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

Photo: Getty
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The three avoidable mistakes that Theresa May has made in the Brexit negotiations

She ignored the official Leave campaign, and many Remainers, in pursuing Brexit in the way she has.

We shouldn’t have triggered Article 50 at all before agreeing an exit deal

When John Kerr, the British diplomat who drafted Article 50 wrote it, he believed it would only be used by “a dictatorial regime” that, having had its right to vote on EU decisions suspended “would then, in high dudgeon, want to storm out”.

The process was designed to maximise the leverage of the remaining members of the bloc and disadvantage the departing state. At one stage, it was envisaged that any country not ratifying the Lisbon Treaty would be expelled under the process – Article 50 is not intended to get “the best Brexit deal” or anything like it.

Contrary to Theresa May’s expectation that she would be able to talk to individual member states, Article 50 is designed to ensure that agreement is reached “de vous, chez vous, mais sans vous” – “about you, in your own home, but without you”, as I wrote before the referendum result.

There is absolutely no reason for a departing nation to use Article 50 before agreement has largely been reached. A full member of the European Union obviously has more leverage than one that is two years away from falling out without a deal. There is no reason to trigger Article 50 until you’re good and ready, and the United Kingdom’s negotiating team is clearly very far from either being “good” or “ready”.

As Dominic Cummings, formerly of Vote Leave, said during the campaign: “No one in their right mind would begin a legally defined two-year maximum period to conduct negotiations before they actually knew, roughly speaking, what the process was going to yield…that would be like putting a gun in your mouth and pulling the trigger.”

If we were going to trigger Article 50, we shouldn’t have triggered it when we did

As I wrote before Theresa May triggered Article 50 in March, 2017 is very probably the worst year you could pick to start leaving the European Union. Elections across member states meant the bloc was in a state of flux, and those elections were always going to eat into the time. 

May has got lucky in that the French elections didn’t result in a tricky “co-habitation” between a president of one party and a legislature dominated by another, as Emmanuel Macron won the presidency and a majority for his new party, République en Marche.

It also looks likely that Angela Merkel will clearly win the German elections, meaning that there won’t be a prolonged absence of the German government after the vote in September.

But if the British government was determined to put the gun in its own mouth and pull the trigger, it should have waited until after the German elections to do so.

The government should have made a unilateral offer on the rights of EU citizens living in the United Kingdom right away

The rights of the three million people from the European Union in the United Kingdom were a political sweet spot for Britain. We don’t have the ability to enforce a cut-off date until we leave the European Union, it wouldn’t be right to uproot three million people who have made their lives here, there is no political will to do so – more than 80 per cent of the public and a majority of MPs of all parties want to guarantee the rights of EU citizens – and as a result there is no plausible leverage to be had by suggesting we wouldn’t protect their rights.

If May had, the day she became PM, made a unilateral guarantee and brought forward legislation guaranteeing these rights, it would have bought Britain considerable goodwill – as opposed to the exercise of fictional leverage.

Although Britain’s refusal to accept the EU’s proposal on mutually shared rights has worried many EU citizens, the reality is that, because British public opinion – and the mood among MPs – is so sharply in favour of their right to remain, no one buys that the government won’t do it. So it doesn’t buy any leverage – while an early guarantee in July of last year would have bought Britain credit.

But at least the government hasn’t behaved foolishly about money

Despite the pressure on wages caused by the fall in the value of the pound and the slowdown in growth, the United Kingdom is still a large and growing economy that is perfectly well-placed to buy the access it needs to the single market, provided that it doesn’t throw its toys out of the pram over paying for its pre-agreed liabilities, and continuing to pay for the parts of EU membership Britain wants to retain, such as cross-border policing activity and research.

So there’s that at least.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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