The End of an Era in Pension Reform

By Professor Deborah Mabbett

The Financial Times (20 March) called it ‘the biggest pensions revolution for almost a century’ but their timing is a few decades out. The Chancellor’s budget announcement on the lifting of constraints on drawing down retirement pension pots is the end of an era that began, not in 1921, but in the 1980s. Under Thatcher, the government sought to curtail spending on the state pension and promote private provision of retirement income. Private pensions would, supposedly, perform so well that state provision could die back under the heavy mulch of the funded layer, managed by our cutting-edge financial services industry and reaping the high returns that followed the big bang of financial market liberalisation.

What happened instead was that the inadequacy of the National Insurance pension, linked to prices at a time when wages were rising strongly, brought increasing numbers of elderly people into the means-tested part of the social security system. This system was made more generous under Labour, which at least did something to address the problem of pensioner poverty. But it damaged the strategy of promoting private funded provision, because savers faced a ‘better off’problem. Basically, it was not worth saving for retirement if the expected level of savings was insufficient to steer clear of means-testing.

It was against this background that the Turner review found that we must return to a basic state pension, whether universal or contributions-based, which would be adequate to live on, so that means-tested supplementation could be put back in its box. This was strongly supported by the financial services industry, which had detected the potential for another mis-selling scandal affecting private pensions taken out by low income earners.

The industry’s problem became the government’s problem with the advent of automatic enrolment. While this has been marketed to the public as a clever application of behavioural economics, its public policy feedback effects have been neglected. If a government tells everyone that they will be better off saving for their retirement, and ensures that they are defaulted into schemes, then it risks some pronounced negative feedback if people are not in fact better off. Thus the recent scramble to find ways of ensuring that excessive fees are not skimmed from auto-enrolled pensions, and thus the decision announced in the budget to allow people to draw on their savings pots as they please.

The government is taking a risk: it is quite likely that many pots will be used up early in retirement, leaving people dependent on the state pension alone. The calculation is that the state pension will have to be paid anyway, so there are no savings for the Exchequer to be reaped from limiting drawdown. This assumes that means-tested supplementation will shrink and become confined to people who would never have saved for retirement. This is the point of the Triple Lock: it will keep the state pension at a sufficient level of adequacy. For historians of social policy, this is not the biggest change in a century but a return to Beveridge, who planned that flat-rate National Insurance benefits would drive out the remnants of the Poor Law. That plan failed, but this one might succeed, because the costs of failure will rebound on a government that has become in effect the main sales agent for private pensions.

The budget announcement has been pitched as an end to compulsory annuitization, brought about by the failings of the annuities market, supposedly about to be forensically exposed by a now-redundant retirement income Market Study. This is smoke and mirrors. The media have proved wonderfully manipulable: few have pointed out that compulsory annuitization ended in April 2011. What stayed after 2011, and has now gone, was a set of rules limiting the drawdown of funds from pension pots. These limits were set with reference to annuity values, but the government had the option of allowing more drawdown, and it exercised this option recently when it raised the drawdown limit to 120% of the corresponding annuity value. If annuities market failure was the problem, the drawdown limit could have been raised further.

The real problem is not the annuities market, but low interest rates on low-risk investments. Low returns are making money purchase pensions look rather sickly at the point of retirement, but they look twice as ill on a realistic assessment of the income stream they will generate. So let’s use a bit more behavioural economics, this time to cover the tracks of low returns. People value the lump of money in their pot at retirement way above the income stream it will generate. The government can avoid a tide of complaint about the results of auto-enrolment by letting people take their pots as lump sums.

Um – so what is the point of auto enrolment, since it is not to generate a retirement income? Some will invest the money differently: by paying off their mortgage, or buying a rental property. Buying a new car (preferably one that does not depreciate as fast as a Lamborghini), or replacing domestic appliances, or double-glazing the windows, might also be sensible decisions. The government is right that people may find better ways to use the money than the financial services industry can offer them, but it still leaves the question of why exactly auto-enrolment took this money in the first place. Why only get the lump sum at retirement? What about other times in life when a lump sum is useful? Perhaps we should just be allowed to draw down our pots every ten years or so? It’s not a rhetorical question: New Zealanders can draw on their auto-enrolled KiwiSaver pots to buy their houses; Americans can take money out of their 401k schemes if they are made redundant or face other major costly events.

It is well-known in public policy-making that problems are redefined to fit the solutions that are available. The solution is auto-enrolment, that beacon of ‘nudge’ policy-making. With a bit of imagination, we find a problem for it to solve. Here it is. The age of eligibility for the state pension is rising. Some people are working longer, but many are not. Life is tough for those who stop working before the state pension age. The available benefits have been cut in real terms: no triple lock for them. The process of claiming benefits, designed to deter scroungers and benefit tourists, will keep many self-respecting citizens from entering the doors of JobCentre Plus. How to survive until reaching pensionable age and entering the promised land, protected by Conservative voters? Answer: tap the pension pot that has been accumulated, which can be accessed ten years before the state pension age. Draw it down carefully, working towards the definite end date of pensionable age, not to an uncertain life expectancy.

One final question: what about those who really want to save to provide income for their retirement, and do not want to be a landlord, or run their own share portfolio? The Chancellor does have something for them after all. For people aged 65 and over, NS&I will launch ‘market leading’ pensioner bonds, paying a significantly higher return than other safe assets. The financial crisis taught everyone that the financial system is underpinned by the state, but large parts of the industry already knew that. The annuities market in particular has always been heavily dependent on the government to provide the financial instruments that it needs to match its liabilities. Reformers have periodically advocated that the government should boost the market by creating tailor-made instruments such as ‘longevity bonds’ that would shift some risks from the insurer to the taxpayer, a process which we’re now all thoroughly familiar with.  In this light, the new bonds from NS&I are a great step forward: pensioners will be able to secure an income stream directly from the government, rather than paying the masters of the financial universe to buy government bonds on their behalf. No wonder the share prices of some financial intermediaries fell. At this rate, we’ll return to having a welfare state by the back door. It might be expensive, but now that we know how much financial intermediation can cost, the welfare state is beginning to look like quite a good idea.

A Change is Gonna Come? Learning from the Tories

By Ben Worthy and Mark Bennister

Source: Opinium Research

How do parties regain power? Perhaps Ed Miliband should look to his opponents for some tips. Tim Bale’s new book on the Conservative party offers some important lessons. As one of the oldest parties around, the Conservatives , leaving aside the wilderness years between 1997 and 2005, have shown themselves ‘willing and able to do whatever it took to return to office as rapidly as possible’. The secret of the party’s success lies in its now legendary ability to change.  Are there any signs that the Labour party is now doing the same?

Bale points out that there are several ‘classic’ drivers for party change- a new leader, a heavy defeat or a shift in the dominant faction. Ed has at least two of these to start with though whether there is a fiercely group of Milibandites who’ve taken over the party must be open to question. Aside from these classic ‘forces for change’, there are some ‘hidden’ pressures such as

  • the pressure to ‘make right’ past wrongs or ‘match’ popular policy
  • the ‘domino’ effect of a particular policy leading to others
  • responding to ‘external’ events

So has Ed set the scene for change? Has he kick started the process? Ever since Tony Blair had his ‘Clause IV Moment’ the media has looked for the key moments when an opposition leader has emerged or sunk. Ian Duncan Smith’s ‘quiet man’ speech sunk him. David Cameron’s husky dogs made him. Was Ed’s ‘One nation party’ speech to conference his starting gun for change?

We can perhaps see some of Bale’s ‘hidden pressures’ at work. The speech matched policy and may lead to other commitments. On spending Ed made it clear ‘there will be many cuts that this Government made that we won’t be able to reverse even though we would like to’ something Ed Balls also emphasised. Ed’s recent moves on other policy, such as his speech on Climate change or position on the banks or Leveson or Europe, may bring a ‘domino’ effect on policy producing many unexpected ‘knock on’ commitments.

The speech also showed signs of Labour making up for past wrongs. Ed spoke of how ‘we can’t go back to Old Labour’ but that New Labour too had its faults ‘because New Labour, despite its great achievements, was too silent about the responsibilities of those at the top, and too timid about the accountability of those with power’. Labour’s adoption of spending plans may be atonement as well as opportunism. There was also a great deal of responding to events ‘no interest, from Rupert Murdoch to the banks, is too powerful to be held to account’. Incidentally, the speech stole a big chunk of political space where the left of the Conservative party used to be.

So what could we see? The pressures for change are certainly there. We may yet see a Labour party with new faces, a new way of working and a raft of new policies. Positions are still unclear and Ed’s big policy review is still in process, as Grant Schapps delights in pointing out here.

Perhaps the big unanswered question is whether the changing party can also propel the leader upwards. Ed’s own ratings remain low (see the graphic above and here). The question, as Bale points out, is how central the leader is to winning elections. Does the increased ‘personalisation’ of politics mean that any changes in the party will be undermined by Ed himself?

And of course, it all depends on how much the Tories are prepared to change too.  One thing Bale emphasises is how much governing parties’ shifts are driven by their desperation to avoid an anticipated defeat.  With an election looming, Cameron may surprise everyone by jettisoning some measures that are supposedly set in stone and running with others that right now no-one would predict.

Dr Ben Worthy is a lecturer in the Department of Politics at Birkbeck, University of London. Dr Mark Bennister is a Lecturer in Politics at Canterbury Christ Church University. He was previously a Teaching Fellow in British Politics at UCL, based in the Constitution Unit.

Taking up the gauntlet in the UK: the only real Big Society is the associative society

By Dr Jason Edwards

The uncritical understanding of what constitutes a ‘community’ and the failure to grasp what forms of citizen self-government are possible in current conditions is what betrays the intellectual laziness of the Big Society’s key thinkers.

As a political project espoused by Britain’s coalition government, the ‘Big Society’ looks moribund. Yet those on the left would do well not to dismiss without reservation the thinking that has lain behind its construction. Big Society thinkers such as Jesse Norman and Phillip Blond offer some accurate diagnoses of the social and economic problems of contemporary Britain, and are right to put forward far-reaching alternatives for socio-economic governance that are informed by ideas of localism, voluntarism, and mutualism.

Continue reading on openDemocracy.

Nick Clegg: Is It All His Fault?

Ben Worthy and Mark Bennister

Nick Clegg has been Deputy Prime Minister for just over two years. Recent polls of his leadership have not been kind: both his party and the electorate do not seem impressed. Hence his pose in the speech at the Lib-Dem conference as he characterised his party (and presumably himself) as the responsible one attacked by ‘vitriol and abuse, from Right and Left, as we work every day to keep this Government anchored in the centre ground’.

Nick Clegg has not achieved what he aimed or hoped to do: the referendum on AV was lost, the House of Lords reform dropped and even his apology doesn’t seem to have gone down as well as he hoped. It is claimed that Vince Cable is circling.

Here again is the link between personality and context. Is Nick Clegg a victim of ‘circumstance’, as one journalist put it? Or is it all his fault? Is he the ‘weakling, a liar and an incompetent fool’, unable or unwilling to change his situation?

To some extent Clegg and his party are the ‘classic’ junior party in a coalition, epitomised by portrayals of Clegg as ‘Cameron’s butler, wife or dog’. There is only so much they can do about this, hence his ‘mansion tax’ call (rejected by Cameron).

For Clegg himself, his steep rise to fame through ‘Cleggmania’ may also mean a fall was very likely, if not inveitable-Cleggmania was unlikely to last long against the realities of power sharing. The sheer range and vehemence of criticism in the media may mean Nick Clegg is some sort of lightning rod or a symbol of increasing personalised politics. As a result of this media portrayal, as this fascinating piece points out, like Cameron, Clegg’s once positive traits have turned into negatives: his boyishness to ‘siren’-like charm or smarmy seductiveness.  Clegg’s courtship of the electorate was portrayed as a ‘holiday romance’ turned sour. So sour that he is now the ‘effigy of choice’ in protests.

But it isn’t all circumstance. Others have pointed to Clegg’s inexperience in the Coalition negotiations and later political manoeuvres. It’s not only Clegg – everyone in the Lib-Dems from leader to staff and special advisers has suffered from this. Yet some accuse him of having a particular talent for wrenching defeat from near victory, or at least turning the ‘tricky’ into ‘disaster’:

For months, if not years, constitutional experts have been warning him that Lords reform faced all sorts of serious obstacles, but he did not listen to their demand for a strategy until it was too late. He has mismanaged this great political project, just as he previously blundered over both student fees and NHS reforms, in both cases turning tricky political situations for his party into outright disaster. Clegg was only elected to the Commons in 2005, but the longer his leadership of his party goes on, the more it appears that he was too inexperienced for the job (full article here)

But what is Nick Clegg to do? He may be hoping that history will see him right. In time he may be seen as the resolute man who made Lib-Dems a party of government. There are historical turnarounds for reputation. George Orwell famously described Prime Minister Clement Attlee as a dead fish beginning to stiffen. Now, more than 60 years later his name is associated with great concrete achievements – even Thatcher didn’t hide her admiration. However, as Attlee pointed out, his achievements were based on a thick pile of legislative achievement rather than words. Clegg needs something on the statute book. Soon.

Dr Ben Worthy is a lecturer in the Department of Politics at Birkbeck, University of London. Dr Mark Bennister is a Lecturer in Politics at Canterbury Christ Church University. He was previously a Teaching Fellow in British Politics at UCL, based in the Constitution Unit.