It is with no great enthusiasm that I forced myself to read the latest Reform Scotland report. This time on pension reform. The format is predictable. A bold 'wake up' headline, some warm words and serious looking charts to reassure us that the proposals are reasonable, and then the sting in tail comes with the usual right-wing Neo-liberal solutions.
This paper, written by a couple of investment bankers, is beyond brazen in its attempt to hand our pensions over to the very masters of the universe that got us into the current financial mess!
The headline, dutifully churned out by a busy media, is that politicians have been sleepwalking to disaster on pensions, both state and public service pensions. Really? All public service pensions were renegotiated in 2008, then we had the Hutton Report, followed by the UK Public Service Pensions Act. That resulted in another renegotiation that is supposed to last for 20 years. It doesn't feel like sleepwalking to someone like me who has spent months of late nights negotiating pension schemes. On the state pension scheme, again the UK government consulted and then legislated for a new flat rate pension and other changes. If there is any sleeping it is Reform Scotland, but then again they are usually on a different planet.
They tell us that pensions are unfunded. Not exactly true. Successive governments have decided to fund the state and many, but not all public service schemes, on a 'pay as you go' basis. The revenue comes in each year and the benefits are paid out. Not exactly unfunded, but there is no long term pot. Actually, the largest public service pension scheme in Scotland (local government) does have a pot, a £24bn one at that.
Reform Scotland's brilliant idea is to turn all our pensions into defined contribution schemes and privatise them. The fact that this would drum up a massive boost in business for their pals in the finance industry, is I am sure just a coincidence!
The problem is that they would charge us a huge amount of money for the pleasure of our much smaller pensions. It's not an accident that private pensions in the UK are such poor value for money. It's about structure, poor performance and excessive (often hidden) fees. Far from giving us 'control' of our pensions, we would be handing them over to the 'masters of the universe'. Defined contribution schemes put all the risk on the individual, not the employer or state that is better placed to absorb the risk. Call me old fashioned, but I prefer democracy any time!
I will now shock Reform Scotland by agreeing with at least one small point in their paper. They propose flat rate tax relief for their new scheme. However, we don't need a new scheme to do that. Government tax subsidies for retirement saving are expensive, ineffective and regressive. Out of the £54 billion the government invests in tax relief, through income tax on employee and employer contributions, 58% goes to the top 10% of wealthier taxpayers (See Anna Rosso's NIESR blog post). As the evidence suggests that there is little need for such subsidies for wealthy people, we should therefore abolish higher rate tax relief. Because income tax is progressive, tax relief is regressive. By limiting tax relief to 20%, the government would save around £7 billion each year.
Reform Scotland's crazy scheme is a recipe for pensioner poverty and huge bonuses for the investment bankers. But as they dreamt up this plan, that is clearly the planned outcome.