Pensions crisis 'as great a threat as terrorism'

Jul 06 2004 by Brian Amble Print This Article

Britainís pensions crisis is as great a threat to society as terrorism or global warming David Willetts, the Shadow Work and Pensions Secretary, has warned, and could affect the shape of the British economy for decades.

Willetts outlined his apocalyptic vision of the future in a lecture to the think-tank Politeia, predicting that the continued failure to address the shortfall in pensions provision could lead to companies going bankrupt, taxes rising, labour mobility reduced, local government in crisis and charities collapsing.

"The scale and implications of the pensions crisis is still not understood," Willetts said. "But I believe it is up there with terrorism or global warming as a threat to much of what we value."

"Above all, it is a threat to the living standards of generations of pensioners. This crisis is going to change the shape of the British economy and indeed society for decades." Britain also risked the emergence of a damaging rift between the pension Ďhavesí and Ďhave-notsí, he said, with resentment growing of public sector workers and staff in large companies who had final salary pension schemes as the majority of people were forced to rely on riskier, less lucrative money purchase pensions or an inadequate state pension.

He predicted particular problems with local government pensions if deficits forced councils to increase local taxes so as to extract more money from local residents, many of whom don't have a final salary pension, in order to help employees of local government who do.

The pensions crisis is "the biggest single disaster" of Gordon Brown's Chancellorship, Willetts went on, although he acknowledged that the handling of pensions by successive Governments had been wrong and that Tory policy in the late 1970s that broke the link between earnings and the basic sate pension had been a mistake.

ďA nation that is saving as little as we are is heading for long-term welfare dependency. We are getting trapped in a vicious cycle in which low personal savings leads to more dependence on means-tested welfare which further destroys the incentive to save.Ē

Britain, he warned, "is heading for long-term welfare dependency" that can only be reversed by encouraging people to save and encouraging suppliers of long-term saving.

"We need to make savings more attractive. That is why we have to reverse the spread of means-testing. It also means increasing the returns that pensioners get on their savings.Ē

Amongst the proposals put forward by Willets to tackle the problem is the idea that the government should issue special bonds which pay more the longer people live.

This would ease the pressure on company pension funds and insurance companies, which could reduce the reserve funds held in case their pensioners live longer than expected.

He also suggested scrapping the legal requirement that at least three-quarters of an individual's pension fund must be spent on a compulsory annuity.

On state pensions, Willetts would restore the link between the basic pension and with earnings, raising its value over several parliaments while gradually phasing out the means-tested state second pension.

But the National Association of Pension Funds (NAPF ) and the Pensions Policy Institute, both of whom have called for the current system to be replaced by a simple flat-rate benefit based on residency rather than work history, were lukewarm about the Tory proposals.

"We need something much more urgent and radical," said Christine Farnish, chief executive of the NAPF. "We cannot afford to drift for another 20 years with the current complexity and all its disincentives to save."