Cicero Policy Briefer

Issue 2, July 2006

Pensions White Paper: dealing with the other affordability test

By Jacob Coy

Ever since the Government launched the Pensions Commission, chaired by Lord Turner, which proposed the most fundamental reforms to our pensions system in decades, it has stressed the need for broad consensus. Nowhere is this input needed more than from the general public who will after all be expected to save more and work longer in order to make these reforms sustainable. The Government’s National Pensions Day aimed to do just that – inform the public and gauge opinion.

Now consider the ongoing discussions between the Treasury and the DWP as to how we best meet the so-called “affordability test” (one of five key tests which pensions reform must pass). This discussion concerns the need to ensure that any proposals for reform are viable in the long term without requiring future governments to increase general taxation in order to pay for them. Over time this should mean that the Government does not spend more than the current level of 5-6% of national wealth on state pensions. Nowhere is this principle put to the test more than with the Government’s commitment to bring back the link between increases in the state pension and earnings. This could be as early as 2012, though the announcement came with the important caveat that it was "subject to affordability and the fiscal position".

While protecting tax revenues is clearly important, there is another affordability test which is arguably just as important, yet to which the government seems to have paid less attention: namely, the affordability of savers to actually make additional pensions savings. The proposed personal accounts, as part of the new centralised national savings scheme, are seen as the solution to the private pensions savings gap. But so too were group stakeholder schemes – and over 80% of those still sit empty.

So will the NPSS actually deliver? Auto-enrolment will help overcome apathy, but some obstacles to a savings culture are more persistent than apathy, with affordability being the biggest. You can’t save it, if you haven’t got it to save. Evidence from the DWP suggests that as many as 40% might opt out because they lack the spare cash, or might have debts to repay, or simply want to make other arrangements. A recent industry report* suggests affordability to save could scupper up to one in three people in their attempts to save more. Not surprisingly, this extends to well over half of those on lower incomes – the target group of savers. Clearly, the Government must start to address this ‘other’ affordability test if the broad consensus is to hold in the long run.

*The Scottish Widows Pensions Report 2006

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.