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The Actuary The magazine of the Institute & Faculty of Actuaries

The Turner Retort

eans-testing represents the practical application of the rule on fair and reasonable social behaviour summed up in the saying ‘from each according to their ability, to each according to their need’. Our ability to contribute is determined by the tax structure which, broadly speaking, is means-tested; so why should not entitlement to benefits be similarly tested?
In the second report of the Pensions Commission there is a recommendation that state means-tested allowances (SMTAs) for minimum income, pensions credit, housing, council tax, etc should be eliminated by a general increase in the basic state pension. Obviously this benefits not only those currently receiving such allowances, but also the large number of the better-off currently getting only the basic state pension. Attempts to justify this change are largely based on the grounds that the present arrangement is a disincentive to saving, a view strongly supported not only by the Association of British Insurers but also the profession’s presidents and Councils does this not savour somewhat of self-interest on our part? Are we behaving like a trade association?

Compulsory saving
The report recommends a compulsory saving scheme. This proposal is primarily aimed at the lower-paid. However, under the current system, many of the lower-paid are entitled to SMTAs upon retirement. So, unless SMTAs are eliminated, any attempt to inveigle the lower-paid into saving in any form which resulted in a pension would be unfair because the effect of any benefit would be negated by the means-testing rules. It would be regressive taxation applied to those least able to protect themselves.
If, therefore, the recommended compulsory scheme were to be introduced and SMTAs were to persist, the lower-paid should be advised to opt out. But who would have the responsibility to recommend that? The insurers? The Financial Services Authority? Or ought we as the profession most identified with pensions be proactive and make the position clear?
Steve Bee, head of pension strategy at Scottish Life, recently highlighted the impossibility independent financial advisers would have in attempting to present fairly to the lower-paid any reasonable case for participating. This applies particularly to women, who make up a substantial proportion of the lower-paid.

In the report itself there does not seem to be any realistic costing for eliminating SMTAs. There are some indications in terms of overall costs at GNP level, but no real assessment in terms of the effect on taxpayers’ pockets. What is called for is an estimate of the potential cost in terms of the increase in current taxation. I have suggested to the Institute president and Council that we should provide this, but have had no reply.

The current position
There is evidence (see the Financial Times of 22 March) of a basic difference of opinion between the chancellor and Lord Turner. The FT reported that the chancellor prefers to extend means-tested benefits, not to eliminate them. In a talk on Radio 4 (in which he was accused of being financially and politically naïve) Lord Turner did say it was unlikely that it would be practicable to eliminate all means-testing.
Another reality Lord Turner has ignored is that the lower-paid (those earning less than £20,000 a year) have little to spare with which to save. Not only is their income often sporadic and unsecured but already many of them are heavily in debt. It was these factors which made the stakeholder scheme such a fiasco, a neat tax-saving device for many of the better-off.

Economic growth
The presentation in the Turner report is in money terms, thus ignoring another powerful factor, namely the cumulative effect of steadily increasing productivity across the world economy, which must be markedly advantageous for our cost of living. Even if the growth in productivity averages only 2% a year, this means that in 25 years’ time it will have increased by nearly two-thirds, while if it is 4% a year, as suggested by some writers if there is not a natural or man-made disaster, then the result would be two-and-a-half times what it is today.
If these figures are realistic there are likely to be sufficient margins not only to satisfy the reasonable expectations of those still working but also provide the goods, and many of the services, for those ranked as retired. What is likely to be in short supply are the carers to look after those incapable of looking after themselves.
Compulsory funding does not provide a simple answer to our pensions problems it just results in a different set. The simplistic assumption that saving is a good thing for all, at all times and in all circumstances, is unreal. If such forced saving goes into government bonds then it is a tax in another form, if it goes into shares it will increase demand and eventually could be the dominant factor in the market. It would be the government’s responsibility what would the wise men at the Treasury do to prevent another boom and bust?
This is a complex subject, and there are no simple fixes. After a working lifetime spent in life assurance and pensions business in this country and abroad, I am certain that the treatment of means-testing is a crucial issue that needs early clarification. If, as seems evident, it is deemed financially and politically impractical to eliminate means-tested allowances in the foreseeable future, then the sooner this fact is acknowledged the sooner will a realistic debate develop.