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Last Updated: Wednesday, 23 November 2005, 13:19 GMT
Reforming the state pension system
By Christine Farnish
Chief executive, National Association of Pension Funds

Christine Farnish
Christine Farnish would like to see state pension reform
One of the leading figures in the UK pensions industry outlines her prescription for encouraging Britons to save more for their retirement.

Pensions and politics make uncomfortable bedfellows.

Over the decades, successive governments have introduced new legislation - always with the best of intentions, but rarely with the best of results.

If you think about it, this is hardly surprising.

Anyone entering the workforce today could expect to work for 40 years or more, before receiving a pension which, if they are lucky, could cover a 30 or 40 year retirement.

Politicians, however, tend to have more immediate horizons. Their object is to win elections, which are rarely more than four years apart.

For the first time since the 1970s, politicians on all sides are waking up to the fact that the UK's creaking pension system needs fundamental reform

There are no short term political gains to be made by long term changes to the pension system.

And, while politicians have repeatedly tampered with Britain's pensions system, they have rarely been prepared to make difficult long-term decisions.

But those decisions are now becoming inescapable.

Living longer

For the first time since the 1970s, politicians on all sides are waking up to the fact that the UK's creaking pension system needs fundamental reform, and the report of Lord Turner's Pensions Commission, due at the end of November, is expected to set out options for such reform.

To get an idea of what needs to be done, it's important to understand how we found ourselves in this position in the first place.

One key factor is that we are all living longer.

This is, of course, good news. But it does mean that if we are to enjoy a decent income in retirement, we either need to retire later, or save more, or some combination of the two.

Yet, at a time when we should be saving more, pension saving has suffered a series of blows.

Successive governments have introduced layer upon layer of red tape for employers who offer their staff pension schemes - adding to costs, and making the UK pensions system the most complicated in the western world.


The government has a Better Regulation agenda, and pension regulations are among the most impenetrable on the statute book.

The UK pension system is crying out for someone to slash away at red tape.

One of Gordon Brown's first moves, in 1997, was to harvest 5bn a year from company pension schemes, and the downturn in stock markets from 1999 onwards affected pension funds as much as any other investors.

The result is that we find growing numbers of employers cutting back on pension provision for their employees, or even getting out altogether.

This in turn means tomorrow's pensioners are in danger of facing a longer retirement, with less funding. It's been estimated that the gap between what we are saving, and what we need to save, is some 27bn a year.

People want a simpler, fairer system, which does not penalise women who have taken work breaks

Last year's Pensions Act aimed to help restore consumer confidence in pensions by setting up the Pension Protection Fund, a safety net for those whose employers go bust with an underfunded pension scheme.

No one would argue with the principle of greater security for pension scheme members.

But the Act did little to address the fundamental long term weaknesses in our pensions system.

Citizen's pension

Back in 2002, the NAPF published a policy paper, "Pensions - Plain and Simple", which set out our ideas on the route forward.

At the heart of this was the abolition of widespread means testing in state retirement provision.

Female OAP
Women could be better off under a citizen's pension

Means testing acts as a disincentive for people to save and fails, on the latest available figures, to deliver much needed pension benefits for up to a third of those poorer pensioners who are entitled to help.

We proposed the introduction of a simpler, fairer Citizen's Pension, which would provide a more secure guarantee against poverty in later life, and lift up to 10 million future pensioners off means tested benefits.

Instead of the present tangle of state pension benefits, the Citizen's Pension would give everyone a basic, adequate state pension payment of 109 a week at today's prices.

It would be paid on the basis of UK residency, rather than National Insurance contributions, like the present system, which penalises many pensioners - particularly women - who have taken work breaks to raise families.

Our research shows that these proposals reflect the pension priorities of consumers.

People want a simpler, fairer system, which does not penalise women who have taken work breaks, and which does not subject millions of pensioners to means testing.

The Citizen's Pension meets these criteria, and makes the whole pensions landscape much clearer.

The "deal" from the state is 109 a week; for anything above that, you have to save through a workplace pension or other savings arrangements.

The new system would reduce pensioner poverty, provide a far simpler state pension system on which to build additional savings, and would be fairer to millions of women, carers and others who miss out under the current system.


We also made another proposal which would help maintain a robust future for our pensions.

One of the reasons the UK pensions system is in such poor health is that decisions have too often been taken without the benefit of independent advice aimed at ensuring long term continuity and sustainability.

We think an independent Pensions Standing Commission would provide this advice, based on the depth of understanding and knowledge of its members.

There is much to be said for an independent voice helping to inform politically important decisions, and a Pensions Standing Commission could bring vital qualities of independence and expertise to the important process of pensions decision making.

Since our original proposals for a Citizen's Pension were published three years ago, the debate on pension reform has moved on significantly.

Facts and figures outlining the depth of the UK pensions crisis

The principle of a simple, adequate, state pension, available to all, is now widely accepted among opinion formers in the pensions, political and academic arenas.

We think a Citizen's Pension would make tangible and affordable improvements to the retirement prospects of millions of Britons, and help establish a sustainable pensions system for the 21st century.

We hope Lord Turner and his colleagues will agree.

And, more importantly, we hope that politicians will be prepared take critical long term decisions in the interest not just of this generation, but of others to come.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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