The pensions debate that’s not getting any younger

Of course, work and pensions are both hugely important issues, not least in the election campaign. The government is promoting employment as being at the heart of its economic record, but pensions have made a very late entry into the campaign.

The Conservatives plan to reverse reforms (introduced under a Tory government) that linked the basic state pension to prices, not earnings, and have claimed means-testing is wrong. Shadow secretary of state for DWP David Willetts has also been promoting an incentive scheme to get people to save for retirement with a “lifetime savings account”.

The Liberal Democrats, similarly, will restore the earnings link, and hence increase the value of the basic state pension, and will give extra help to those over 75.

Meanwhile, Labour has been rather quiet on the pensions question. The Pensions Commission, set up by the government to review private pensions, will (perhaps conveniently) not report until the autumn.

The Conservatives claim that the result of the government’s pensions agenda to date has been the creation of a society where it is easy to borrow and hard to save. It is certainly the case that the current complexity of the available pensions options makes it very difficult to know what is the best strategy in planning for retirement.

The boom in buy-to-let is part of a trend in which housing is seen as a form of pension. However, we are becoming increasingly aware of the consequences of buy-to-let, in particular on house prices as they are pushed out of reach of first-time buyers. The interim report of the Pensions Commission, published last year, was emphatic that individual investment in housing is not the solution to the pensions crisis.

The Conservatives claim that the government’s pensions agenda has created a society where it is easy to borrow and hard to save

Another way to ensure people provide for themselves is to compel them to do so. Compulsion is one of the key issues the Pensions Commission is assessing and has precedents in other countries. Australia has a largely successful “superannuation scheme” introduced over a decade ago, which is essentially a compulsory savings scheme.

But one of the political risks of compulsion is that the public is likely to see it as a tax rise. Another option is for people to work longer, and hence defer the need for a pension, but this is highly unpopular.

So what is the solution? At the heart of the problems with the current pensions system is that its complexity leaves everyone baffled and disengaged, and that savings incentives don’t work. The current key incentive is tax relief on pensions savings, but there is little evidence of the impact of this relief on how much people save. Yet the relief costs the Treasury billions each year and is hugely regressive: the more money someone earns, the more tax they pay, and so the more relief they get if they save.

A much better alternative would be to match people’s savings in a clear and transparent way. For example, for every £10 saved, the Treasury could give £1. This type of incentive is already being piloted in the government’s Savings Gateway, and the Conservatives’ plans for new incentives would work along these lines.

Finally there is the issue of complexity. Often complexity in public policy is viewed as a necessary evil, to ensure policies reflect complex circumstances. But the cost of complexity can be huge. Its role in the failings of housing benefit is all too apparent; likewise with pensions. The interaction between the current heavily means-tested system, with an aspiration that more people will save for their retirement, leaves people unable to make informed choices about their futures. If we are going to get anywhere, simplification has to become a priority.