Pensioners of the future beware!

Andy Walker, Secretary, Ilford South CLP, argues that state pensions are fairer and more reliable than means-tested and private pensions.

Stake-holder pensions, New Labour speak for private pensions, are likely to be recommended by the current pensions review as a replacement for the State Earnings Related Pension Scheme (SERPS) for new entrants.

According to the 1998 Financial Times Handbook of Personal Pensions the gap between the worst and best performing pensions is a staggering 300%. This means the poor mug who bought the worst plan would be receiving a pension of only a third of the lucky soul who chose the highest performing fund. The review may anticipate this objection to private pensions and may advocate low-charge, low-risk tracker funds as the only permissible vehicles for stake-holder pensions. Tracker funds are passively managed, that is, they just track an index of shares, say the FTSE All Share index, which keeps charges down and reduces risk. The majority of actively managed funds fail to beat trackers over a long period.

However, while trackers may be good news for the investor, it is doubtful that overall they are better than state provision. The problem is the uncertainty of the value of the final pension. Private pensions not only rely on investment performance but also the prevailing market annuity rates, both factors which change constantly. Also, trackers still produce different results because different methods are used to calculate the index. The latest FT figures show a difference of 11% between the best and worst All Share trackers over five years.

If trackers are allowed which include an overseas component, i.e. an element invested in a USA tracker fund, then, in effect, British jobs are being exported overseas. Advocates of privatisation will argue that the billions invested in industry will make up for the inequalities in pension provision, but there are other ways of promoting investment, such as granting generous tax relief.

Under current legislation employees not in occupational pensions can opt out of the State Earnings Related Pension Scheme (SERPS) and invest their National Insurance contributions into a private pension scheme. The SERPS pension cannot be taken until 65; the private pension can be drawn at 60. This is a major selling point for pension salespeople. If it does not create an equal pension age for both schemes, the Government will be seen to favour privatisation.

That our Party should be considering private provision after the mis-selling fiasco is interesting. Private pensions are often sold by high pressure salespeople, working in pairs, knocking on prospects' doors in the evenings without any prior consent to a sales interview. Contrast this gung-ho approach to the lackadaisical clear-up of the mess afterwards, a few polite letters encouraging policy holders to complete complex new forms. The clear-up rate would have been much more impressive if the methods used to sell the pensions in the first place had been employed, i.e. sending out staff to knock on doors and paying them only if they got the review form completed.

How the private sector sells pensions is shown in this quote from Scottish Equitable pensions director Stewart Richie: "If you stay in SERPS you are making the heroic assumption that the state is going to keep its promise on SERPS." I wonder how many thousands of people make the "heroic assumption" that private pension salespeople keep their promises, especially after the mis-selling disaster.

Government ministers refuse to refute speculation that means-testing the state pension may become Labour Party policy after the next election. Leaving to one side the electoral consequences of such a policy, the practicalities of means-testing are worth examining. The means test could not apply to pension income alone, otherwise it would create a disincentive for people to join occupational schemes and purchase private provision.

A pensioner's capital would have to be part of the test. Information technology may have advanced recently, but it will still be expensive to administer such a scheme because pensioners' capital fluctuates. Will an inheritance or windfall from whatever source have to be declared on an annual pension form? Say a pensioner spends some of his or her capital so that it falls below the means test; if it was spent on a holiday, will this be deemed feckless and disqualify him or her from claiming a state pension?

Every winter 30,000 people in the UK die of cold. An estimated one million pensioners do not claim state benefits to which they are entitled. From April, £15 million will be spent on testing ways of encouraging pensioners to claim extra benefits. If the additional benefits were claimed in full they would add an average £16.10 to the state pension, costing £1.7 billion in total. If this campaign succeeds it will mean Gordon Brown will have to raise substantial extra revenue -- perhaps a reason to think it will fail.

Sun Life, a private pension provider, is a leading donor to the Labour Party. If our Party legislates for a bonanza for private pension companies at the expense of the universal state pension, ordinary members will wonder if we are acting on behalf of big business or pensioners.

The level of the state pension should be determined by MPs, not the vagaries of the stock market. The treatment of elderly people is a key test of a civilised society. Should we extend the means-testing regime that already condemns some of our pensioners to die of hypothermia, our claims to decency will be exposed as a sham.

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