Chancellor must change tack or risk the wrath of pensioners

Next month’s Autumn Statement could cause the Government to lose the next general election or incur a massive compensation bill unless the Chancellor changes his current policy on pensions.

Regular readers may have guessed that I am referring to the mis-selling scandal that is bound to result from automatically enrolling low-income people into the new National Employment Savings Trust (Nest). As things stand, forcing them to start saving in Nest or other pensions will merely deprive them of means-tested benefits to which they would otherwise be entitled in the future.

So compulsory saving will be a waste of money for them. Worse, it will be bad advice for those who are in debt by the fourth week of every month or, for any other reason, cannot afford to lock cash away until they reach retirement age. Millions of graduates might be better off paying down student debts, for example, or saving to buy their first home.

The legal principle that compensation must be paid when financial advice, let alone compulsion, causes any individual to be worse off is well-established. A series of scandals including personal pensions sold to people who might have been better off in company schemes, with-profits endowments and payment protection insurance (PPI) have all demonstrated that it is no defence to claim good intentions.

So, for example, arguing that auto-enrolment will reduce the burden on taxpayers by cutting benefits won’t reduce individuals’ entitlement to compensation when they realise what is going on. But most of those affected are young or low-paid or both – in other words, the groups of people who are least likely to be members of company schemes already or take much interest in pensions. As a result, it will take a while for this scandal to reach the front page or television screen.

Even so, massive numbers are involved. About 300,000 people had a total of £4m taken out of their pay packets when they were auto-enrolled into pensions last month, when the new scheme was launched, and millions more will be affected as smaller companies and their employees are brought within its scope in the months and years ahead. And nearly half of all pensioners are currently so poor that they are eligible for means-tested benefits.

Lest this sound alarmist, there is no need to take my word for it. Pensions expert Dr. Ros Altmann, the director-general of Saga, summed up the problem succinctly this week: “It is dangerous to auto-enrol people into pensions unless we can be sure they will not lose all their savings in a state pension means test.”

In a bid to reduce this risk, as recently as the last Budget the Chancellor said he intended to increase the basic state pension to the equivalent of £140 a week in 2010 money, with effect from 2015. That would have defused the auto-enrolment scandal by massively reducing the number of pensioners entitled to means-tested benefits.

Unfortunately, to keep this pledge affordable, the higher payments were to be restricted to people reaching state pension age after 2015. That proved a fatal flaw in the plan. Excluding more than 10 million existing pensioners from the higher payouts would be political suicide.

While millions who had paid tax and National Insurance contributions (NICs) all their working lives would be excluded forever from the improved basic state pension, many others who never paid any tax or NICs but none the less have residency rights in the UK and retired after the change might benefit.

No wonder the Prime Minister’s office vetoed the plan as soon as its political consequences became clear. No one needs to tell Number 10 that pensioners tend to exercise their right to vote rather more rigorously than younger constituents. So the original proposals would have resulted in an extreme example of a reform where those who miss out make most noise while many winners would remain blithely unaware of what was going on.

Neither is an attractive proposition for legislative change just months before the next general election is due. To be fair to Steve Webb, the pensions minister, it isn’t his fault that the benefits system is so complex that any attempt at change is like trying to nail down a warped floor board. As soon as you think it’s fixed at one end – boing! – up it pops at the other end.

What to do? Fortunately, the demographics offer a solution, which is supported by pensions experts including Dr. Altmann, Steve Bee of Paradigm Pensions and Tom McPhail of Hargreaves Lansdown.

Restricting the increased basic state pension to everyone aged over 75 would mean only 4.4 million people would benefit, while restricting it to those aged over 80 would limit initial payouts to only 2.6 million.

Either option would offer everyone, including existing younger pensioners, the hope of benefiting one day while cutting the cost to a half or quarter of the level of introducing better pensions for all immediately.

Either option would also avoid the massive costs of compensating people wrongly compelled to start saving and have the additional benefit of helping to win the next general election. Or at least avoid losing it. What’s not to like?