The pensions blind spot

“All in it together? MPs WILL get a payrise worth up to 12%” thunders this morning’s Independent newspaper. While I’m not a big fan of our MPs, this headline has persuaded me that they deserve the payrise that apparently will be proposed by the independent body given the task of setting their pay. If even a supposedly more mature and considered newspaper like the Independent indulges in this kind of vindictive, misleading headlining, then something is clearly wrong.

This headline is revealing about how information is communicated in our society. First of all, no formal announcement has actually been made. The headline is based on a leak, which only reveals a partial picture. And yet by the time the full news is released, it will be old news. Speed trumps accuracy in the world of news media. The 12% figure is also misleading. It compares the proposed salary to be implemented in two years’ time to the current one. 9% is a more accurate number, and indeed this is what other organisations are reporting. Such considerations do not weigh heavily with headline writers.

But there is a further distortion. Apparently the proposal will be to reduce MPs’ pension entitlements at the same time – though the details don’t seem to have been leaked. So the total package will not be as generous as the headline writers make it sound. But here the journalists seem to be at one with the general public: treating pension entitlements as being of little real value, and failing to realise the implications of changes to it. Over the past couple of decades companies have been squeezing their employees’ pension plans hard, so that overall pension provision is now pretty meagre, when it used to be generous. This has barely reached the popular consciousness. Only public sector trade unionists have grasped that this is an fact a steady reduction in what people are paid.

There are in fact sound economic reasons for changes to pension arrangements. The proportion of pensioners to the working population is rising, and this makes pensions less affordable. Unfortunately high rates of pension saving don’t help change this dynamic much: this is one of those things that may work for individuals, but not for society as a whole. Pensions have to become less generous overall, and the collapse of private sector occupational pension plans is just part of that process.

But there is a big problem at the heart of it. Employers are in headlong retreat from pension provision, but individuals are not stepping forward into the breach to save more into personal pension plans. Even where they do, and they are being “nudged” into doing so by opt-out pension schemes, the amount being saved will go nowhere near providing for the scale of pensions the previous generation had been entitled to. This is sometimes offered as an example of irrational economic behaviour. But it isn’t. The transaction costs of saving weigh heavily on all but the very rich, and investment returns are dismal – even without the current regime of very low interest rates. Personal saving is a very inefficient way of delivering a pension for the majority.

It is better if the state steps in. A state-managed pay as you go scheme has comparatively low transaction costs, as well as reducing the risk to individual savers. Reforming the state pension is one of the more impressive achievements of the current Coalition government. It has been led by Lib Dem pensions minister Steve Webb, but it has not been politically contentious – the Conservatives deserve credit for letting him get on with the job – and Labour have not got in the way. Previous governments have changed their pensions ministers every year or so before any reform effort could get going. The focus has been on establishing a good basic pension to which everybody is entitled, which people can then top up through personal savings. Previous state schemes have tried to concentrate entitlement on the most needy, destroying the incentive to save, or to create complex entitlements based on income and contributions, which few understand because of the need not avoid double counting with subsidised private savings.

But the cost of this pension commitment will grow, and this is causing many sage heads to worry. Personally, I think we have to grin and bear it. If it looks as if it will run ahead of the ability to raise taxes, then we have to push the age entitlement back. But this is one of the critical strategic issues that our political leaders must grasp as our demography changes. Paying for the NHS is another.

These are weighty and important matters, which deserve much more attention than they get. They are much more important in the scheme of things than how much our MPs are paid. The country needs more MPs like Steve Webb, with both the intellectual and political skills to push forward difficult reforms like the one on pensions. We have a long way to go on that score.

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