The role of private insurance
and occupational pensions
108. The Government's 1998 Green Paper on welfare
reform listed as a key principle that "the public and private
sectors should work in partnership to ensure that, wherever possible,
people are insured against foreseeable risks and make provision
for their retirement."[194]
In its 1998 Green Paper on pension reform, the Government set
out measures designed to reduce the share of pension income coming
from the State from the present level of 60 per cent to 40 per
cent by 2050.[195]
The expectation is that the private sector, which currently accounts
for 40 per cent of pension income, will increase its share. As
Ms Bennett commented, "the relationship between state and
private provision for risks and savings is therefore changing,
with potential implications for the contributory principle."[196]
109. Professor Alcock described the relationship
which Beveridge saw between state and private provision as follows:
"The way in which I
think Beveridge originally conceived the relationship between
those two systems is that they were mutually compatible. You could
have social insurance and private insurance operating alongside
each other because everybody would be clear about what their social
insurance rights were and could then use private insurance in
order to build on those, so it would be a quite separate relationship
which would develop as an individual through a commercial base."[197]
The TUC saw private insurance as providing a useful
supplement to social insurance, but argued that it could not be
assumed that private provision could substitute for state support:
"While unions are proud
of their record of negotiating high quality benefits from employers,
especially pensions, we are also aware of the fact that many workers
are not covered by these schemes, and that those outside the labour
market are, by definition, unable to benefit from them. Without
statutory rights to such benefits reliance on occupational provision
will produce patchy coverage which misses those who need it most."[198]
110. The limitations of private provision were pointed
out by many groups.[199]
Research carried out by Disability Alliance and the Disablement
Income Group found that those people most at risk were the least
likely to obtain affordable (or any) private cover. Thus "disabled
people, women, people in manual occupations, part-time or casual
work, or with interrupted work records, were the least likely
to belong to an occupational scheme. Those with a pre-retirement
disability tended to get less occupational pension than non-disabled
colleagues.[200]
The Low Pay Unit drew particular attention to the lack of an alternative
to the State Retirement Pension for low paid employees with no
access to occupational schemes. They pointed out that around three-quarters
of full-time employees have access to company pension schemes
compared to less than half of part-times. Almost all full timers
(97 per cent) get occupational sick pay compared to two-thirds
of part-timers.[201]
111. Individual's contributions are not affected
by the likelihood of unemployment, sickness or long-term disability.
In contrast, private insurance links an individual's premiums
to their level of risk.[202]
We agree with the Social Security Advisory Committee, who when
they looked at this issue concluded:
"In the fields of
incapacity, disability and unemployment, we see little scope for
developing private provision to an extent which would impact on
state benefits. There is clearly a market for private insurance
in these fields and it will doubtless continue to develop, as
it has done in recent years to meet new needs. However, we believe
that the state should remain the major provider of benefits for
long-term sickness, disability and unemployment. The universal
coverage of the state scheme is its great virtue and is essential
for the protection of the most vulnerable who might find private
cover difficult to afford or even to obtain, if they represented
a high risk."[203]
112. In the case of private and occupational pension
provision, the Government has acknowledged that "lack of
knowledge, the Maxwell affair and the mis-selling of personal
pensions has left many people lacking confidence and trust in
any type of pension arrangement. People are not sure where to
get advice and who they can trust. Much of the information that
is available is of poor quality. Because of this, many people
run the risk of making the wrong pension choices, their confidence
and trust in pensions may be undermined and they may be put off
saving altogether."[204]
113. The Government has introduced legislation designed
to increase state pension provision for the lowest paid, whilst
encouraging greater private provision for people on modest incomes
and above. Most immediately, it has sought to boost the incomes
of present day pensioners through the means-tested Minimum Income
Guarantee (see paragraph 78 above). In the longer term, in a scheme
which will fully mature in 2050, the Government has proposed legislation
to replace the State Earnings Related Pension with a new State
Second Pension aimed at people on low or intermittent earnings,
for whom the cost of private, funded pensions are out of reach.[205]
Carers, some disabled people and mothers with young children will
receive flat-rate credits to the new State Second Pension. Those
earning below £9000 a year, including carers, will be better-off
under the State Second Pension than at present because they will
be treated as if they had earnings at that level. The Secretary
of State told us:
"we are benefiting some
six million low paid people, some two million carers, three million
disabled people with broken work records, by developing the contributory
principle and the contributory system through the new state second
pension.[206]
114. For those on incomes between £9000 and
£18,5000, the Government has introduced measures designed
to encourage greater private provision through the introduction
of low cost stakeholder pension schemes, and higher National Insurance
rebates.[207]
In order to combat the lack of confidence of many people in private
provision, stakeholder pensions will be obliged to conform to
minimum standards, for example on charging and flexibility, and
have an approved structure of governance designed to ensure that
schemes are run in the interests of members, are value for money,
and give good quality information. For all middle and higher earners,
the aim is that all should have private, funded pensions.[208]
115. We do not propose to embark on a detailed analysis
of the Government's plans for pension reform, save to comment
on three aspects which are relevant to our inquiry. We see no
contradiction between a contributory system delivering state pensions
and parallel private provision. However, the background to the
Government's proposals is the declining value of the basic 'first
pillar' of pensions, the State Retirement Pension. The basic state
pension currently provides about a third of all pensioner income
and is the largest single source of support.[209]
The decision of the Government in 1980 to link the uprating of
the pension to prices not earnings has caused its subsequent value
to drop significantly. According to the Government Actuary, with
continued uprating of basic retirement pension in line with prices,
by 2060 it will be worth only around six per cent of male average
earnings.[210]
116. CPAG told us, people are having to move towards
private provision, not out choice but "because they are frightened,
they are anxious about what sort of protection they are going
to receive from the state."[211]
Age Concern said it was dismayed at the Government's simplistic
view that decent state pensions are not affordable, and therefore
the answer is more private provision:
"This ignores the fact
that all pensions, whether private or state, funded or pay-as-you-go
represent a transfer from one generation to another. As the Pensions
Provision Group states[212]
'More pre-funding is not a panacea ¼.
However they are provided, pensions are a charge on the economy
at the time they are paid'. The Government Actuary[213]
has also argued against relying too heavily on private funded
provision stating that in his view the best option is a 'reasonable
level of largely flat-rate pay-as-you-go social security provision
as the basic first pillar'. Age Concern believes that in order
to achieve better pension provision, overall we must pay more
towards pensions, and this is likely to need improvements in both
state and private provision."[214]
117. The state pension is the foundation of pension
provision. Whilst we accept that individuals may well choose to
supplement the state pension provided from compulsory contributions
with additional voluntary provision, we have come to the conclusion
that the state must ensure that every citizen has a sound financial
platform on which to build. We note the Government Actuary's view
that "real earnings growth will result in working people
being relatively better off in future even if National Insurance
contribution rates were to be increased to meet the cost of increasing
flat-rate benefits in line with earnings. Based on gross pay and
real earnings growth of 1.5 per cent per annum, real earnings
relative to prices will, in the year 2060, be approximately 2.5
times the corresponding level in 1999-00. Allowing for higher
National Insurance contribution rates and earnings limits, someone
on average earnings would still have real net earnings, after
National Insurance contributions, of approximately 2.4 times current
levels."[215]
We are mindful also that the State Second Pension will not fully
mature until 2050.
118. A second area of concern is the relationship
between the State Second Pension and the Minimum Income Guarantee.
We agree with the present Government, which in its Green Paper
on pension reform said that "people who work all their lives
should not have to rely on means-tested benefits when they retire."[216]
The intention of the State Second Pension is to allow people who
receive it to retire at a level of income which puts them above
the qualifying level for the Minimum Income Guarantee, thus avoiding
means-testing. The problem, however, is that the Government has
given no commitment that the State Second Pension will be uprated
in line with earnings. In contrast, the Government is committed
to uprating the Minimum Income Guarantee in line with earnings
through the remainder of the Parliament. The danger is that pensioners
who have paid National Insurance contributions throughout their
working life and who retire on the State Second Pension will find
themselves, within a few years, worse off than pensioners on the
Minimum Income Guarantee. The risk is likely to increase in the
longer term as the value of the basic state retirement pension
diminishes. It is unclear whether the Second State Pension will
expand to meet the shortfall. Such a scenario would make a mockery
of the principle that the pension system should reward work.
119. Finally, we have reservations about the Government's
decision that payment into funded pensions, including stakeholder
pensions, should be on a voluntary basis. Through the State Second
Pension, the Government recognises that saving for old age is
impossible for people on the lowest incomes. It must also recognise
that saving for old age is not at all easy for people on modest
incomes of over £9000. In Australia, we were impressed by
the widespread public support for compulsory superannuation. A
survey by the Association of Superannuation Funds of Australia
found that there was 97 per cent support for compulsory superannuation,
while 60 per cent of those surveyed were willing to contemplate
paying higher amounts than the 9 per cent of earnings planned
for 2002. The Chief Executive of the Association told us that,
although people in Australia were normally against compulsion,
they knew they needed the discipline to save. Compulsion also
removed the potential for a sense of unfairness: everyone else
was having to save as well, to prevent them from being a burden
on the taxpayer. However, this was in the context of contributions
in Australia being compulsory for employers only. There was some
scepticism as to whether compulsory employee contributions would
attract the same support. The level of employer contribution in
Australia was regarded by many as not sufficient to provide a
reasonable pension level in the long term. We agree with Mr Field
who told us, "you cannot run it on the basis of allowing
people to choose in these basic areas because there are always
more pressing needs and always the thought: 'well, if I do not
make the contribution, taxpayers will pick me up later on.'"[217]
We consider that a compulsory rate of saving for pensions may
be essential to ensure that everyone is helped to make proper
provision for their old age. This is particularly important for
those on modest incomes who face a number of competing financial
demands and where making provision for old age will not always
receive the priority it deserves.
120. There is a clear and urgent problem in meeting
the needs and expectations of less well-off pensioners, particularly
those just above Minimum Income Guarantee level, in the light
of growing inequality within the range of pensioner incomes generally.
Our inquiry has identified possible causes and solutions, including
the prima facie need to increase the basic state pension,
but we do not wish to prejudice our more detailed inquiry into
pensioner poverty issues by drawing conclusions and making recommendations
before that inquiry is completed. The evidence we have collected
as part of this inquiry will help inform our deliberations on
this vital concern as our pensioner poverty inquiry progresses.
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