Scrutineer: End the revolving door at the pensions department

Published on Sunday 7 June 2009 21:10

WELCOME aboard, Yvette Cooper. Yvette (aka Mrs Balls) is no mere window dressing but the government's latest "work and pensions" supremo.

But do you feel a tad confused about the comings and goings of pensions ministers? You're not alone. As of last night Cooper was the ninth secretary of state with responsibility for pensions since 1997. I am indebted to insurance giant Aegon for providing me a helpful aide memoire list of those who have hopped, skipped and jumped through the pensions brief over the past 12 years. Previous illustrious office holders include Harriet Harman, Alistair Darling, Alan Johnson, David Blunkett, John Hutton, Andrew Smith, Peter Hain, and of course James Purnell. At least Purnell had 18 months in the job compared with Hain, who lasted just six months, and David Blunkett who only stretched to seven.

Adding in the number of ministers, the grand total of politicians who have passed through the pensions department's revolving door is 19. (And that's not including any replacement for pensions minister Rosie Winterton, now appointed to lead regional development policy, and who will be now reporting to Peter Mandelson, Lord of All He Surveys and Much Else Besides.)

And what is it that all these talents share in common? They have all haplessly presided over a progressive collapse in Britain's pension system. Indeed, they have allowed a triple crisis to develop. The first crisis is the ever widening black hole that is public-sector pensions. In 2006 the government estimated the cost of the unfunded liabilities of these at 650 billion. It has since refused to publish an updated cost – and that figure is likely to be an underestimate as it relies on unrealistically low life-expectancy figures.

In a report late last year, the Confederation of British Industry put the cost at 915bn. But it admits even this is a "conservative figure … Many commentators calculate the true liability to be well over 1 trillion".

Rather than reducing the burden, the government is allowing it to increase by 10bn every year because not enough money is being paid in contributions.

An estimated 90 per cent of the public-sector workforce is signed up to a defined-benefit scheme, with the average pension said to be worth three times as much as a private-sector one.

Pension schemes for local government officers and MPs are funded. But five million people – including civil servants, teachers, NHS staff and members of the armed forces – are enrolled in schemes for which no money is set aside.

The second crisis is in private-sector pension funding. This is also in disarray. Today the vast majority of final-salary schemes in the private sector are closed to new employees and many are well along the road to closing for future benefit accruals for existing members too.

Part of the reason, says Steve Bee, pensions guru at Scottish Life, is that employers have had to cope with a blizzard of pension legislation in recent years and at the same time have had to account for their long-term pension promises to their employees on a short-term basis. Fluctuations in scheme balances can thus directly affect the bottom line of their annual accounts.

Since 2004 there has been an additional burden placed on employers who run final-salary schemes, as they are now required to support the employees of other businesses through the Pension Protection Fund.

Bee says: "The combination of these factors during recessionary times like these would have been enough to have triggered off the closures of many schemes. But coming as they have hand-in-hand with unprecedented increases in longevity and an increasing tax burden on pensions, it's all turned into something of a 'perfect storm'."

The third crisis has been a dramatic shortfall in pension saving, partly through a toxic combination of government tax raids on pensions, poor performance of pension funds and loss of public confidence in the value of saving.

And what has a progression of successive ministers done on any of these fronts? Almost nothing whatever – other than to establish a powerful case to stop this department being used as a stepping stone for "here today, gone tomorrow" politicians.

We need a tax-free shelter for pension saving; we need an end to the torrent of regulation that has driven up scheme costs, and we need a compelling – and tax-attractive – set of options to encourage pension saving from an early age.

Above all, we need a savings champion to help the transfer from public to private pension provision. Over to you, Yvette.