Dignity and Securityin Retirement

Pensions Policy Paper

Policy Paper 67

Contents

Summary of Key Proposals 5

Current Issues in Pensions 71.1 The problem with pensions 71.2 The state pension 71.3 The occupational sector 81.4 Private saving 81.5 The cliff edge of retirement 91.6 The opportunity ahead 9

The Citizen’s Pension 112.1 The problem 112.2 The vision 112.3 Achieving the vision 122.4 Other retirement income from the state 132.5 Women and the state pension 14

Occupational Pensions 153.1 The problem 153.2 The vision 153.3 Achieving the vision 15

Private Saving 184.1 The problem 184.2 The vision 184.3 Achieving the vision - National Savings Pension 194.4 Achieving the vision - Annuities 204.5 Achieving the vision - Independent education and advice 20

Retirement 225.1 The problem 225.2 The vision 225.3 Achieving the vision 225.4 Age discrimination 225.5 The third age 23

Taxation of Pensions 24

Conclusion 25

Summary of Key Proposals

This document considers the UK state pension system, and then builds on that basis to look at otherforms of retirement income.

It presents a vision of a system where much more power and choice is put in the hands of pensionersand those saving for a pension, whilst recognising that pensioners also need a secure income from thestate in their retirement.

Liberal Democrats propose that the state pension is reformed by:

• Ensuring that everyone has a decent income in retirement by creating a Citizen’s Pension, withentitlement based on residency not National Insurance contributions - a policy that will be ofparticular benefit to women;

• Setting this pension at the level of the Guarantee Credit, thereby lifting nearly all pensioners outof means-testing;

• Uprating it in line with average earnings, so that pensioners share in the growing wealth of thenation;

• Guaranteeing this Citizen’s Pension for all pensioners aged over 75 in the first full financial yearof the parliament, as the first step to providing it for all pensioners.

Liberal Democrats propose that occupational pensions are reformed by:

• Establishing a kitemark system for occupational pensions so that all employees and job applicantscan see the rating that a company’s scheme has been given;

• Making occupational schemes ‘opt out’ schemes rather than ‘opt in’ schemes so that employeeshave to make a conscious decision not to save in the scheme;

• Allowing companies to make membership of their company scheme a condition of employment.

Liberal Democrats propose that private saving is reformed by:

• Increasing incentives for private saving by reducing means-testing and ensuring that every pennysaved is a penny better off;

• Restoring confidence in private pensions by offering new, low-cost pensions run by NationalSavings;

• Removing the requirement to buy an annuity at 75, so that pensioners can decide for themselveshow to use their savings;

• Giving everyone an annual pension forecast to help them plan their saving;

• Introducing new low-cost ways of accessing advice, including through local Citizen’s AdviceBureaux.

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Liberal Democrats propose that retirement is reformed by:

• Encouraging a ‘flexible decade of retirement’, where workers can combine part-pension and part-work so that retirement becomes a process rather than a sudden ‘cliff edge’ event;

• Bringing forward age discrimination legislation immediately and ensuring that it is vigorouslyenforced;

• Ensuring that employers scrap arbitrary retirement ages;

• Making it financially possible for older people to return to education and training, by makingstudent loans available to those over 55.

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1.1 The problem with pensions

1.1.1 Pensions policy in the UK is a mess. Thecurrent pensions system is the legacy of an earlierage, and needs a coherent vision for the twenty-first century. As Liberal Democrats, we believethat everyone should be entitled to a decentstandard of living in retirement. To achieve this,the current system needs a radical overhaul.However, successive governments have failed totake decisive action, and have instead introducedendless schemes, add-ons, pre-election bribes andpiecemeal reforms. As a result, people do notunderstand the pensions system, and neither dothey have any confidence that it will providesecurity for them in retirement. Instead we areseen to be in the middle of a pensions crisis,which needs to be tackled urgently.

1.1.2 Over 11 million UK citizens - roughlyone in four of the adult population - are over statepension age. Some are still in paid work or havebeen in high-income jobs, and can look forward tosubstantial occupational pensions and a highstandard of living in retirement. Some are elderlywidows struggling to survive on meagre incomeswith limited savings. A coherent pensions policyneeds to reflect this great diversity in the needsand expectations of people over pension age. As apriority, we need to end the scandal of more than2 million pensioners living below theGovernment’s poverty line. Currently a pensionerreceiving the full basic state pension and with noother source of income is 25% below the officialpensioner poverty line.

1.2 The state pension

1.2.1 Since the Conservatives broke the linkbetween pensions and earnings in 1980 the valueof the state pension has fallen further and furtherbehind the wealth of the nation. In 2004 the valueof the basic state pension is just £79.60 per weekfor a single pensioner and £127.25 per week for acouple. This is in spite of Government estimatesthat a single pensioner requires a minimum of£105.45 per week to live on, and a couple needs£160.95.

1.2.2 In addition, the state offers a secondpension related to earnings over a working life.

This system, previously known as the StateEarnings-Related Pension Scheme (SERPS) isnow known as the State Second Pension (S2P).Some workers may ‘contract out’ of this systeminto a company pension scheme or certain privatepension arrangements. In 2003, the average statepension payment - basic state pension plus statesecond pension/SERPS - for recently retiredpensioners, was just one fifth of average earnings.There will be many people in the future receivingthe full basic state pension and an additional statepension who will still be below income supportlevels, and will still have to go through theintrusive means-tests to receive enough to live on.

1.2.3 In addition to income from the state andprivate pensions, pensioners may receive incomefrom a variety of other sources. Among youngerpensioners, income from employment may beimportant. Many pensioners also enjoy incomefrom investments and savings, although theseamounts tend to be relatively modest, especiallyamong older pensioners.

1.2.4 Labour came to power in 1997 with apledge that “all pensioners should share fairly inthe increasing prosperity of the nation.” Yet thisGovernment has spent less of the nation’s wealthon pensioners than the Conservatives did.Pensioners have not forgotten the miserly 75pincrease they were awarded in 2000, and Labouris aiming to reduce still further the amount ofincome that pensioners receive from the state,from 60% to 40% of the average pensioner’sweekly income.

1.2.5 Instead, as the value of the state pensionfalls, more and more emphasis is placed onmeans-tested benefits to bring people up to adecent minimum income. Under theGovernment’s flagship Pension Credit, introducedin 2003, more than half of all pensioners have togo through means testing. The Institute for FiscalStudies has estimated that this proportion mayincrease to 82% by 2050. In 2004, the PensionCredit aims to bring the income of all singlepensioners up to £105.45 a week, and all couplesup to £160.95. This benefit is linked to averageearnings, so that it rises in line with the wealth ofthe country. The Pension Credit also includes asavings credit element which provides an

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Current Issues in Pensions

additional weekly payment for those with modestamounts of income from occupational or privatepensions. However, many pensioners view thesetop-ups as an undignified handout rather than aright and the process of claiming such benefits isoften very complex. Alarmingly, the Governmentitself predicts that 1.4 million pensioners willultimately fail to claim the money to which theyare entitled.

1.2.6 Of the 2.2 million pensioners currentlyjudged to be living in poverty, about two-thirdsare women. On average, women have muchsmaller pension entitlements than men, largelydue to incomplete contribution records owing toperiods out of the labour market. Even for thosepeople retiring now, men have an average basicstate pension entitlement of £73.45 per week,whereas women have an average entitlement ofjust £51.24 per week. Many poor pensioners areelderly widows, who have very low state andwidow’s pensions, and the cumulative effect ofdecades of inflation eroding the value of theirsavings. Many women have paid NationalInsurance contributions at the reduced marriedwomen’s rate, which leaves them dependent upona smaller pension based on their husband’scontributions, but little or nothing in their ownright. Although many women made an informedchoice to pay reduced contributions, many morereport that the implications of this choice werenever explained to them. As a result, they receivea huge shock on the eve of retirement when theydiscover that they may be entitled to as little as apenny a week in state pension. The Governmenthas recognised that poor women’s pensionspresent a major problem, but it has done very littleto address the issue.

1.2.7 In addition to the problems faced bywomen, older pensioners are also more likely toface poverty. The average weekly income ofpensioners over 75 is almost 30% less than that oftheir younger counterparts. The Government hasrecognised this trend by entitling pensioners tofree TV licences at 75 and extra winter fuelpayments. It is also introducing a one-off £100payment to help over-70s with their council tax.In addition, at the age of 80, people receive a tinystate pension top-up of 25p a week. However,these policies do not address the fundamentalproblem of an inadequate state pension.

1.3 The occupational sector

1.3.1 In 2000, just over 10 million UKemployees were active members of anoccupational pension scheme. This is almost halfof all employees, but the figure has declined bymore than half a million since 1991. Recentevents have presented real challenges tooccupational provision, when confidence hadalready been dented by the Maxwell pensionsaffair. Some of these are being tackled by theGovernment; others need further action.

1.3.2 Many employers have traditionallyoffered pension schemes that guarantee aproportion of an employee’s final salary inretirement. Increasingly however, companies havebeen switching from final salary or ‘definedbenefit’ schemes to ‘defined contribution’schemes. These shift the burden of risk from theemployer to the employee, as returns on definedcontribution pensions depend on the state of thestock markets at the time of retirement, and onannuity rates which have fallen sharply.

1.3.3 This trend away from final salaryschemes has been going on for decades, butseveral factors have led to a sharp increase inrecent years. The abolition of dividend tax reliefon pension funds in 1997 takes £5bn out ofcompany pension funds every year and pours itinto the Exchequer’s coffers. More fundamentally,we have come to the end of a period of buoyantreturns where employers could take contributionholidays from their pension funds. Lower returnsand rising life expectancy have together put realstrain on company schemes. The FRS17regulation - which takes a snapshot value of afirm’s assets on one particular day - has perhapsreflected these changes over-dramatically.However, the underlying funding problems arethere for all to see. Urgent reform is needed if theprivate sector is to take its proper role in a moreequal partnership with the state to provide a majorsource of income in retirement.

1.4 Private saving

1.4.1 In 2001 Labour introduced stakeholderpensions to expand pension provision amongpeople on modest earnings (£9,000-£20,000 peryear), many of whom have no access tooccupational pensions. Of the 1.6 millionstakeholders that had been sold by the end of2003, more than a third (36%) have been bought

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by those who fell outside the original targetmarket or have been bought by people whoalready have other forms of private provision.Three-quarters of company stakeholder pensionsare “empty shells” with no active members.

1.4.2 The Association of British Insurers hasestimated that, in order to enjoy a comfortablestandard of living in retirement, we need to save£27 billion per year more than we are saving at themoment. The Government’s 2002 Green Papersuggested that about 3 million people areseriously under-providing for their retirement,and another 5-10 million may also want toconsider saving more - or working longer -depending on their circumstances and theirexpectations of retirement.

1.4.3 Debacles such as Equitable Life havedemonstrated that private pension saving can beunreliable which, combined with the poor statepension, a culture of means testing and problemswith occupational schemes, serves to damageconfidence in pensions saving even more. Weneed to reverse this trend.

1.5 The cliff edge of retirement

1.5.1 The demographics of the UK populationare changing as people live longer, and the birthrate falls, which puts more pressure on thepensions system. The 2001 census revealed thatthere are now more people aged over 60 thanunder 16. The Government Actuary’s Departmenthas estimated that by 2050 24.4% of thepopulation will be aged over 65 and 9.1% over 80,compared with 15.6% and 4.0% respectively in2000. It is getting more difficult to support thegrowing retired population solely by a smaller andsmaller working age population.

1.5.2 Half a century ago a woman who hadreached 65 could expect to live to 79, and a manto 77. Today however, the life expectancy of 65-year olds is 84 for women and 81 for men, andpeople can expect to spend the first ten or fifteenyears of their retirement fit and active, and inrelatively good health. Despite this rise in lifeexpectancy, the provision for retirement has notchanged.

1.5.3 People are still expected to retirecompletely when they reach a certain age. Havingworked 48 hours a week, for 48 weeks a year, for48 years of their lives, it can come as a greatshock to reach the cliff edge of sudden retirement.People who may wish to stay in work, possibly byreducing their hours or changing jobs, or even goback to college, are discouraged by a combinationof age discrimination in the workplace, outdatedlegislation and a general perception that olderpeople cannot re-train.

1.6 The opportunity ahead

1.6.1 The factors contributing to the ‘pensionscrisis’ are widely seen as problems. However, weshould be welcoming the longer life expectancyof our citizens, and looking at ways to harness themany talents and experiences of the oldergenerations. The pensions system outlined aboveis complex, inflexible, inadequate, and unable tocope with present demand.

1.6.2 Ideally, progress on pensions should beon the basis of all-party co-operation, so thatpensions cease to be a political football. We needto establish a stable basis on which individualscan base their financial futures, rather thanallowing short-term political priorities to dictatechanges in the system as one governmentsucceeds another.

1.6.3 To this end, Liberal Democrats have longadvocated a permanent Independent PensionsAuthority, which would take many of thedecisions about pensions policy out of the partypolitical arena. This would involve all the majorpolitical parties, representatives of employersthrough the CBI and of employees through theTUC, independent pensions experts such as thePensions Policy Institute, and representatives ofpensioners such as Age Concern and Help theAged. Pensions are too important to be used as apolitical football, with each successiveGovernment changing the decisions made by theprevious one and putting new requirements inplace. This Authority would be advisory and notable to make policy, but it would bring together agroup of experts from different sides of the debateto advise the Government of the day. It would alsopublicise the advice it gives to Government, sothat the public can see the choices that aGovernment has made in relation to pensions, andcan judge more easily whether those choices wereright. People have the right to be better informed

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so that they can judge what the Government isdoing in their name. This would create thestability essential to enable people to plan fortheir retirement, and recognises that the pensionstimescale is longer than any one party’s time ingovernment.

1.6.4 Liberal Democrats are therefore seizingthe opportunity to look afresh at the issues, and tocome up with new and innovative ways ofaddressing the crisis. Firstly, for each of theproblems outlined above we clearly set out avision of how it needs to be improved. We then

explain how we would achieve that vision,showing the immediate and medium-term stepsthat are necessary. Any responsible political partyaiming to tackle the pensions crisis needs a visionof how the pensions system should be organised,but they need to be equally clear about the stepsthey would take to make that happen.

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Policy Priorities:

• To ensure that everyone has a decentincome in retirement by creating a citizen’spension, with entitlement based onresidency;

• To set this pension at the level of theGuarantee Credit, thereby lifting nearly allpensioners out of means-testing;

• To uprate it in line with average earnings,so that pensioners share in the growingwealth of the nation;

• To guarantee this citizen’s pension for allpensioners aged over 75 who meet theresidence requirement in the first fullfinancial year of the parliament, as the firststep to providing it for all above statepension age.

2.1 The problem

2.1.1 The current system of state pensions iscomplex in the extreme. The state pension isbased on the contributory principle which resultsin huge variations in the amount that a pensioneractually receives. Since the last ConservativeGovernment broke the link between pensionincreases and average earnings, the real value ofthe state pension has been allowed to plummet.Since then the pension has generally increased inline with prices which can produce derisoryincreases such as the miserly 75p increase in2000.

2.1.2 On top of the state pension, there are theadditional state pensions - now known as the StateSecond Pension (S2P) which has replaced theState Earnings Related Pension Scheme (SERPS)- which individuals can opt in or out of. For manypensioners the two state pensions do not providethem with enough income to reach the level theGovernment deems acceptable. On top of thiscomes the Pension Credit, a means-tested benefitwhich half the pensioner population is eligible toclaim. The Government predicts that within ageneration up to three-quarters of the pensionerpopulation will be forced to jump through thehoops of means-testing, even though they may

have built up entitlements to the additional statepensions.

2.1.3 In addition the Government hasintroduced the Winter Fuel Payment, free TVlicences for the over 75s, 25p per week for theover-80s and a one off £100 payment to those 70plus to help with Council Tax.

2.2 The vision

2.2.1 The Government’s vision is to allow themajority of pensioners to retire poor and thenclaim complex state top-ups. Some do claim themoney but incredibly the Government’s owntarget for paying the Pension Credit assumes that1.4 million pensioners will miss out. The systemmeans no-one can be sure by how much, if at all,their various entitlements will increase. Thesystem also means that no-one can be sure howtheir personal pensions and savings will affect thelevels of benefits they may be entitled to inretirement.

2.2.2 The Liberal Democrat vision is to providea radically simpler system that is understood byeveryone. Liberal Democrats would introduce aCitizen’s Pension paid to all individuals who meeta residence requirement as a right. It would bepaid at the level the Government believespensioners need to live on (the Guarantee Creditpart of the Pension Credit, currently £105.45 perweek for single pensioners and £160.95 per weekfor couples).

2.2.3 The Citizen’s Pension would massivelyreduce means testing, with pensioners being‘floated off’ Pension Credit and onto the Citizen’sPension. Importantly the poorest pensioners of all- those who are entitled to the Pension Credit butwho are not receiving it, would be majorbeneficiaries from a pension by right. TheCitizen’s Pension would be paid without the needfor form filling, phone calls to call centres, andthe provision of personal and often intrusivedetails.

2.2.4 Liberal Democrats would ensure that theCitizen’s Pension retained its value, by linking itto increases in average earnings, thus ensuringthat pensioners shared in the increasing wealth ofthe nation.

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The Citizen’s Pension

2.2.5 It is vital that people know where theystand when it comes to private saving forretirement. The Citizen’s Pension will ensure thatevery penny of pensions saving will give them areturn. Unlike the current means-tested system,on top of the Citizen’s Pension every penny ofadditional private and occupational saving wouldbe retained.

2.2.6 The Citizen’s Pension would ensure muchof the current complexity is stripped away. TheCitizen’s Pension would ensure that a statepension is paid at a level that negates the need foradditional state pensions. The State SecondPension would be phased out and with it would gothe minefield of complexity that surroundscontracting in and out. The eye-wateringlycomplex Pension Credit would also cease to existin its current form.

2.2.7 Entitlement to the Citizen’s Pensionwould be solely on the basis of a residence test. InGovernment we would devise residence rules indetail based on Government data, but theprinciple would be that the recipient should havespent a significant amount of his or her liferesident in the UK. One option for the UKresidence requirement could be 20 years spent inthe UK since the age of 25. Alternatively the NewZealand model could be mirrored, where therequirement is for someone to have been residentfor 10 years since the age of 20, 5 of which mustbe since the age of 50. There is already a rule ofthis sort in the UK pension system wherepensioners aged 80 or over are entitled to a non-contributory pension at a modest rate, providedthey have resided in the UK for 10 of the last 20years. Where an individual only partially satisfiedthe residence test, the rate of pension would bepaid on a pro rata basis.

2.2.8 Payment of the Citizen’s Pension wouldcontinue provided the person was residentanywhere in the EU, or another country which hasa reciprocal arrangement with the UK over thepayment of pensions. The Independent PensionsAuthority would look at whether furtherreciprocal arrangements could be established withother countries to allow as many pensioners aspossible to benefit from our proposals, whilstrecognising that a country’s first duty is to thosewho live within its borders.

2.3 Achieving the vision

2.3.1 As a first step to lifting pensioners out ofmeans-testing and achieving a Citizen’s Pensionfor all, in the first full financial year of a LiberalDemocrat Government we pledge to give aCitizen’s Pension to all pensioners aged 75 andover, meeting the residence requirements. Forthose currently receiving a state pension based ontheir own contributions the Citizen’s Pensionwould be paid at the level of the Guarantee Credit(currently £105.45 per week). Married coupleswould receive a Citizen’s Pension at the level ofthe Guarantee Credit for couples (currently£160.95 per week). For those currently receivinga full basic state pension this will add over £25 aweek to their pension and for those receiving themarried couple’s pension it will add over £33 aweek. On the first day that this policy comes intoforce, one million pensioners would be lifted outof means testing.

2.3.2 The current value of the pension is so low,that merely linking it to earnings would simplymaintain it at a very low percentage of averageearnings. Such a policy would only add around £7to the weekly pension by the end of a Parliament.Ensuring that the Citizen’s Pension is linked toaverage earnings means that those aged 75 plusget a significant pension boost and also that itsreal value is protected.

2.3.3 It is right to prioritise the oldestpensioners first because they tend to be thepoorest. They have been retired the longest andare therefore most likely to have used up anysavings they had. They are also more likely not toclaim the means-tested benefits to which they areentitled.

2.3.4 Those who are not yet 75 when this policycomes into force will not lose out. They will keeptheir current pension entitlement, along with anymeans-tested benefits they are currently claiming.In addition, pensioners will be the mainbeneficiaries of Liberal Democrat policies toscrap the Council Tax and replace it with a LocalIncome Tax. Close to 90% of pensioners overallwill be better off or unaffected as a result of LocalIncome Tax, with many paying hundreds ofpounds a year less. This will be a massive boost topensioner incomes, and will help many of thepoorest under-75s.

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2.3.5 This policy will cost £2.7 billion in thefirst year, rising to £3.2 billion over a parliament.The Liberal Democrat Spending Review hasidentified about 1% of Government spending -£5bn per year - that we want to spend differently,on our priorities. Pensions are a clear LiberalDemocrat priority, and therefore the fundingneeded to implement the first stage of theCitizen’s Pension would come from this SpendingReview.

2.3.6 We will consider a number of ways offunding the move to a Citizen’s Pension for allpensioners, but one option is changing thearrangements for contracting out of the additionalstate pension. There is only a need for anadditional state pension whilst the standard statepension is inadequate - although some of thosewith additional state pension entitlements willstill face means testing in their old age. Once allpensioners have been lifted above means testing,the need for an additional state pension will nolonger exist. Therefore it would be illogical tokeep the rebates which exist for those who havecontracted out.

2.3.7 This is one option for funding theextension of the Citizen’s Pension; another wouldbe to raise state pension age. Whoever is inGovernment at the time, the state pension age forwomen will rise to 65 by increasing one year inevery two between 2010 and 2020. TheGovernment Actuary’s Department has projectedthat life expectancy will increase by four yearsbetween now and 2050. Clearly, if life expectancycontinues to improve over coming decades, itwould be sensible to review the age at which thestate pension is payable. We would ask theIndependent Pensions Authority to consider this,looking at the changing demographics and otherrelevant trends.

2.3.8 We recognise that estimates about futurechanges in the state pension age are subject tochange. The further into the future that we look,the more uncertain the estimates must be.However, Liberal Democrats realise that peopleneed reliable information about their retirement ifwe are to encourage them to save. Therefore weguarantee that a Liberal Democrat Governmentwould ensure that a clear statement of changingstate pension ages is given out at least 15 years inadvance of the change coming into effect, and thatthis statement would only be subject tosubsequent change where there had been a majorunforeseeable event.

2.3.9 Furthermore, we believe that decisionssuch as pension ages or changing the rebates forthe additional state pensions should not bemotivated by political concerns. We would ask theIndependent Pensions Authority to look at both ofthese issues, in the context of the need to fund arobust Citizen’s Pension for all, and to adviseParliament on any necessary changes.

2.4 Other retirement income from thestate

2.4.1 Many pensioners and people coming upto retirement benefit from additional SERPS, orState Second Pension entitlements. How theentitlements are paid will depend on whetherpeople have contracted in, or out, or a mixture ofboth during their working lives. The entitlementsmay be in the form of personal pensions, whetheroccupational or private, or they may be entitled toreceive an additional state pension.

2.4.2 When the Citizen’s Pension has beenextended to all pensioners, there will be no needfor this extra state support because all pensionerswill be guaranteed a decent income as of right.However, in the meantime many pensioners agedunder 75 will welcome the extra support that theadditional state pension provides.

2.4.3 Liberal Democrats will allow people tocontinue accruing rights to S2P so that they arehelped to save for the years before they becomeentitled to the Citizen’s Pension. Although thecurrent system of contracting in and contractingout is complicated, we believe that it would bestserve pensioners if it was phased out once theCitizen’s Pension is fully extended.

2.4.4 There are many top-ups to the currentbasic state pension which provide pensioners withother retirement income. Under our proposals thelargest of these, the means-tested GuaranteeCredit, would, for those over 75, be superseded bythe Citizen’s Pension. However, to ensure that no-one loses out, those over 75 who do not meet theresidence requirement, and whose income isbelow the level of the Guarantee Credit, wouldcontinue to receive a means-tested income top-up.

2.4.5 The existence of means-testing has forcedthe Government to introduce the Savings Credit,which rewards people who have modest pensions,savings and income. Under our system, therewould no longer be a need for the Savings Credit

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- pensioners would in addition to their Citizen’sPension be allowed to hold onto every penny oftheir personal pensions, savings and otherincome. However to ensure that pensioners do notlose out we would guarantee that those whoreceive enhanced amounts through the PensionCredit are protected. This includes people withdisabilities, carers and couples whose combinedstate pension income is above the GuaranteeCredit level.

2.4.6 To ensure that no pensioners are madeworse off by the policy we would keep all otherexisting top-up payments, including the WinterFuel Payment, free TV licences for the over-75sand the Christmas Bonus.

2.5 Women and the state pension

2.5.1 Women will particularly benefit from aCitizen’s Pension paid as a right.

• Currently 50% of women receiving a basicstate pension get less than the full rate of£79.60 per week.

• Newly retired women receive an average£51.24 per week basic state pensioncompared with £73.45 for men.

• Many women with insufficient contributionsonly qualify for a 60% pension, based ontheir husband’s earnings.

• Many women lose out from the 25% rule. Toget the minimum basic pension payable(25%) a person normally needs 10 or 11qualifying years. If you have paid NationalInsurance contributions for fewer years theyare effectively lost.

• Every year up to one third of eligible womenmiss out on £0.5 billion worth of means-tested pension top-ups.

2.5.2 In the long run, the Citizen’s Pension willsolve these problems. However, some womenaged under 75 are receiving state pensions as lowas 1p per week because they paid the marriedwoman’s stamp, which meant that their NationalInsurance contributions did not count towardstheir state pension. In the short term therefore,before the Citizen’s Pension is extended to theunder 75s, their pensions could be improved inthe following ways:

• The Government needs to write to all thewomen who have ever paid this stamp toalert them to their current position and warnthem that their pension rights may be injeopardy. Many in their 40s and 50s will thenhave time to take steps to enhance theirpensions in other ways.

• Women should be allowed to pay backNational Insurance contributions forincomplete years, in order to boost their statepension entitlements.

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Policy Priorities:

• To establish a kitemark system foroccupational pensions so that all employeesand job applicants can see the rating that acompany’s scheme has been given;

• To make occupational schemes opt outschemes rather than opt in schemes so thatemployees have to make a consciousdecision not to save in the scheme;

• To allow companies to make membershipof their company scheme a condition ofemployment.

3.1 The problem

3.1.1 Recent events and the current economicclimate have combined to present real challengesto occupational provision. Some of thesechallenges were discussed in section 1.3, but themost pressing current problem with pension fundsis that of defined benefit schemes winding-upwhen the company becomes insolvent, oftenleaving insufficient assets to cover the liabilities.Many workers who have been accumulating rightsin schemes throughout their working lives havebeen left with very little, or even with nothing atall.

3.1.2 The Government has proposedestablishing a Pension Protection Fund (PPF) toaddress the problems of schemes winding up.This is to be a central fund, paid into by allemployers with defined benefit occupationalschemes. It will be a non-Government body, butwill aim to pay at least 90% of their expectedpensions to members whose schemes are woundup. It will continue to manage funds where theguarantor company has gone bust, which will easethe problem of all the liabilities needing to be paidat one time. Liberal Democrats believe thisapproach is right, but the Government needs tounderwrite the Fund as lender of last resort, toensure that it delivers on its promises and does notoffer false security. We campaigned for afinancial assistance package to protect those whohad already lost their pensions, but we areconcerned that the Government’s solution doesnot offer adequate funds to cover all those

affected. More needs to be done to protect andencourage the occupational pension sector andthose who rely on it to provide for theirretirement.

3.2 The vision

3.2.1 Liberal Democrats believe that employersare a vital partner in pension saving, and that formany people occupational pensions are the bestvehicle for saving in a pension. Therefore ourvision is for an occupational pension sector whichis attractive to savers, which is as straightforwardas possible to join, and which offers secureinvestment opportunities. This needs to avoidplacing unnecessary regulations and burdens onthe employers that offer occupational pensions,whilst ensuring that employees can haveconfidence in their pensions.

3.3 Achieving the vision

3.3.1 Liberal Democrats welcome theGovernment’s attempts to make occupationalpensions more secure, and to strengthen theposition of defined benefit pensions which canoften offer the most reliable income in retirement.However, we do not believe that the PPF cancredibly offer this security unless the Governmentis prepared to act as the lender of last resort.Without this level of Government involvementthere can be no guarantee that scheme memberswill receive 90% of their expected pension. Itwould be indefensible for a Pension ProtectionFund set up by Government, who nominate itsdirectors, to dishonour its pensions promises -making that crystal clear now would be far betterthan an inadequate last minute rescue like theGovernment’s recent retrospective compensationpackage. Moreover, Liberal Democrats believethat the PPF premiums should fairly reflect therisks of insolvency in each company’s scheme; thepremiums must not become a poll tax on pensionfunds, penalising responsible employers withprudent pension funds.

3.3.2 The compensation package announced bythe Government is designed to offer assistance tothose workers who have lost out through wind-upsbefore the PPF is established. The full details haveyet to be announced, but it is clear that the £400

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Occupational Pensions

million package, spread over 20 years, will benowhere near enough to fully compensate allthose who have lost out. Independent figuressuggest that the real cost of compensation is likelyto be nearer £2.3 billion, over the next twodecades. Liberal Democrats believe it is essentialthat the compensation package covers all thosewho have lost out through wind ups, includingthose who lost out when solvent employers woundup a scheme. We also believe the Government hasa duty to properly compensate those who have lostout, and support a package that mirrors the 90%pay out that will in future be provided by the PPF.

3.3.3 Wind-ups should always be a last resort,and more can be done to protect individualsbefore the Pension Protection Fund needs tobecome involved. Pension funds are trust fundsestablished by an employer or group ofemployers, but controlled by trustees. Sometrustees are appointed by the employer and someby the scheme members. Since 1995 the duties oftrustees have rightly become more onerous, andthe Pensions Bill 2004 will require trustees to bequalified in knowledge of their duties and ofpensions law. Liberal Democrats support this, butit is unrealistic to expect a good level ofknowledge before someone has been appointed,and so training for trustees must be arranged.Member nominated trustees should reflect the fullmix of scheme members including retired schememembers.

3.3.4 Even though the problem of occupationalschemes winding up may be eased, the perceptionthat pension saving is insecure remains. Some ofthe issues around this are dealt with in section 4.3,but one way of giving people more confidence inoccupational pension products would be toestablish a kitemark system. This would involvethe Pension Regulator creating categories forpensions, so that a five star pension would offerthe best package of benefits, and a one starpension would be the least attractive. Employeesor job applicants would be able to find out therating that their company’s pension has, and couldinclude that in their decision about where to work.Companies would not have to get their pensionaccredited, but a company which chose not to doso might find that employees and potentialemployees were drawing their own conclusionsabout why that might be.

3.3.5 In the past Liberal Democrats haveconsidered whether Government could impose acompulsory saving levy on employees and theiremployers. The Citizen’s Pension removes theneed for compulsion as it guarantees a decentpension. The Citizen’s Pension also provides anincentive to save as it ensures pension saving isfully rewarded. The decisions surroundingwhether people wish to save to make theirretirement more comfortable are then left to theindividual.

3.3.6 Various Governments and otherorganisations, in this country and abroad, haveexperimented with various ways of encouragingpeople to save. In the UK, Tesco has developed asubtly different scheme from most otheremployers; one that clearly provides the kick startthat is so often needed. They automatically enrolemployees onto the pension scheme, so that anindividual has to opt out of provision, whereas inmost companies it is up to the individual to opt in.This generates participation levels of around90%. This suggests that the bother of arrangingpension provision, rather than the disincentive ofpaying money into it which could otherwise bespent immediately, is the major deterrent fromsaving. Therefore Liberal Democrats wouldlegislate to make all occupational pensionschemes opt out schemes rather than opt inschemes. This would hope to repeat the success ofthe Tesco scheme in terms of take-up, and wouldmake it more trouble for someone not to have apension than to have one.

3.3.7 In addition, we believe that employersshould be able to make membership of theiroccupational scheme a condition of employmentfor new employees if they wish to do so. It shouldbe left to individual employers, in consultationwith their employee representatives, to decidewhether or not to make use of this option.

3.3.8 Survivor’s benefits are a minor part ofoccupational scheme design, but are nonethelessimportant to those affected by them. Manyoccupational schemes guarantee a pension for ascheme member’s spouse if they should outlivethe scheme member. However, since a pensionscheme needs to be able to date its paymentsaccurately and to have proof of a relationship, thishas so far only applied to married partners. NewCivil Partnerships legislation means that manymore people will be able to register theirpartnership, and Liberal Democrats would ensure

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that any scheme which offers survivor’s benefitsoffers them to all legally registered couples.

3.3.9 Two other issues relating to the treatmentof marriage in occupational pension schemesneed to be addressed. The first is the fact thatmany schemes refuse to pay survivor’s benefits topeople who marry post-retirement. Whilst weunderstand the need to avoid death-bed marriagessimply for pension purposes, we believe that such

restrictions on survivor’s benefits are unfair andshould not be allowed. The second issue is thatwidows who remarry often lose their widow’spension. We are concerned that the amount lostcan be substantial and can in some cases impose afinancial penalty on remarriage. We believe thatscheme rules for widows who remarry should bereviewed.

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Policy Priorities:

• To restore confidence in private pensionsby offering new, low-cost pensions run byNational Savings;

• To remove the requirement to buy anannuity at 75, so that pensioners can decidefor themselves how to use their savings;

• To give everyone an annual pensionforecast to help them plan their saving;

• To open up new low-cost ways of receivingadvice, including through local Citizen’sAdvice Bureaux.

4.1 The problem

4.1.1 Pension saving should be a partnershipbetween individuals, the state and employers. It isnot necessary for the state to provide the whole ofan individual’s income in retirement, as this wouldprevent individuals from exercising their ownchoice about saving and spending across theirlives. Contributions to pension saving fromindividuals and their employers are thereforeimportant.

4.1.2 Very few people have private pensionsaving outside of occupational pension schemes.14% of men and just 9% of women have apersonal or stakeholder pension, and recentfigures show that 41% of men and 47% of womendo not have a non-state pension at all (FamilyResources Survey 2002-03, table 7.12). This isvery concerning when we consider the estimated£27 billion savings gap and the decline inoccupational pension provision by employers.People are also deterred by short-termfluctuations in the stock markets and shocks fromcompanies such as Equitable Life. Individuals aremistrustful of making a savings commitment insuch a climate of uncertainty.

4.1.3 In addition, the extension of mean-testedbenefits to more than half the pensionerpopulation sends the message that it is not worthsaving for retirement, since additional pensionprovision will be penalised by the means-test.The Government claims that the savings creditelement of the Pension Credit provides anadditional payment to reward people with modestoccupational or personal pensions, but people stilllose 40p in the pound of any savings. Byabolishing means-testing as far as possible, wewould ensure that every penny saved is a pennybetter off.

4.2 The vision

4.2.1 Liberal Democrats have laid out certainpriorities for the reform of private saving:

• To ensure that every penny saved is a pennybetter off;

• To restore confidence in private pensionsaving by giving people access to a NationalSavings Pension - a simple, safe andaffordable savings product;

• To relax the current requirements to buy anannuity by the age of 75;

• To ensure that consumers are betterprotected, by giving them information so thatthey are more aware of their pensionprovision and can make better decisionsabout their savings, by:

4.2.2 Sending everyone a clear annualstatement of projected retirement income;

• Including courses on financial managementin school Citizenship education;

• Establishing a network of advice serviceswithin local Citizens’ Advice Bureaux orother local information providers.

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Private Saving

4.3 Achieving the vision - NationalSavings Pension

4.3.1 People should be responsible for theirown private provision where possible, building onthe foundation of a decent state pension. The statehas a role in providing a stable framework,offering individuals simple, safe and affordableways to save.

4.3.2 Liberal Democrats will therefore developa strong new arm of National Savings andInvestments, to be called National SavingsPensions (NSP). This will offer simple,inexpensive building blocks for savers and theiradvisers to use in planning a pension. In order tokeep down the costs of these products, NSP couldnot afford to offer investment advice, but the NSPproducts would be a natural step for peopleadvised by the CAB-based pensions advicenetwork (outlined in section 4.5.6).

4.3.3 The strength of the National Savingsbrand and the economies of scale in these fundsmean that NSP will offer pension savers a realbargain. Low long-term charges at wholesale rateson each fund would allow the power of compoundinterest over long periods to build up people’spension savings. It will offer four basic indexfunds: United Kingdom equities (through a 10 or20 year FTSE Tracker), conventional gilt-edged,index-linked gilts and money market/cashdeposits.

4.3.4 Equities have consistently produced verygood total returns for long term savers. Equityinvestment is never risk free, and so-calledguaranteed equity products bite hard intoinvestors’ income to pay for the guarantee. Butanyone investing in the UK equity index for anyten year period since 1918 would have lost incapital terms only twice and gained 83 times.Even between 1928-1938 and 1964-1974,dividend income would have made up the capitalloss. Despite the downturn in the market between2000 and 2002, real returns, after inflation, on UKequities are still very satisfactory over the past tenand fifteen years, beating UK cash (short-terminterest-paying deposits) although underperforming gilts, and are way ahead of cash, giltsand inflation over the twenty years and longer. Aten or twenty year National Savings PensionsEquity Tracker would let small pension saverscapture these historically excellent returnswithout being panicked out of equities in adownturn or suffering middlemen’s excessivecharges.

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4.3.5 Many people, however, no longer spreadtheir pension saving sensibly over different typesof assets, but are putting all their pension fundeggs into the housing basket. This is a dangerousconcentration of risk on one or two individualassets, especially since most people’s wealth,outside pension savings, is tied up in the housethey live in. Liberal Democrats therefore opposedthe Chancellor’s Budget change allowing SelfInvested Pension Plans (SIPPs) to includeindividual houses, second homes or buy-to-letproperties.

4.4 Achieving the vision - annuities

4.4.1 Current rules require every pensionerwith a defined contribution pension fund -whether occupational, personal or stakeholder - touse the entire proceeds of that pension fund,minus a tax free sum, to buy an annuity by the ageof 75. In return they receive a guaranteed annualincome until they die.

4.4.2 There is a general perception amongpeople in their 60s and early 70s that they arebeing forced to buy a product that will yield arelatively poor pension and cause the loss of alltheir capital. Many pensioners also take the viewthat they have saved for their old age and it shouldbe their choice if they want to sacrifice part oftheir pension income now to preserve some oftheir capital to pass on to their children.

4.4.3 We would relax these rules and introducegreater flexibility into pensioners’ choices. Wewill not force people to buy an annuity at 75.Annuities aim to ensure that pensioners do notbecome a burden on the state by spending all theirsavings and then ending up reliant on means-tested benefits. However, with the introduction of

our universal Citizen’s Pension which will lift allpensioners above the poverty line, this argumentbecomes irrelevant.

4.4.4 In the transitional period, with a Citizen’sPension for those aged 75 and over, we will givepeople the option of purchasing a 10 year annuitywith some or all of their savings at the age of 65,to ensure that they had an adequate income beforethe Citizen’s Pension took effect at 75. Thesecould offer a much better rate of return thantraditional annuities - possibly as much as twicethe weekly income - because they would be for afixed term. Alternatively, if a person chooses notto buy an annuity, we would allow them to keepthe savings to do with as they wish provided theydo not come within the scope of means-testedbenefits. These would be taxed on withdrawal inthe same way as they are now, and any remainingsavings would be taxed at the pensioner’s death, asat present.

4.5 Achieving the vision -independent education and advice

4.5.1 A poll by Age Concern found that the toppriority for people in their 50s and 60s is access togood, independent information and advice.Commercial advisers are perceived to be verycostly, and their independence is sometimesdoubted, if they are tied to a company or paid oncommission.

4.5.2 The Association of British Insurers alsofound a direct causal link between the amount ofinformation available and the rates at whichpeople save. People in lower to middle incomebands (according to the ABI report, those withhousehold incomes under £35,000 per year) arefarthest from the target saving level, and therefore

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Average Annual Total Returns (Capital and Income Combined)

Period to end UK Equities UK UK Cash (Short Term InflationMay 2004 Gilts Deposits) (R.P.I.)

10 YEARS 7.3 8.2 5.8 2.5

15 YEARS 8.7 9.3 7.5 3.2

20 YEARS 12.2 9.9 8.5 3.7

most in need of advice. There is a clear role forGovernment to ensure that advice is readilyavailable, independent, trustworthy and affordableto all.

4.5.3 It is vital that people receive a clearprojection of the income they can expect inretirement. The Government is already committedto providing web-based retirement planners in thefuture, but its system is so complicated that thereis little hope of such statements providing thenecessary clarity. Neither do they giveinformation on means-tested benefits, which willprovide an incomplete picture if governmentpolicy succeeds in bringing three-quarters ofpensioners within the scope of means-testing.

4.5.4 Liberal Democrats would ensure thateveryone received an annual statement showinghow much pension they had accrued, drawingtogether savings in different funds, as well as theCitizen’s Pension and any other benefitentitlements. It would then set out the weeklyretirement income that they could expect. Thismight project different income forecastsaccording to whether the individual retired at 60,65 or 70. Once a person reached retirement, theirstatement would show them how much of theirpension pot they had left, how much they hadannuitised and their projected future income.

4.5.5 Such a pension forecast would enablepeople to become better informed about theirindividual positions, but would not of itselfprovide general information and advice, nor helpthem to choose the best pension products to meettheir needs. We want to see courses on financialmanagement and saving as a standard part of

Citizenship education in schools. The FinancialServices Authority (FSA) has already begunlooking at the part it can play to improve theteaching materials and information available inschools and colleges. Equally, courses on how tocalculate a projected pension income couldbecome part of the core secondary numeracycurriculum.

4.5.6 We also want to see the pensions industryinvolved with other savers. The FSA hassuggested a series of generic services to helppeople identify their needs and the productswhich may meet those needs, but which would notoffer the same individual and costly product-specific advice which advisers give now. One wayfor people to access this would be through localCitizens’ Advice Bureaux or other localinformation providers. Communities would havean easy point of access for independent advice,ensuring that no-one was stranded withoutinformation. These local advice centres wouldneed government backing if they were dispensingpension advice, to avoid crippling insurancepremiums covering them against wrong advice.Alternatively, it may be increasingly logical to usethe Internet, digital TV, mobile phones, ATMs andother technology to disseminate this information,taking the burden away from advisers altogether.

4.5.7 It is our aim to equip consumers with theskills to be discerning about the products andservices they use. However, we must beware ofplacing too great a burden upon the financialservices industry. Government must be careful notto add to the costs of providing advice, therebycausing advisers’ prices to rise further.

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Policy Priorities:

• To encourage a flexible decade ofretirement, where retirement becomes aprocess rather than a sudden cliff edgeevent;

• To bring forward age discriminationlegislation immediately and ensure that it isvigorously enforced;

• To ensure that employers scrap arbitraryretirement ages;

• To make it financially possible for olderpeople to return to education and training,by making student loans available to thoseover 55.

5.1 The problem

5.1.1 At the start of the 21st century, people areliving longer, and remaining active and healthyfor longer. As a result, many people are not readyto retire completely at 60 or 65. They may want towind down gradually, mixing work with leisureand learning, or to move out of the occupationthey have been doing for most of their life, andinto a less pressurised job. The cliff-edge ofretirement where someone is fully employed oneday and fully retired the next is outdated. It canleave people feeling bored and frustrated as theystruggle to cope with the sudden change. A surveyby the Chartered Institute of Personnel andDevelopment found that almost one third ofpeople (31 %) wanted to work beyond 60 (Age,Pensions and Retirement - Attitudes andExpectations, CIPD 2003). Yet in 2003, just 8 percent of men and 10 per cent of women continuedto participate in paid work beyond state pensionage (Labour Force Survey Autumn 2003).

5.2 The vision

5.2.1 Liberal Democrats want to solve many ofthese problems by changing the perception ofretirement. It is out-dated to see retirement as asudden event, so that people are full-timeemployed one day and full-time retired the next.We want to give more power to individuals tomake their own choices about how and when they

retire, without them being constrained byarbitrary rules.

5.2.2 To complement this vision of a societywhere people make their own choices aboutretirement, we need to establish and enforcerobust laws against age discrimination. This mustinclude provision for equal access to educationand training, as well as a change in the culturetowards older people in the workplace.

5.3 Achieving the vision

5.3.1 We see no need for this cliff-edge to exist,and want to find ways of helping people to retiregradually and flexibly, over a number of monthsor years if they choose. Liberal Democrats havelong been campaigning for a change in the InlandRevenue rules that prevent people from drawingpart of their occupational pension if they stillwork for the same employer. We welcome theGovernment’s commitment to abolishing thoserules, which will allow older people to reducetheir hours and draw some of their occupationalpension to make up the short-fall in earnings.This will be a significant step towards helpingpeople to have a truly flexible retirement.

5.3.2 If more and more people are able tofollow this pattern of retirement, with someearnings to boost their pension at the start ofretirement and the promise of a higher pensionlater on, the problem of people using up theirprivate or occupational pensions in the early yearsof retirement and then living in poverty as theyget older will be eased. At the moment manypeople use their private pensions to lift theirstandard of living at the start of retirement, butoutlive their savings and are left with aninadequate state pension. The longer theycontinue to earn, and the more they save, the morethis risk is alleviated. Moreover this recognisesthat people are individuals and have their ownideas about how and when they want to retire.They should be given as much freedom aspossible in making that decision.

5.4 Age discrimination

5.4.1 Outlawing age discrimination in theworkplace will also be vital to ensuring that

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Retirement

people can carry on working for as long as theywant to, provided they are capable of doing thejob concerned. Older people have huge talentsand experience, which are often not fullyrecognised or utilised by the wider community.They are also able to pass on their skills andknowledge to their successors. In the workplacehowever, there is often implicit, and sometimesexplicit, prejudice against older workers.

5.4.2 The Government has proposed tointroduce legislation to tackle age discriminationin the workplace by the end of 2006. In oppositionLabour hailed this as a priority, but inGovernment they have dragged their feet. Thistimeframe is not acceptable, therefore, we havebeen calling for immediate implementation ofrobust and rigorously enforced legislation.

5.4.3 We would also outlaw compulsory agesof retirement in the workplace. Obviously, tocontinue working, employee and employer needto agree that it is to mutual advantage. We see noreason to impose a mandatory upper age limit.There should no longer be an assumption that justbecause someone has reached a particular age,they are not fit to do a particular job. Peopleshould be judged on the basis of their ability to doa job, not on their date of birth.

5.5 The third age

5.5.1 The expectations of those approachingretirement have shifted dramatically in recentyears. The baby boomer generation has nointention of growing old quietly and feel that theystill have plenty to give. The active years havebeen termed the third age - the period betweenwork and the onset of the physical and ofteneconomic insecurity of old age - the fourth age -which used to characterise the whole ofretirement. This subject has been examined ingreater detail by the Liberal Democrats’ Third AgeCommission, which offers further suggestions andproposals.

5.5.2 Often, learning, education and re-trainingare seen as the preserve of young people. There isa perception that older people cannot learn newskills or information, and this creates a culturewhere many older people would never considerre-entering education. However, re-training cantransform older people’s lives. By the time theyreach 55, let alone 65, many people are ready tostop doing the job they started thirty or forty yearspreviously. It may have become monotonous, or along period in a senior position may have becometoo stressful. Alternatively, career progressionmay not have brought all the person had hoped, orthere may be another job which had alwaysattracted them. At the moment many of thesefeelings lead people to see retirement as the bestoption, because they fear their age will preventthem getting a job in their preferred field, orbecause they need to re-train and believe they aretoo old. It is short-sighted of the Government toignore the needs of people in this situation.

5.5.3 Liberal Democrats would thereforeencourage people who wish to do so to re-train.We would allow those aged over 55, who arecurrently not eligible for a student loan, to securesuch a loan against their house or other assets toenable them to study. This would becomplemented by our policies to enforce strictanti-age discrimination legislation, and our beliefthat working culture needs to change so thatpeople do not become burnt out. If we continue towork some of the longest hours in Europe it islittle surprise that people reach 60 or 65 and needto stop. A change in working culture wouldbenefit everyone, not least by enabling those whowish to work longer to do so. Assistance to peopleto wind down gradually from full-time work, andperhaps to find new interests and abilities as theyget older, then becomes meaningful.

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6.1 At the moment tax relief is available forpension saving, as an incentive for people to savemore, and to reward those who are saving.Therefore contributions to a pension fund attracttax relief at the person’s top marginal tax rate atthe time they are paid in, investment returns aretax-free, and when the pension is withdrawn it istaxed at the person’s marginal rate at that time. Atax-free lump sum can be taken instead of some ofthe pension income, which can reduce the amountof tax payable on withdrawing the pension.Liberal Democrats agree with the principle ofgiving tax relief on pensions, but we have someconcerns over how this is implemented.

6.2 At present more than half the moneyspent on tax relief for pension contributions goestowards just 2.5 million higher rate tax-payers.This fails to give the most help to those who mostneed it, which is a crucial part of the LiberalDemocrat approach to Government involvementin pension saving. However, another central partof the Liberal Democrat approach is to promotesimplicity, and with the other changes we arecurrently proposing we believe that it wouldcreate more confusion than simplicity to changethe tax reliefs as well. There is a great benefit tosavers across the income range in having a stabletaxation regime, but we would encourage theIndependent Pensions Authority to review taxreliefs to find a fairer system.

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Taxation of Pensions

7.1 Every citizen deserves dignity andsecurity in retirement, but the current pensionssystem provides neither. Successive governmentshave failed to tackle the issues, and piecemealreforms have created layers of incoherent, highlycomplex schemes. Britain’s current and futurepensioners are facing an uncertain retirement.

7.2 An increasing reliance on means-testedtop-ups to prop up the state pension system isrightly seen by pensioners as an undignified hand-out rather than an entitlement, so that manysimply do not claim the money that is rightfullytheirs. In addition, confidence in the occupationaland private pension sectors has plummeted asfirms close or wind up their company schemes,whilst stock market dives and the Equitable Lifedebacle have demonstrated that personal pensionsare not safe either. The newspapers are full of highprofile cases of workers who have saved for 40years and lost everything. Many people no longerbelieve that a pension will provide them with asecure retirement income.

7.3 Liberal Democrats believe that we need anew coherent vision for the twenty-first century;one that will restore dignity and security inretirement. We will introduce a radically simplerCitizen’s Pension, to be paid to everyone whomeets a residence requirement, regardless of theirNational Insurance contribution record. It will beuprated each year in line with average earnings,ensuring that pensioners will genuinely share inthe increasing wealth of the nation.

7.4 We will introduce the Citizen’s Pensionfor everyone over 75 as a first step to extending itto all pensioners. Older pensioners tend to be thepoorest, and it is right that we start by addressingtheir needs.

7.5 The Citizen’s Pension will be paid at thelevel of the Guarantee Credit - currently £105.45per week for a single person and £160.95 for acouple - and will immediately lift more than onemillion pensioners out of means-testing. It willbenefit women in particular, many of whomcurrently have very small pension entitlementsand are more likely to be reliant on incomesupport. It will also be paid without the need for

form-filling, phone calls to call centres, or theprovision of intrusively personal details.

7.6 It is also vital to restore confidence inoccupational pensions, the traditional goldstandard of pension saving. We support greaterprotection for those who have already lost theirpensions when their companies became insolvent,and will ensure that the Government standsbehind the new Pension Protection Fund, as thelender of last resort. This will enable it to honourits commitments to protect future entitlements.

7.7 We will ensure greater security forindividuals in occupational pension schemes byintroducing a kitemark system to grade thedifferent packages of benefits on offer. Take-up ofcompany pensions will be boosted by requiringemployees to opt out rather than opt in to theirfirms’ schemes.

7.8 To encourage individuals to save for theirown retirement, we must ensure that every pennysaved is a penny better off. Removing the bulk ofmeans-testing will create an incentive to save, asno-one will be penalised for putting money asidefor their retirement.

7.9 In the transitional period before theCitizen’s Pension is extended to all pensioners, wewill offer those under 75 the option of purchasinga 10 year annuity with some or all of their savings.This will ensure that they have an adequateincome before they reach 75 and start getting theCitizen’s Pension, and could offer twice theincome offered by traditional annuities. We willalso abolish the requirement to buy an annuity bythe age of 75.

7.10 Many people are deterred from saving bythe complexity of the products available and thelack of inexpensive, accessible advice andinformation. We will build upon a trusted brand todevelop a new National Savings Pension, whichwill offer simple, safe and affordable savingsproducts. We will introduce financialmanagement and saving as part of Citizenshipeducation in schools and look at ways for peopleto access savings advice through local Citizens’Advice Bureaux. Twenty-first century technology

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Conclusion

can be harnessed to provide pension informationand forecasts for individuals, and we will considerthe best ways in which the Internet, digital TV,mobile phones and ATMs can be used to thispurpose.

7.11 As life expectancy increases and peopleremain fit and active for longer, we need a newvision of retirement. We want to give older peoplethe opportunity to wind-down gradually fromwork over a flexible decade of retirement ratherthan retiring completely overnight. To achievethis, we must transform today’s ageist culture,which assumes that older people can no longermake a valid contribution to society. Agediscrimination legislation needs to beimmediately and vigorously enforced, and we willencourage older people to re-train, change jobsand even go back to university if they wish to doso. Older people have a wealth of knowledge andskills which we must not dismiss or devalue.

7.12 This paper lays out a twenty-first centuryvision for pensions and a twenty-first centuryvision for retirement. We believe that it will tacklethe pensions crisis, sweep away pensioner povertyand restore confidence that a combination of stateand private pension provision can truly providesecurity and dignity in retirement.

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This paper has been approved for debate by the Federal Conference by the Federal Policy Committeeunder the terms of Article 5.4 of the Federal Constitution. Within the policy-making procedure of theLiberal Democrats, the Federal Party determines the policy of the Party in those areas which mightreasonably be expected to fall within the remit of the federal institutions in the context of a federalUnited Kingdom. The Party in England, the Scottish Liberal Democrats and the Welsh LiberalDemocrats and the Northern Ireland Local Party determine the policy of the Party on all other issues,except that any or all of them may confer this power upon the Federal Party in any specified area orareas. If approved by Conference, this paper will form the policy of the Federal Party, except inappropriate areas where any national party policy would take precedence.

Many Liberal Democrat policy papers contain proposals which would change the way public money isspent. Many also involve passing new primary legislation. Clearly, in a single parliament, it might notbe possible to implement all of our policies. Therefore, at the time of a General Election, the LiberalDemocrats produce a manifesto which details specific spending and legislative priorities should theparty be elected to government. This means that no proposal in this paper should be taken as a guaranteeor as a spending commitment for a first parliamentary term until it has been published in a fully costedmanifesto containing our priorities and guarantees.

Working Group on Pensions Policy

Ben Stoneham (Chair) Darren McLauchlanCllr Cathy Bakewell Lord OakeshottBaroness Barker Dr John RyanLaurence Cox Sir Aubrey Trotman-DickensonJonathan Davies Philip VinceJef Foulger Prof Steve Webb MPFrank Griffiths Roger HeapeNeville Hunnings Staff:Paul KennedyJames King Claire BenthamDr Tim Leunig Paul HodgsonChris Long Jo Holland

Note: Membership of the Working Group should not be taken to indicate that every membernecessarily agrees with every statement or every proposal in this Paper.

Comments on the paper are welcome and should be addressed to: Policy Unit, Liberal Democrats, 4Cowley Street, London SW1P 3NB

ISBN: 1 85187 723 1 © August 2004

Further copies of this paper may be obtained, price £4.00 plus £1.00 postage and packing from:Liberal Democrat Image, 11 High Street, Aldershot, Hampshire, GU 11 1BH, Tel: 01252 408 282.

Printed by Contract Printing, 1 St James Road, St James Industrial Estate, Corby, NN18 8AL.This document has been prepared using 100% recycled paper.

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