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An article published in SPAG's Newsletter for March 2005
"The UK state pension system is among the least generous in the developed world.”
That's not just our view - it's what the Pensions Com-mission, appointed by the government to advise on pensions policy, wrote in its first report last October.
The basic state pension will rise next month, as it normally does each April, in line with the increase in prices over the previous year. For a pensioner with a full contribution record, this means an increase of £2.45 a week, from £79.60 to £82.05 - far below the minimum income of £109.45 which those who claim the means-tested Pension Credit are entitled to.
Why are British state pensions so mean? It’s not because we can’t afford to do better. On the contrary, as the Government Actuary’s latest report shows, the National Insurance Fund, from which our pensions are paid, continues to be one of the nation’s most profitable financial institutions. In fact, it’s a wonder nobody has suggested privatising it.
The Fund is fed by working people’s weekly contributions and each year’s income is intended to be spent on benefits paid in the same year. Unlike private pension schemes, the state scheme doesn’t need to build up colossal reserves - it only needs to break even year by year.
But that’s not the way it has worked in recent years. National insurance contributions are a percentage of earnings, so the Fund’s income automatically rises in line with earnings. But pensions and other benefits are normally increased in line with prices. As earnings rise faster than prices, the Fund makes a hefty profit year after year.
A year ago, it was sitting on a surplus of over £27 billion. In the past 12 months, it has raked in £4 billion more than it has spent and the Government Actuary predicts a profit of £3.4 billion in the coming year, bringing the total in the Fund up to £34.6 billion by March 2006.
The Actuary recommends that, to ensure that the Fund doesn’t go into the red, it should start each year with enough money to pay two months’ benefits - about £10 billion. That would still leave about £25 billion available for spending in the coming year. The total cost of the basic pension is now running at about £43 billion a year, so an extra £25 billion spent over the next few years could make a big difference.
Any such suggestion provokes a horrified reaction from ministers. Just because the Fund is rolling in money now, they say, we can’t assume that it will stay that way. The Government Actuary’s figures, however, show that the situation of the Fund is set to improve steadily over the next five years, with annual profits rising from £3.4 billion in 2005-06 to £7.4 billion in 2009-10. By then, if present policies continue, the balance in hand will have risen from £31 billion to £60 billion!
Spending that money would not, in itself, be enough to raise the basic pension to a level that people could live on without the addition of means-tested benefits. To achieve that, more money would have to be found, for instance by cancelling the cuts made in employers’ contributions in recent years and reintroducing the Treasury’s annual contribution to the Fund. But persuading the government to use the money already available for its intended purpose is an essential first step. As things are at present, both working people and pensioners are being conned.