Towards the end of last month, the government launched a new pensions commission. The last one, which reported nearly 20 years ago, carried out one of the most effective and impactful of all independent reviews done for governments. It led directly to automatic enrolment into pensions, consensus on the need to increase pension ages and increases in the level of the state pension.
It is not surprising that this new body is badged as a “revival” of the original commission. Its remit is to look at ways of raising income levels for future generations of pensioners, particularly those at risk of poverty and with low lifetime incomes, while taking account of the sustainability of the system. Excellent. While, on the surface, things seem to be going pretty well, there are some serious challenges coming down the road.
We know broadly what needs to be done in terms of increasing pension saving, raising pension ages and stabilising the level of the state pension. The key challenge for this new commission will be to translate sensible proposals into a broad consensus. More perhaps than any other element of government activity, pension policy needs to be stable and long-term.
One of the last commission’s great achievements was to win a fight with the Treasury that the state pension should rise henceforth in line with average earnings. Recall that for 30 years after 1980 it rose only with prices, falling further and further behind earnings. It was at risk of becoming nugatory. Since then, the political consensus has shifted 180 degrees. The so-called triple lock — which sees the
pension rise each year by the higher of earnings growth, price inflation and 2.5 per cent — appears sacrosanct.
But nothing lasts for ever. Indeed, many people don’t think the state pension itself will last much longer. When polled, a third claim not to believe it will exist in 30 years’ time. This despite the way that politicians of all flavours fall over themselves to guarantee not merely the pension, but also the continuation of the triple lock. I wonder if the widespread scepticism is in fact a reaction against those promises. People are not completely stupid. The triple lock clearly can’t go on for ever. So if our elected representatives aren’t being honest about that, who knows what their real intentions are?
This lack of confidence is a real problem. Even for the pretty well heeled, the state pension is a crucial part of retirement planning. It provides possibly the only guaranteed regular income that most will receive in retirement, it is a bulwark against the fear that savings will be means-tested away and it provides some protection against inflation.
That’s why one of the key recommendations that my former colleagues at the Institute for Fiscal Studies and I have made is that the government should implement a four-point guarantee: that the state pension will never fall in real value, that it will never be means-tested, that we will always get at least ten years’ notice of any increase in pension age and that over time it will maintain its value relative to average earnings.
What we did not do was recommend what the value relative to average earnings should be. This must be a crucial challenge for the new commission. It needs to create the sort of consensus around the future level of the state pension that, remarkably, its predecessor managed on so much else. If it achieves that, then we can get off the infinite escalator that is the triple lock. We can give future generations a solid foundation on which to base their other saving decisions. And we can provide governments with some certainty about the cost of pension provision going forward.
Once you’ve decided on a target level, you can simply keep the triple lock until we hit the desired fraction of average earnings. Or policy could hurry us to that point. We could then “lock in” that gain — a quadruple lock, anyone? — but go no further.
Here is where I worry about the politics. The last Labour government was confident enough to have as chair of its commission Adair Turner, now Lord Turner of Ecchinswell, a formidably independent thinker and former head of the CBI. The other two members were the late Professor Sir John Hills, the foremost social policy academic of his generation, and Jeannie (now Baroness) Drake, then deputy general secretary of the Communication Workers Union. There could be little doubt about the independence of this group, not least when it came to standing up to the chancellor Gordon Brown and insisting on earnings indexation of the state pension.
By contrast this government has put Drake, a Labour peer, in the chair. She is a true expert with the necessary knowledge and qualifications. But to put one of your own parliamentarians in charge must risk perceptions of independence. That risk is compounded when one of the other two commissioners, Professor Nick Pearce — also a person of integrity, intelligence and expertise — is a former Labour adviser and former head of the No 10 policy unit under Gordon Brown. The
third member is the businessman Sir Ian Cheshire. They will have to work doubly and triply hard to prove their independence and get that crucial consensus and cross party buy-in.
They are barred from making any recommendation that the triple lock be changed over this parliament. Given that they aren’t due to report until 2027, that’s no great constraint. They must, though, whatever they are instructed by ministers — and it seems they have been warned off — address it for the future.
It would be utterly absurd to have a commission on the future adequacy and sustainability of the pension system which does not address this most fundamental of questions. This new commission must demonstrate its seriousness and independence by making it clear right away that they will not accept any such limit on their remit.
Paul Johnson is provost of The Queen’s College, Oxford. Follow him on @PJTheEconomist