Mps must look long term

Pensions and politics are inextricably linked since they each deal with the allocation of scarce resources between conflicting priorities. It is, therefore, both forlorn and inappropriate to call for the separation of pensions and politics. However, we could do pension politics much better.

Ideally, when a new government comes to power it should have a vision of where it would like the pension system to be in 25 years’ time. It should then check the extent to which existing legislation and government infrastructure is likely to deliver the desired outcomes.

If a change in strategic direction is required, this should be imple-mented as quickly as possible in a new parliament, so any political pain associated with a change of direction will have been forgotten by the electorate when it is next asked to pass judgement on government policy. In practice, reality is a million miles from this rational approach.

Politicians no longer put adult manifestos before the electorate, preferring to rely on bland platitudes. Thus, having arrived in office, they have no long-term strategy by which to guide their daily activities. As a consequence, policy is made on the hoof as politicians respond to the “somebody must do something about it” syndrome whenever there is a system failure.

This means that long-term pension policy is made through the rear view mirror rather than through the windscreen.

What makes matters worse is the tendency to micro-manage. Politicians do not think through the policy, they pass this incomplete policy to parliamentary draftsmen, who then produce legislation based on the false assumption that our legislators know everything about everything. When reality dawns, inadequacies in our legislation do not result in big bonfires but rather amending legislation, which usually makes things even worse because no-one is honest enough to acknowledge that legislation in principle is better than legislation by prescription.

Sadly, many pensions professionals too yearn for prescriptive certainty which their experience should teach them is unattainable. Any professional worthy of the name should relish the prospect of plying their trade in a world governed by principle-based legislation.

If ever a government had an opportunity to buck the trend of history, it was this one. The majority won in May 1997 was sufficiently large for the government to anticipate at least two, and possibly three, terms in office. If only it had taken this opportunity to take our hotchpotch pension system by the scruff of the neck and legislate differently for a better world.

Yes, there would have been some transitional pain, but by now that pain would have been long forgotten and we would have moved onto the sunny uplands of a more rational pensions landscape. Instead, we have continued to get more of the same knee-jerk sticking plaster solutions to yesterday’s problems.

Most of the government’s critics highlight tax policy. I beg to differ. It is the layer upon layer of well-intentioned but counterproductive social policy laws that have destroyed all that was good about the UK pensions system. Such social policies have usually been based on the myth that risk-free pensions are both affordable and attainable. While tax simplification may still be causing nightmares in some back offices, it has really emancipated the electorate.

The vast majority of people can now save what they want, when they want and how they want for retirement, free from a one-size-fits-all Inland Revenue straitjacket based on the “use it or lose it” approach to tax incentives.

As a result of tax simplification, savers can now adopt a more holistic approach to their financial management. If they enter the world of work with debts, they can use spare cash to clear them. They can then build a rainy day nest egg to avoid going into debt again. Then can come more medium-term market-linked, but accessible, mutual funds.

Only when things become clearer might it make sense for such savings to be rolled over into a more tax-advantaged but less accessible pension regime.

The auto-enrolment approach to personal accounts flies in the face of this financial logic. It assumes that the default savings vehicle for the less well-off is a market-related pension plan. This will seldom make sense. As a consequence, the drift towards personal accounts fills me with awe.

What we need from our legislators, whoever is in power, is inherently simple. We need a labour market which is blind to age so folk of all ages have access to learning and earning opportunities. We need a simple state pension which provides a guarantee against absolute poverty in old age, with parliament having the right to revisit the definition of “old” and “absolute” from time to time. Finally, we need a market for pension savings which is proportionately regulated acknowledging the asymmetry of knowledge between sellers and buyers.

Employers and employees, commercial providers and their customers should then be left to get on with it. Those employers who wish to share pension risk should be free to do so knowing that parliament will not subsequently renegotiate the deal. If our next prime minister can adhere to these three key principles, chances are his or her pension legacy will stand the test of time, and will not need cobbling together at the 11th hour because the preceding decade has been wasted.

Alan Pickering is chairman of the Life Academy and a senior consultant at Watson Wyatt