than just those of the self-interested pensions establishment

By omitting any reference to age or length of service and so removing the principle of “insurance”, the universal workplace pension can provide much better value for money for both employees and contributing employers, provided pensions are only paid on a monthly drawdown basis to avoid the prohibitive costs of buying annuities. Pensions payable should be based on the value of the employee’s individual pension pot accumulated by retirement date, just like the current small self-administered pension systems.

Past surveys have found that on pensions, the public most distrust the government, the insurance industry and their employers, in that order. The government cannot even be trusted to honour its Guaranteed Minimum Pension (GMP). Members of private sector schemes going into the Pension Protection Fund or Financial Assistance Scheme find their GMP, like the rest of their pension entitlement, reduced and stripped of its inflation indexation.

If we are to restore confidence in workplace pensions, the management and the ownership of universal workplace pension funds must clearly be seen to be independent of the government and the insurance/pensions industry, as well as contributing employers. Full control of the system must be vested in an independent board along the lines of the Bank of England Monetary Policy Committee that represents the interests of all pensioners and retirement savers, rather than just those of the current self-interested pensions establishment.

Universal workplace pensions must be a direct contractual arrangement between every employed retirement saver/pensioner and the board, with no one in between regulating or extracting fees or profits.

The fund (and so everyone’s pension) must be ultimately guaranteed by the government as one of the country’s major (but totally ring-fenced) assets. All contributions should be tax free.

Universal workplace pensions will be funded by employer and employee contributions as now, but scheme management costs, currently paid by employers, should be covered by the scheme. Longer term, payment of both state and universal workplace pensions could be combined.

Once these pensions are established, funds from all current workplace schemes can then be transferred into the universal workplace pension fund, which will pay full contracted benefits.

The government’s pension reform proposals appear to be just more of the old inefficient employer bashing that has created the current mess and will only make it worse. If readers want to see a workplace pension provision, available to employees of all sectors, that shares the nation’s affordable resources without the current discrimination and provides a guaranteed equitable return on a lifetime investment, then a universal workplace pension system is the only way to achieve it.

Colin Harding is a past president of the CIOB