The pensions revolution arriving by stealth

By Philip Johnston

Nick Clegg’s fatuous suggestion that parents nearing retirement should be encouraged to use part of their pension fund to finance the house purchases of their children is impossible to take seriously. Not simply because it was so evidently written on the back of a fag packet, or whatever is the modern PC Lib Dem equivalent – a muesli box, perhaps. But mainly because it clashes so spectacularly with the important message that the Government is trying to get across at the moment: namely, that people need to save more for their old age because the state won’t be able to support them. The idea that a quarter of a pension pot as small as £40,000 should be diverted into the housing market, with all its attendant uncertainties, is not so much foolhardy as insane.
 

In any case, people can already take 25 per cent of their pension in a tax-free lump sum from the age of 55 and spend it as they choose, including using it as a deposit for an offspring’s first home. So it is not clear what Mr Clegg is offering in addition to the existing rules. Surely we can make up our own minds what to do with our own money without the Deputy Prime Minister’s help and guidance? If, however, he is proposing that some pension money could be assigned to a mortgage before the age of 55, that is especially dangerous, since no one knows how the funds, linked as many of them are to shares, will perform. Perhaps they will turn out to be as bountiful as those wonderful endowments we were all sold in the halcyon days of the Eighties, promising to pay off the loan with “that little bit extra for the holiday you always wanted”? There was such a shortfall in my policy that I sold it years ago. Thank goodness I didn’t plunder my pension as well.
 

Moreover, Mr Clegg is only talking to around a third of the workforce in occupational pensions; the rest don’t save for their retirement. Which is why, next week, one of the biggest social changes in 100 years will begin to take shape: the automatic enrolment of employees into a pension scheme. This policy is so unheralded that many of those about to be signed up are unaware of its existence. Yet by Christmas, an estimated 600,000 staff in large companies will be enrolled on to schemes, unless they opt out. This will then be extended to millions more working in smaller firms over the next five years. Those opting out will be re-enrolled every three years until they give up and stay put. Ministers hope that apathy will be the saver’s friend and that most employees will be in a scheme by 2017.
 

This is a far-reaching measure, on a par with the introduction of the state pension by David Lloyd George in 1909. It is, indeed, the first attempt to force people to save since the National Insurance Fund was established after the Second World War. This, of course, was supposed to be a ring-fenced pot of money into which we all paid part of our income, topped up by employer contributions, to help us when we were in need. Many people still believe the NICs they pay are being invested for their retirement, when in reality the money is used to pay for current social spending. As the post-war Labour minister, Aneurin Bevan, said: “The great secret about the National Insurance Fund is that there ain’t no fund.” More than that, the Treasury has for some years used the fund’s annual surplus (this year about £38 billion) to pay down the national debt, in order to spend more on other public programmes rather than on improved pensions and benefits.
 

Since the state cannot be trusted to spend the money it takes off us prudently, the only way forward is for people to make private provision for their future. Financial experts sense that the automatic enrolment initiative is the precursor to mandatory saving schemes from which it will be impossible to opt out. That would be administratively more straightforward, but is it what we want? After all, public trust in pensions has been declining sharply. Figures released earlier this month by the Office for National Statistics showed that the number of private sector workers paying into pension schemes has plummeted to its lowest level since records began in 1953. The Government says 11 million people are not saving enough for their retirement; and while pension saving has fallen across all age groups, the decline has been steepest among those aged between 22 and 29, falling from 43 per cent in 1997 to 24 per cent today.
 

 
Given the complexity of our pensions regime, this is hardly surprising. But it also has something to do with an ingrained scepticism about what might happen to the money. Once it is in a private fund it should be far removed from government predation; but who would bank on that? Gordon Brown’s tax changes had a huge impact on occupational schemes, from which they have yet to recover. Confidence has been hit further by a succession of scandals, both criminal and financial, and by the way fees and charges have undermined annuity values.
 
But the fact remains that with people living longer than was expected just 20 years ago, the notion that the state will be able to continue providing a pension that comes close to subsistence level is fanciful. From October 1, we will be witnessing the beginning of a gradual transfer of responsibility for looking after people in their retirement away from the general taxpayer and on to the shoulders of pension recipients and their employers. Mind you, given the state’s record in this field, perhaps we should take Mr Clegg’s advice and blow some of it in the property market – or the nearest casino. /Telegraph