IFS GOES CURLY WURLY ON PENSIONS…

KEN HOUSTON 

LIKE tens of thousands of former fans, I no longer follow Coronation Street, largely due to the increasing incidence of ludicrous plots and the script having become mired in the same political-correctness as its BBC rival, EastEnders.

Not long before the rot set in, one of the Street’s most popular characters was geeky Norman ‘Curly’ Watts, portrayed by the actor, Kevin Kennedy. ‘Curly’ (so nicknamed because of his ultra-straight hair), lodged with Emily Bishop and worked as a council bin man despite possessing a university degree and a keen interest in astronomy.

Against all the odds, Curly successfully wooed Raquel Wolstenholme (played by Sarah Lancashire), the young blonde landlady of the Rovers Return after she saw the size of his telescope. While they went on to wed, mixed-up Raquel soon regretted her decision and brought the marriage to an end; Curly was written out of the show shortly afterward.

While Lancashire has gone on to be a ‘star’ of television drama, Kennedy has rarely been seen on the small screen since – until recently, that is, when he appeared to have metamorphosed in the role of a leading financial commentator by the name of Paul Johnson

However, despite the amazing facial resemblance, Paul is not Kennedy but director-general of the right of centre think tank, The Institute for Fiscal Studies and a regular contributor to televised news and political debates on tax and other financial issues.

Most recently, Mr Johnson has again been riding one of his favourite hobby horses – pensioners who, to paraphrase Harold Macmillan, “have never had it so good”. But rather than celebrate this welcome news, he cannot help comparing pensioner affluence with the woes of fellow citizens in their twenties, thirties and forties.

Mr Johnson has called on the government to end the ‘triple lock’ under which state pensions go up by either inflation, earnings growth or 2.5 per cent, whichever is the highest. This is because at some point the process will become prohibitively expensive by injecting “a bizarre degree of randomness” into future levels of state pensions, making them dependent not on overall increases in prices or earnings but on the timing of those rises.

The IFS noted projections by the Office for Budget Responsibility which forecast that continued use of the lock would add well over 1pc of national income to spending on pensions by the middle of the century.

Mr Johnson continued: “The longer term future looks very uncertain. Those now in their 20s, 30s and 40s may well end up with lower incomes in retirement than their parents. The focus for policy needs to be on getting private provision right, with more risk-sharing, and a rational and stable tax policy”.

The new single-tier pension being introduced in April represented “a stable basis for future provision”. He emphasised, however, that it could not be optimal for individual savers to be left with all the burden of risk relating to uncertain investment returns and longevity, at a time when those currently working are moved from defined benefit to defined contribution pension in the private sector.

Changes to ensure that the risks were shared across society and across generations should be a priority, he added.

Hmmm. While there is nothing intrinsically wrong with the last sentiment, it is worth remembering that most baby boomers began work at the age of 15 or 16 and went on to pay income tax and national insurance for half a century – not for them the several years of further study after leaving school, either at university or ‘college’. And for the small minority (circa 7 per cent) who did go onto university, it was a means to an end rather than an end in itself (i.e. attendance at university now almost becoming a ‘lifestyle choice’).

Of course, the five decades of national insurance contributions paid by the baby boomers have turned out to be been insufficient to pay for their current state pensions – but that is because successive governments have abused national insurance by lumping in contributions with general taxation rather than ring-fencing it for social security as was the original intention.

This is why it is shameful when politicians include state pensions as part of the national bill for ‘welfare’ – as if those recipients now in retirement had not made a contribution during their working lives.

If the turnaround in pensioner incomes is, indeed, “astonishing”, perhaps it is despite, rather than because of, financial and demographic changes.

For almost 20 years, substantial numbers of home-owners nearing retirement have been forced to re-mortgage or at least take out a hefty personal loan to cover the shortfall on failed endowment policies – rather than receive a bonus, as was promised by smooth-talking, commissioned-based ‘mortgage advisors’. In the same period the value of an annuity based on £100,000 of pension savings has dropped from approximately £18,000 a year to around £6,000. This is due in part to increased longevity but another major contributing factor has been the £5 billion annual tax raid on pension funds begun by Gordon Brown and continued to this day by George Osborne (who, unlike Brown, rarely gets much flak for this from a compliant press). Consequently, the concession on state pensions as presented by the Chancellor’s ‘triple lock’ seems small beer in comparison.

Thankfully, new pensioners are now permitted to choose income drawdown should they prefer that to an annuity but even so, to maintain the value of remaining untouched capital, they will have no alternative but to keep a substantial amount of the fund invested in the stock market. Clearly, the potential consequences of any sustained fall in share values are much more serious for those drinking in the ‘last chance saloon’ (financially at least) than for people with many years ahead before retirement and who, therefore, still have the time to make up any losses.

With the golden age of the ‘final salary’ company scheme now over, recent governments have been paying much more attention to pensions, resulting in the auto-enrolment scheme.

Now a plan is being floated whereby tax relief on pension contributions would be ended in return for pension income becoming free of tax at some undetermined time in the future.

However cynics are already – understandably – warning that the good intentions behind relief taken away now might simply be forgotten about several decades hence and that pension incomes would continue to be taxed as they are at present.

The problem with government and pensions is the conflicting interests between current (young and young-ish) contributors and current (elderly) recipients – and how this affects their voting intentions. Consequently, perhaps the state pension has itself become an anachronism and the future lies in taking it out of politics altogether by handing over complete responsibility to private sector providers. Such an outcome would, of course, still require a state regulatory body – one that would need to show a lot more diligence than that displayed by the late, unlamented Financial Services Authority in its dealings with the banks.

So Mr Johnson’s inference that new pensioners are somehow living some subsidised life of Riley is rather out of kilter – just like the plots in Coronation Street.

Twitter: @PropPRMan

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