The Spectator

Help the aged

Pensioners seem doomed to a retirement on baked beans — bought with means-tested benefits.

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Andrew Smith, the Work and Pensions Secretary, resigned this week, so he says, in order to spend more time with his family. Or maybe he was peeved at some of the comments made about him by his colleagues. What is certain is that he didn’t resign for the reason he ought to have done: that the government’s policy on pensions has been a failure.

In 1997 our pension pots were brimming. Alone in Europe we looked forward to a well-heeled old age without impoverishing future taxpayers. Just seven years later, however, many seem doomed to a retirement on baked beans — bought with means-tested benefits.

The change in fortunes for pensioners, to be fair, can partly be blamed on the collapse of the stock market bubble. But this is far from the whole story. The FTSE-100 Index now stands a little higher than it did in May 1997, yet our collected pension fund assets have fallen in value from £812 billion to £708 billion. One of the reasons is that the Chancellor, in one of his first acts in office, damaged the incentive to contribute to a pension fund by abolishing tax relief on dividends. He perhaps calculated that few would understand this tax rise and that in any case the booming stock market would help to cover up his raid. Yet the effects are now all too clear, with returns sluggish.

The government is not entirely to blame, either, for the collapse in income suffered by recently retired pensioners: thanks to falling annuity rates a £100,000 pension pot will currently buy a 65-year-old man an annual income of under £5,000, compared with about £10,000 in 1990. Low annuity rates go hand in hand with low interest rates, which in other respects are a good thing. Yet the government could very easily have alleviated the problem for pensioners by abolishing the rule which forces us to use our accumulated pension funds to buy an annuity by the age of 75. This is an iniquitous rule in several respects: if the annuity market happens to be depressed on our 75th birthday, we cannot delay in the hope of getting a better deal. Worse, a terminally ill 75-year-old is forced to swap a capital sum, which could have been used to support dependents, for a lifetime income, even when he knows that that lifetime is unlikely to last more than a few months. The Conservatives have several times attempted to have this rule abolished through three Private Members’ Bills and an amendment to the current Pensions Bill. But each time the government has squashed it.

The government has done so because it is preoccupied with the interests of public sector workers. Nurses, civil servants and diversity officers do not need to worry about annuities because they are guaranteed ‘final salary’ pensions underwritten by taxpayers. For the same reason the government bitterly resisted the demands for compensation for 60,000 private sector workers who have lost their pensions as a result of the firms for which they worked going out of business. It took a threatened rebellion by 200 Labour backbenchers, and the potential loss of the entire Pensions Bill, for the government to set up a £400 million fund to alleviate hardship for those affected.

There are some welcome clauses in the Pensions Bill. It will set up a pension protection fund to compensate those who lose their pensions as a result of future company bankruptcies. We will be allowed to defer payment of our state pensions until the age of 70 in return for a larger pension then. But as Pensions Secretary, Andrew Smith otherwise ignored the fundamental problems behind current pension provision: that we are living longer yet retiring earlier. Ultimately, it is unrealistic for us to expect to work for 30 years and then spend another 30 or 40 years on cruises funded by pension contributions made during our brief careers. As we have argued before in these pages, the longer we live, the longer we must work. There is a case for raising the age at which the state pension can be taken to 70 for everybody.

The government has promised to introduce legislation in 2006 prohibiting age discrimination by employers who set mandatory retirement ages. This will be welcome: a similar law passed in the US in 1986 increased the number of over-65s in employment by 15 per cent. One of the joys of visiting that country nowadays is to be served in shops and restaurants by eager white-haired men and women who have chosen to stay at work because they love their jobs.

But it isn’t just the private sector that has been guilty of age discrimination. It is absurd that healthy teachers and doctors are being forcibly pensioned off in their sixties when there is a shortage of new recruits to replace them. The mandatory retirement age for doctors is a recent phenomenon: it wasn’t long ago that Britain’s oldest GP was still seeing his patients in his nineties.

By swanning off to spend more time with his family at the age of 53, Andrew Smith exemplifies the problem of early retirement that has become endemic in the public sector. As it happens, he has done the nation a favour by leaving his job. But it is regrettable that his reward for failure, when he leaves Parliament, will be a final salary pension beyond the wildest dreams of most of the taxpayers who are obliged to underwrite it and who, as a result of the government’s policies, will find themselves living in a penurious old age.