The Chancellor’s announcement of a new ‘Lifetime ISA’ has, according to the Financial Times, caused a great deal of disquiet amongst the British pensions industry.
Many senior figures are quoted as fearing that it represents the first step towards the wholesale transformation of the pensions system into an ISA-based model – a “radical shake-up” from which George Osborne has reportedly, and perhaps typically, retreated.
This charge is taken up by John McTernan, a former advisor to New Labour, in the Daily Telegraph. He describes it as “an assault on the basis of occupational pensions.”
He raises a serious point about the fact that the ISA, unlike a workplace pension, has no employer contribution. That will certainly need to be addressed if, or rather when, a wholesale shift away from traditional pensions takes place.
Such a shift does, however, seem inevitable.
It is no secret that there is a demographic time bomb ticking away beneath the UK’s tax base and the public services that depend on them. Absent regular transfusions of immigrant youth, we face a future with an ever-expanding phalanx of expensive elderly citizens drawing from a shrunken base of what we now call ‘working age’ people.
This problem is very difficult to tackle because older people are not only much more likely to vote but feel fully entitled to what several generations of politicians have told them is their due. They have, after all, ‘paid in’.
Of course they have no in fact done anything of the kind, for the most part: their tax contributions funded current expenditure, and were not squirrelled away to bankroll their retirements. In the private sector such pyramid arrangements are illegal.
Yet even as advances in medical science extend our dotage, they also lengthen the years in which we are fit to work. It is only natural, therefore, that we should expect to work a lot longer than the post-War generations did.
The entire concept of ‘a retirement’ is, after all, an artefact of the welfare system. It was clumsy of the original architects of pensions to base their end-of-life benefit on a fixed age, rather than need. That the pension age then fell so far behind life expectancy was politically inevitable, but the consequences have caught up with us.
Simply put, today’s young people face the fact that they will not have a long retirement. The state cannot afford for an increasing number of physically able older people to drop out of the workforce years, or decades, before they need do so.
In the future, the idea of decades of life out of work will probably seem as unreal as the old, final-salary corporate pensions of the yesteryear do today, a few public-sector holdouts notwithstanding.
As medical advances help us stay active longer, the expectation in the future must surely be that whilst you can work, you work – unless you can save enough to pay for a period of idleness yourself.
We have already started in that direction: where once the retirement age was a guillotine that fell across a person’s career, it is now simply a milestone at which one unlocks an entitlement. Eventually it will not even be that.
These additional years in work, combined with measures such as the Lifetime ISA to encourage life-long saving, will afford people more time to accrue the money they need to provide for themselves in their twilight years.
Meanwhile the original function of the state pension – to provide for those incapable of supporting themselves financially from the end of work until they died – could be served by some form of needs-based infirmity payment.
Does any of this mean that the Chancellor’s specific policy is a good one? That’s very hard for non-experts to judge. But the broad direction of travel seems clear, and the necessity clearer still. Whether the Lifetime ISA is the change we need, change is definitely needed.