Government policies risk pensions paralysis

2004

As the Labour Party Conference opens this week, the government's pensions policies have come under renewed attack for discouraging saving and causing ' pensions paralysis'

According to research carried out for the latest quarterly Pensions and Savings Index from the Association of British Insurers (ABI), means testing penalises those who save for their retirement and actively deters others from saving at all.

Half of those questioned for the survey said that they would be persuaded to start saving or increase their saving for retirement if the Government promised “that they would not reduce your entitlement to state benefits because of your pension.”

According to the ABI, three-quarters of those starting work today will be on means-tested benefits when they come to retire if the current policies were to continue, something that the ABI said is "just not sustainable".

In particular, means-tested benefits cost ten times as much to administer as the basic state pension – the Pensions Policy Institute claims that some 18,000 civil servants are required just to administer the pensions credit system.

The ABI's Director General, Mary Francis, said that while it is impractical to abandon means-testing entirely, "the less we rely on it the better".

"Too much means-testing disincentivises private saving. It creates consumer confusion at best and pensions paralysis at worst - people do not know whether they will be better off saving or taking their chances with means-testing," she said.

Last week global economic think-tank the OECD warned that Britain risks labour shortages and economic slowdown because of the "adverse effects on incentives to work and save".

The ABI research also highlighted just how far public trust has been eroded in a pensions system they do not understand.

Almost two thirds of people do not feel confident that they will have enough money to live comfortably in retirement while eight out of ten do not trust the government to keep its word on pensions.

The ABI has urged the government to simplify the system by increasing the state pensions for people earning less than £15,000 a year, reducing the reliance on means-testing, increasing incentives to save for a private pension for those who can afford to do so and keeping the state pension age at 65.

Others, including the National Association of Pension Funds and the Pensions Policy Institute have called for a simple flat rate pension paid to anyone who satisfied a minimum residency test.

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