Preserving pensions is a huge challenge

Some encouraging news for pensioners, in the short term at least. David Cameron has signalled that he wants to keep the “triple lock” in place should he win the next election – a guarantee to increase the state pension every year in line with whichever is the highest of inflation, average earnings or a baseline of 2.5 per cent. It is thanks to the triple lock that ministers can claim that in 2012, the basic state pension enjoyed the largest cash rise ever seen.

On top of that, Steve Webb, the pensions minister, has told The Sunday Telegraph that he wants the elderly to be allowed to switch to better-paying annuities – in the same manner that home owners change their mortgage deals every few years. It is certainly an attractive idea. At present, many people are exploited by a market that is far too complicated, is packed with hidden charges, and discourages people from shopping around for a better deal (and, in many cases, from taking out a pension at all). It is calculated that some consumers could have raised their pension incomes by more than 20 per cent if they had only purchased their annuities from a different insurer.

Welcome though these changes are, they are no panacea. Of course, the principle that the state should assist people in their old age is a noble and often necessary one – and given that people have contributed towards this all their lives, the provision of a proper pension is a moral contract between the state and the individual. At the same time, however, the startling fact is that welfare costs now amount to a quarter of all public spending – and around half of the welfare bill is pensions. As our population ages, this expense increases, becoming a challenge passed down from one overtaxed generation to another.

Over the coming decades, we will need to move towards greater reliance upon the private sector before bankruptcy looms. That means Britain needs to encourage the growth of the independent pensions market. So the Government’s moves to make it easier to shop around are most welcome. It might also help if individuals were able to opt out of the state arrangement altogether and invest instead in privately managed insurance schemes. Either way, bold action is needed to ensure solvency in the long term.

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