Global Aging Issues
Interview with Mr. Mervyn Kohler
Head of Public Affairs, Help the Aged / News Release
January 17, 2006
In 2002, an independent body was commissioned by the UK government to assess the challenges associated with the UK pension system and to make recommendations for its reform. The Pensions Commission published an initial report in October 2004, which presented an analysis of the adequacy of the pension system and personal savings in the UK. The final report, which provided recommendations for reform and the likely results if policy is unchanged, was released on November 30, 2005. This long awaited final report sparks the beginning of a national debate on pension reform, which is expected to conclude with wide-scale pension reform legislation.
The AARP Global Aging Program spoke with Mervyn Kohler about his reactions to the recently released Pensions Report and other timely aging policy issues in the UK. Mr. Kohler is Head of Public Affairs at Help the Aged, a UK based charity fighting to free disadvantaged older people in the UK and overseas from poverty, isolation and neglect.
GAP: The recent release of the Pensions Commission Report has sparked a national debate on pension reform. What are Help the Aged’s priorities in this debate?
MK: Our priorities are a bit sideways to where the Pensions Commission Report was going. Our priorities are dealing with poverty of the population today while the Pensions Commission Report was not looking at that, but at the problem of pensions in the long run. It made clear that the arrangements we have in place today will not guarantee the equity of people twenty to thirty years down the road, and that was its principal concern and official remit.
We believe that this is important and we buy into that, but we do have an immediate problem of many pensioners living today below the poverty line. There was not a lot in the Pensions Commission Report dedicated to that problem. There was some but not enough.
GAP: If the Pensions Commission’s recommendations are made policy, will pensioner poverty be mitigated?
MK: It will certainly be mitigated. What the Pensions Commission has done in political terms is quite cleverly calibrated. It has come up with a series of recommendations that, without question, address the issues that need to be addressed. In doing so, it left government with quite a bit of wiggle room in terms of when these recommendations should be introduced and the balance and trade-offs between working longer, saving more and accepting higher taxes.
When various recommendations should be introduced is extremely important from the point of view of pensioners of today. If the government doesn’t implement legislation until 5 years down the line, today’s pensioners won’t feel much tangible benefit.
The other wiggle room that the recommendations have left is in regard to having to take action on working longer, saving more and paying higher taxes. The emphasis that the government places on those elements may not do much for the pensioners of today. Pensioners are already retired and they are not interested in savings because they’ve made them already. They are going to be particularly interested in what comes out of the agenda on paying more tax on income and what comes out of it in terms of benefits. Adair Turner says we need action on all of these fronts, but up to a point you can choose what mixture of the elements to implement.
The government white paper which will be released this spring is going to be tremendously important. The way in which government responds will be important to pensioners of today and tomorrow depending on the particulars of its proposals against the recommendations.
GAP: Are Adair Turner’s recommendations generous enough or is a more generous state pension necessary?
MK: I think his suggestions are cautious and in some degree modest. I think he has been trying to create a package which would command a new consensual approach of all of the numerous stakeholders. He wants the government to buy in, he wants the opposition to buy in and he wants pension providers to buy in. To that point he has been modest. He hasn’t gone to anything so radical that it will frighten people, but the mood in UK is ready to accept that we need to spend more on our pension provision because it has been so conspicuous in recent years that the mainstream of pension provision has been falling apart at the seams.
We have seen mass closures in occupational pension schemes, we have seen fewer people getting pensions and we have seen a state pension and social security arrangements barely compensating for any of these changes. And our basic state pension scarcely provides for basic subsistence and costs of living anyway.
GAP: The current UK pension system has created an income equality gap for women pensioners. The Pensions Commission report seeks to solve this problem through a flat-rate state pension based on residency and a second state pension based on contributions or caring credits. Are these recommendations enough to close the gender gap in pensions?
MK: If they were implemented soon enough they would succeed, in large measure, in [closing the gender gap]. This is largely an issue of how quickly they get resolved. The Pensions Commission talks about paying a ‘full’ basic pension to people over the age of 75 regardless of their contribution record. That leaves the question of what we do with people age 65-75 and it probably means many will work longer in some capacity.
There is a real problem with the issue of credits. How do you backtrack over somebody’s history and create a carer’s credit that accounts for people who were carers before the point that the government established the Home Responsibilities Protection (for women looking after children) in 1978 or even the more recent carer’s credit. There is no mechanism to track these credits. The Pensions Commission proposal would help people who are beginning careers today and will be able to keep adequate track of caring (1). But it does nothing for older people today who do not have any official caring record. 1978 was when we first implemented any form of credit and until then we had no credit built into the pension system.
I think this is a problem and that is why Turner is suggesting that people over 75 get a full state pension, whether they had earned credits or not. That is actually helpful in solving some of the problem.
This issue is something Help the Aged will be pushing for quite hard because we have so many women over 75 who have built up small entitlements in even our meager state pension because the state pension has been based on contributions. If you are a woman, you need to work 30 years to get a full pension and most of these women have not worked 30 years because of their caring responsibilities. The employment structure in the UK has not enabled women to work in that way in the past.
GAP: One of Help the Aged’s key principles to successful pension reform is that the reformed system be “clear and understandable.” Would the Pensions Commission’s recommendations accomplish this goal?
MK: I think the report is a step forward, but the recommendations do not amount to a system that is as clear as we would want it to be. It is probably clearer in the sense that people have fewer decisions they have to make, but the judgments about building up an adequate pension are still complex. From the individual point of view, the Turner Report clarifies a little bit going forward, but certainly not as clear and transparent as we would like it to be.
We have a government trying to push forward an “informed choice” agenda where people will be provided with a forecast for what they can expect to get when they arrive at age 65. People will have more information into what income they can expect in retirement. I think we’re going in the right direction with this agenda, but people are still going to have trouble determining what there income will be worth in a set period of time, calculating for inflation and so forth.
GAP: It seems that any pension reform in the UK will seek to make greater use of older workers and the Pensions Commission report recommends a gradual rise in retirement age. What steps must be taken to maximize the potential of older workers?
MK: I’d like to make two points on that. First of all, I think Turner has been very helpful by indicating that the maximum years of work necessary for building an adequate pension are not as frightening as the media has been leading people to believe.
Turner was talking about retirement age being 66 in 2020 and 68 in 2050, and these numbers are really not alarming numbers. They are certainly not as alarming as the “work until you drop” scenario being drummed-up by the media.
Second, we need a whole new look on how labor markets operate because older workers lose out on training opportunities. We have rampant age discrimination on older workers, which theoretically will be corrected as we implement age discrimination laws later this year. We are not, however, helping employers to repackage work that can be user-friendly to the older worker and to employers. Take a small business, for example, with 5 or 6 employees. If one of the employees wants to work part-time, the employer may agree, and he will find somebody to cover for the resulting decrease in hours, but sooner or later he has more people taking that route and has hired 6 more employees to cover the same work. That creates a substantial administrative cost for a small employer.
We have to take a deep look at the issues of an aging workforce. This problem is less than it was 20 years ago, but we are not giving people the capability to work from home and other flexible working options that would allow older people to carry-on work and be productive for longer. This is not a UK-centric challenge, but it is one that faces the entire developed world. This is an issue we must solve and it is one we can solve, but it will require active intervention.
GAP: Low income workers tend to work longer and have shorter lives. Will raising the retirement age have a disproportionately negative impact on low income workers? What steps can be taken to mitigate such negative consequences?
MK: That is absolutely, empirically correct. We have a huge amount of health inequality in the UK. If you compare the longevity of people in Glasgow to people in richer London, you are talking about a discrepancy of 10 years of life expectancy. This is unacceptable, but I don’t think we should use pension reform to address health inequality. To try to correct health inequality through our pensions scheme is wrong. The real solution is trying to correct health inequalities in society through changes in health care systems and life-style.
GAP: The Pensions Commission has recommended the creation of a low cost national savings pension scheme with compulsory employer contributions and automatic enrollment. Will this increase personal pension savings? Are other personal savings incentives and vehicles necessary?
MK: I hope that the Commission’s proposal does increase pension savings. One issue in the last 10 years is that employers have been walking away from contributions. The Commission proposes bringing employers back into the loop. You’re standing on a 3 legged stool if you have contributions from employees, employers, and government, but without this tripartite input, the amount that people would have to put away, if left on their own to create an adequate pension, is too daunting. We must have a balance and the Commission does try to tie all 3 elements into the picture.
One worry I have is that by suggesting a minimum 5 percent contribution from employees and 3 percent contribution from employers, totaling 8 percent, we may be lulling people into a false sense of security that those contributions will give them adequate savings, which they won’t. We must not let the minimum contributions become the normal contributions.
The important principle is making sure that the vehicle is in place that ensures that there is an employer contribution alongside an employee contribution along with a government offered tax incentive.
Another element we will be pushing for is that it is universally available. There are questions in the report of whether it will be available to people working part-time or self-employed because there are many of these people in the labor-force who don’t have access to pension schemes.
GAP: Even with auto-enrollment, people are going to have to learn to make complicated financial decisions. What needs to be done to ensure that people are well equipped to make such decisions?
MK: I think that the activity going on within the way in which government policy has been developing to give people more information on what their pension expectations can be with occupational, private and state schemes will help. Government is calling it their “Informed Choice” agenda(2). This may frighten people into making more savings by making them more aware of the realities.
This is an important point. We are not living in a benevolent dictatorship. People have to make choices for themselves, but they need proper information to make sensible decisions. I think the combination of how government is moving forward and Turner’s recommendations will move us in right direction toward that objective.
We are really talking about behavior of a population in the long-term. If you are a 25 year old coming out of university with debt and looking to buy house, then a pension is the last thing you’re worried about. But if we start getting information, and continued reminders, it may change behavior over the long term.
GAP: The government plans to release a proposal later this month to reform the incapacity benefit system(3), aimed at encouraging more people to get off the benefit and seek employment. How will reform impact older people in the UK and what are Help the Aged’s main priorities, concerns and goals for such reform?
MK: We are fairly supportive of reform provided that it gets implemented in a whole and complete package. Reform really has two legs. One is to get more people off the incapacity benefit and back to work. That, in a sense, is not bad because evidence shows that if you are in work, you are more actively engaged in society, you have more friends, you feel involved and you have good reason to get up in the morning and look after yourself.
The other half of the package is that we have to create the opportunity and provide a support network, which may involve training, it may involve help with transport, it may involve help with care. You can’t simply tell people to get on their bikes and get a job and cut them off from benefit. You have to give proper support in order to make the aspiration a reality. One issue we have is that the government has been trumpeting pilot project successes. We don’t want a bunch of pilot projects. We want a national plan, which is available to everybody.
In summary, this reform is good in principle, but it needs to be supported by investments in the employment of older people. If the package is genuinely trying to provide a more active life and an employed life as an alternative to accepting that your health and body is no longer capable of going back to work, that to me is a sensible choice. The evidence at the moment is that we have in the UK around 1 million people over the pension age still in the workforce. This is ten percent of those over the age of 65. They may be in part-time work or other flexible arrangements, but they are registered in the workforce. This is a substantial number. Whether this shows that people have an appetite to carry on working longer or that the pension statuses of people make working longer necessary, there seems to be a growing willingness to continue working under the right circumstances.
GAP: What are your predictions for pension reform?
MK: I really do believe that there is going to be meaningful reform. A government proposal will be published as the year goes on and there will be legislative action by next year.
The problem is too serious for there to be no action. We are seeing employers closing schemes almost every day. Currently we are seeing reasonably well-to-do pensioners today – perhaps one third to a half of our pensioner population - but this is not the projected case for the near future.
Government is concerned about public expenditure and within the Labour administration there is an argument of whether we dare increase public expenditure or might we allow pensions to carry on withering away on the vine. That is not an option. I am very optimistic that we are going to make a breakthrough.
The reform is well supported by a fantastic Adair Turner report. The report is so well argued and well supported. If we needed an evidence base to make these reforms, than for heavens sake, Adair Turner has given it to us.
(1) The Pensions Commission recommends the creation of a flat-rate basic state pension which would accrue based on years of residency in the UK. In addition, a second state pension is recommended which would accrue based on contributions, for those in the workforce, and caring credits, for years people spend out of work caring for children or other family members.
(2) The Informed Choice Program was established by the UK Department for Work and Pensions to bring about a cultural change in regard to saving for retirement by improving access to information about retirement saving, simplifying information on retirement saving and building the financial knowledge of people in the UK. The program is working with employers, the financial service industry, NGOs and academia to improve people’s access to pensions as well as increasing private pension participation rates.
(3) The incapacity benefit (IB) is a contribution-based state benefit available to people who are unable to work because of disease, injury or impairment. Entitlement to the benefit is usually based on having paid adequate National Insurance contributions. IB has been subject to persistent reform debate because studies have shown that once individuals begin receiving the benefit, they have a small likelihood of returning to work. In addition, the Department for Work and Pensions recently published a study suggesting that there is a link between deprivation and high numbers of people receiving incapacity benefit. For more information on the DWP Study, click here.
The views expressed in this article do not necessarily represent the views or policies of AARP
Mervyn Kohler has been Head of Public Affairs at Help the Aged since 1984. This involves monitoring developments with a bearing on older people across Government and Parliament and the private and voluntary sector, and looking for opportunities for the Charity to participate in new initiatives. He contributes both to the formation of the Charity's policy position, and to its communication with the outside world at conferences, seminars and the media. He represents Help the Aged on a range of committees, groups and working parties, and currently serves on the Government's Fuel Poverty Advisory Group. As the political importance of older people has increased, and the raft of issues affecting older people has grown, he has tended to focus on subjects around incomes, poverty, and the broad macro-economic themes. He has held posts on a number of Charity trustee bodies and non-governmental organizations.
More information on Help the Aged’s policy position on pension reform can be found in their recently published briefing, Pensions, Pensioner Poverty and the Pensions Commission Final Report.