Ed Balls and George Osborne attend the State Opening of Parliament on May 8, 2013. Photograph: Getty Images.
Show Hide image

How Labour can trump Osborne's pensions reforms

A state annuity scheme would improve the public finances, provide financial security and raise living standards.

When the hardline conference motions used to roll in calling for the nationalisation of the top 200 industries, John Smith would jest that we should replace the term "industries" with "chip shops". These days there are few opportunities for such humour in the Labour Party, but sometimes this means Labour avoids advocating an obvious state solution, even when it represents much better value than a typical annuity.

George Osborne’s Budget pension reforms are, in fact, a case in point. No one can doubt that locking pensioners into poor value annuities was no longer tenable. Giving those reaching retirement age greater freedom to make their own investment and spending decisions also makes plenty of sense. The concern is that the risks associated with such freedoms may result in some pensioners falling back on the state later in life. This not only means many living out their final years in penury but also the taxpayer having to find extra funds to cover social care or benefits such as housing benefit.
 
The Conservatives want to suggest that those who raise fears about the personal and fiscal consequences of Osborne’s reforms are accusing pensioners of being bad people, stupid and irresponsible to the core.  But did we accuse working age people of irresponsibility when we introduced opt-out defined contributions pensions for all?
 
The problem is a simple one: someone reaching retirement does not know how long they will live, and many underestimate how long they will. Someone who turns 65 this year will, on average, live to 85 (84 for a man and 86 for a woman) and annuities, for all their faults, take away the risk of failing to judge your life expectancy correctly.                    
 
The solution is equally simple. While continuing to offer retirees the freedom to pay down a mortgage, buy a Lamborghini or even a chip shop, the state should offer its own annuity. It has a vested interest in doing so because it will pick up the tab if Osborne turns out to be less prescient than he would have us believe. The state can offer value for money because it does not have to make a profit. If the state were raising funds through the bond market it would pay out a perfectly respectable interest rate, currently somewhat above 2.5 per cent for a 10 year bond. On this basis, someone investing £100,000 in a state annuity would be likely to do better by about £12,000 over a remaining 20 years of life than with a private sector annuity.
 
Indeed, because of the potential risk to the public finances the state may want to be more generous than this.  All it needs is clear and transparent actuarial calculations and payments could be made with those for the state pension. The insurance industry would howl but it would have little cause for complaint because the market failure is obvious and Osborne has already driven a stake through its less than generous heart. Besides, the state would not be a monopoly but act as a competitor to the private sector: as a spur to efficiency and innovation. And with a state annuity, freedom would be underpinned by security.  
 
Many suspect Osborne of alighting upon his pensions reform with more than a thought given to the short-term fillip to the public finances, as the newly retiring enjoy their unexpected freedom, and with little regard for the long-term impact on the public finances. A state annuity has the potential to provide a very substantial medium-term boost to the public finances while simultaneously warding off a potential fiscal time bomb. If the state annuity was sensibly generous, and the default position for three quarters of a pension pot, with retirees (anyone 55 or older) having to opt-out rather than opt-in to the state annuity, as many as half or more of those reaching retirement might take up the states offer and use their pension pot to pay for a guaranteed lifetime income.
 
With roughly 650,000 people becoming eligible in a year, and an average pension pot of close to £30,000, if half of retirees used three quarters of their pot (the remaining quarter being taken as a tax-free lump sum) to buy a state annuity, the public finances would be better off by around £7bn in the first year and still better off each year for many years to come. Over the lifetime of a parliament, the public finances might be boosted by as much as £30bn. Of course, there is a debate to be had about how we treat this on the public books, but without doubt the impact on the government’s finances would be exceedingly positive in the early years.
 
Where else can Labour so readily demonstrate that it can improve the public finances, provide financial security and raise living standards? And all this without nationalising any chip shops.

Nick Pecorelli is Associate Director of The Campaign Company

Getty
Show Hide image

This is no time for a coup against a successful Labour leader

Don't blame Jeremy Corbyn for the Labour Party's crisis.

"The people who are sovereign in our party are the members," said John McDonnell this morning. As the coup against Jeremy Corbyn gains pace, the Shadow Chancellor has been talking a lot of sense. "It is time for people to come together to work in the interest of the country," he told Peston on Sunday, while emphasising that people will quickly lose trust in politics altogether if this internal squabbling continues. 

The Tory party is in complete disarray. Just days ago, the first Tory leader in 23 years to win a majority for his party was forced to resign from Government after just over a year in charge. We have some form of caretaker Government. Those who led the Brexit campaign now have no idea what to do. 

It is disappointing that a handful of Labour parliamentarians have decided to join in with the disintegration of British politics.

The Labour Party had the opportunity to keep its head while all about it lost theirs. It could have positioned itself as a credible alternative to a broken Government and a Tory party in chaos. Instead we have been left with a pathetic attempt to overturn the democratic will of the membership. 

But this has been coming for some time. In my opinion it has very little to do with the ramifications of the referendum result. Jeremy Corbyn was asked to do two things throughout the campaign: first, get Labour voters to side with Remain, and second, get young people to do the same.

Nearly seven in ten Labour supporters backed Remain. Young voters supported Remain by a 4:1 margin. This is about much more than an allegedly half-hearted referendum performance.

The Parliamentary Labour Party has failed to come to terms with Jeremy Corbyn’s emphatic victory. In September of last year he was elected with 59.5 per cent of the vote, some 170,000 ahead of his closest rival. It is a fact worth repeating. If another Labour leadership election were to be called I would expect Jeremy Corbyn to win by a similar margin.

In the recent local elections Jeremy managed to increase Labour’s share of the national vote on the 2015 general election. They said he would lose every by-election. He has won them emphatically. Time and time again Jeremy has exceeded expectation while also having to deal with an embittered wing within his own party.

This is no time for a leadership coup. I am dumbfounded by the attempt to remove Jeremy. The only thing that will come out of this attempted coup is another leadership election that Jeremy will win. Those opposed to him will then find themselves back at square one. Such moves only hurt Labour’s electoral chances. Labour could be offering an ambitious plan to the country concerning our current relationship with Europe, if opponents of Jeremy Corbyn hadn't decided to drop a nuke on the party.

This is a crisis Jeremy should take no responsibility for. The "bitterites" will try and they will fail. Corbyn may face a crisis of confidence. But it's the handful of rebel Labour MPs that have forced the party into a crisis of existence.

Liam Young is a commentator for the IndependentNew Statesman, Mirror and others.