With both of the main political parties claiming your pension is not safe with the other, and that they will keep the triple lock, we drill down into what the parties are offering, whether it’s enough for the future and how they will deliver it.

For this episode Mubin is joined by David Gauke. David is a British political commentator, solicitor and former politician who was the Member of Parliament for South West Hertfordshire from 2005 to 2019. David has served as Secretary of State for Work and Pensions, Secretary of State for Justice and Lord Chancellor. He is also a member for the Pensions Review steering group.

 

Transcript

Mubin: David, thanks for joining us. So, many might be wondering why we should be concerned about pensioners. I mean, once you've taken housing costs and childcare costs into account, they've actually got living standards very similar to working age people. And we've seen pensioner poverty reduce massively. So why are they a priority? 

David: Well, you're certainly right to say there's been a transformation in recent generations. Even someone as youthful as me can remember times where pensioners were very often seen as being the poorest in society and struggling to get by. And of course, there do remain pensioners who are in poverty. But what we have seen in recent years has been an increase in the state pension, people retiring very often with quite a lot of property behind them, the beneficiaries of pretty generous workplace pensions. And as you say, pensioner poverty has diminished a lot. And their living standards are quite high. And frankly, there are an awful lot of pensioners who have got living standards that younger people look on with a great deal of envy. 

The challenge, though, I think, is if we look further ahead, what we are likely to see is people retiring, who haven't benefited from those relatively generous workplace pensions, defined benefit schemes that have people receiving two thirds of their final salary. We're also seeing an increased number of people who are self-employed, and self-employed people, by and large, save a lot less for their pensions. Not everybody is getting on the housing ladder in the way that happened previously. 

So, I think there is an issue as we look forward, as to what's going to happen to future generations of people as they retire, are they going to have the savings? Are they going to have the property behind them, and so on. So, I think it's right to think about this strategically and think about this before the problem really hits. Because if you want to do something to solve pensioner poverty, and particularly in an environment where demographics are going to make it challenging for future governments, you want to be thinking about that sooner rather than later. So that those who maybe might not be saving adequately at the moment, for example, can be encouraged to save now, so that they don't face a problem later. 

Mubin: So, to sum up, today's pensioners are in quite a good position, but not everybody. We've got some problems with the self-employed in terms of what they’re saving, but the real problem is future generations. So, you think then why does this area get quite bit of attention, for example, say the triple lock? Is it just because they're very good at voting and parties are interested in capturing that vote?

David: Well, it does have to be said that, you know, political parties are competing in a market if you like, they are there to win elections. And pensioners are very good at turning out and voting. And as a consequence, political parties are inevitably going to try to compete for those votes. And, you know, there is there is a certain amount of evidence to say that as voters, they are very sensitive to protecting their own interests. I mean, that probably gets me into trouble for making that point. But I think it's nonetheless true. Certainly, having had the experience of putting forward a policy on social care that suggested that maybe people's homes might be used to support that.

And that caused an immediate rumpus. So these are people who follow politics quite closely, I think, compared to the population as a whole, they read their newspapers, and they turn out and vote and you know, that gives them a degree of power, which is why you mentioned the triple lock pension, something that was almost stumbled into as a matter of policy going back a few years ago in the coalition government is very hard to get off and I'm pretty sure that all the major parties would like to get off the triple lock pension. Because it is very expensive. It's also pretty volatile in terms of what's going to happen in the future, we can't say for sure, with the state pension, because it all depends on the vagaries of what happens with earnings or inflation, and so on. It's quite hard both for the government to plan and for individuals to plan as to what the state pension is going to be in, in future years, but it is ratcheting it up. And that is, as I say, as a hook. I'm pretty confident both Labour and the Conservatives would like to get off. But there's no benefit in being the first mover here. And if one party was to say, actually, the triple lock has had its day, the other party, I'm sure would ruthlessly exploit it. But in the end, at some point or other, you know, it's not sustainable to stay on the triple lock. And I think we've got to find a way off it.

Mubin: It sounds a bit like an addiction, one thing you can't really get off, and you're going to upset lots of people here. But can you just quickly explain what the triple lock is? Because actually, I think lots of people don't know what it is. 

David: It's essentially that the state pension will increase by the higher of annual earnings, inflation, or two and a half percent. Partly, the history of this goes back to the year in which inflation was very low. And I think the state pension went up by 75p a week. And that caused a huge furore, even though the real value was not being lost.

Now, I think when it was established, it was during the coalition years, the expectation was, there wouldn't be very many years, where earnings, or inflation was below two and a half percent. But we did have years where both earnings and inflation were very low, and the two and a half percent actually became quite expensive. That's one of the sort of perverse things about the triple lock, it tends to bite, the two and a half percent bit, tends to bite in years in which the economy is struggling, where tax receipts are struggling.

And the consequence of all of this has been that the state pension is now higher than it otherwise would have been. so, the typical state pension now is £204 a week, whereas it would have been £180 without it. And so this is an inelegant means to a laudable end, is what people might say about it.

But I think the inelegance actually does matter for all those reasons we've talked about. And as the Institute for Fiscal Studies has argued, a better thing would be to say, ‘Well, where do we want the state pension to get to’? You know, perhaps as a percentage of earnings, and then get to that point and then come off it. You then move to a system in which the state pension - that increases in the long run in line with earnings, but perhaps with some protection for years where inflation is higher than earnings. 

Mubin: And effectively we are signed up to that for the next five years because that's what the parties have committed to. 

David: Indeed, indeed, yeah, both main parties. And look, I think, I mean certainly there has been some chatter that Mel Stride, the Work and Pensions Secretary would have liked to have moved off this.

I dare say Liz Kendall, who's quite a Blairite, Shadow Work and Pension Secretary will certainly be aware of the pressures on the taxpayer. So I think the political parties see the difficulty with the triple lock. But getting off it for all the political reasons we've talked about is immensely difficult. 

Mubin: So let's just think about how generous the state pension can be. So we're currently locked into triple lock for the time being. And it's about 30%, of full-time median earnings at the moment. Do you think it can rise more than that? And partly, I'm asking this because, you know, politicians are quite worried about the cost of this going forwards, and the cost to the public purse. But do you think this is roughly as high as it can get? Or do you think we can be a bit more generous given the state pension isn't as generous as some other state pensions internationally? 

David: My personal view and look, I do approach this as a fiscal conservative, as an unreconstructed fiscal conservative, is that there are an awful lot of pressures on the public finances, at the moment. There are lots of areas in, for example, public services, where there is clearly a demand for higher spending. We already have a situation where our tax burden is very high.
 
There are lots of ways in which we could spend money that might improve our productive capacity over time. And so you know, and I am in the privileged position of not standing for parliament and not having to be elected and not having to talk to pensioners on the doorstep and explain why enough is enough. But I think it's, given all of those priorities, I don’t think we are in a position to afford to go beyond where we have gone. So I would be in favour of departing from the triple lock now. But if we're not going to do it now, then maybe there's a percentage point that we should declare and say at that point, we're coming off it. And that's, that's how you do it. But given all the pressures on the public finances, I think we're, we're kind of hitting the limits. 

Mubin: So this is great, David, that we can have you and have an honest conversation rather than what's happening with other politicians at the moment.

So, let's talk about triple lock plus then, because you know, triple lock wasn't enough, we've got to have another lever on there as well. What is it and you know, it's something that Conservatives have brought in.

David: In truth, it isn't really a pensions policy. It's a way of presenting a tax policy, which is the return of what we used to call age-related allowances. Now age-related allowances have been in our tax system from I think 1924. Winston Churchill brought them in and got dropped in 2012, in the famous or infamous budget of that year by George Osborne. I was the tax minister at the time, 

Mubin: So, you’re to blame? 

David: I will fully take responsibility for this because I thought it was a, and I still think it's a, perfectly sensible reform. I don't see the argument at all, for saying that just because you've reached a certain age, you get a more generous personal allowance.

So essentially, what the government has said, given that personal allowances, in contrast to what was happening in 2012, personal allowances are frozen and that the state pension is going up. What they're essentially saying is that people shouldn't, if they're just receiving the state pension, they should not be paying income tax.  It is worth pointing out of course, there are actually millions of people who will receive a higher state pension and will continue to pay tax on it. So, as a rhetorical argument, it doesn't work.  This is a policy that is very much targeted at a favoured group, in the electorate, in the hope of being rewarded accordingly.

Mubin: There're loads of areas of policy, which we're going to touch on where the parties are being quite silent. So, let's take one of those, which is the state pension age. Now, that's expected to go up to 68 in the late 2030s. It's been mooted for quite a long time. It's 67, at the moment. And an announcement needs to be made in the next parliament to trigger that really, because you've got to give people notice. What do you think is actually going to happen? Do you think that will go forwards?

David: I think it really does need to. And I think when it comes to the sustainability of the public finances, this is an important measure, and a failure to address it. And, you know, let's be honest, as we, as we talk, it looks as if you're going to have a Labour government with a very large majority. If in those circumstances, Labour's not in a position to make this change, then I think that's quite a worrying sign. It has been fascinating, if you look at what's happened in the UK. And again, I was part of the coalition government where we brought forward increases in the state pension age, which saved the exchequer enormous sums of money.

But that was announced with very little pushback, and a recognition that this was necessary.

And again, the sky didn't really fall in. It's quite a contrast with, for example, in France, where President Macron ran into enormous difficulties when trying to make really very modest changes to a much more generous state pension regime. And I just think governments have, if you like, got to keep facing up to the long-term fiscal challenges of the country.

And it's one of those ones where the longer you leave it, the harder it is to change. I don't want to get side tracked into the whole issue of council tax revaluation, for example, but it's now almost impossible to change the value of the valuation of council tax, because 1991 was the last time we did it. 

Mubin: Wow

David: And it takes, you know, the longer it goes, the harder it is to change it. And it's not a perfect analogy, but I do think, you got to kind of you got to kind of stick at this. So we've got a formula in place. And as long, as long as the longevity statistics continue to support the approach that was done, I think governments have got to sort of stick on the path of increasing the state pension age. 

Mubin: Yeah, I think this goes back to what we talked about earlier with triple lock, the longer that goes on, the harder it potentially may be to get rid of it.

I suppose there's a bit of a trade off between  faster rises of a state pension age, or maintaining the triple lock,  because both potentially increase a cost to government. Which would you prioritise?

David: Yeah, it's, it's a fair challenge. I am such a sort of voter unfriendly Treasury hardliner on this, that I would both abandon the triple lock and increase the state pension age. So I would want to do both.

I am strongly of the view that we have to reflect changing life expectancy. But we do have to recognise that increasing the state pension age, doesn't have an equal effect on everybody, if you are somebody who's working life is essentially consists of working from home or sitting in a nice office, and essentially doing work that you find interesting. And you know, some of us are privileged to be in that position, you kind of look at it and go - ”Goodness sake it should be much higher, you know, we should be encouraged to keep on working for much longer”. 

If, however, your job is much more physical, might be outdoors much more, it's tougher. I mean, there's no getting away from that. And also, you're probably the type of person who's not going to build up sufficient non-pension savings, to give you options to say, “Well, actually, I am, you know, I'm tired of this. And I'm, you know, I'm going to live off my savings for a few years”. So, you know, there are there are genuine trade offs and challenges here. 

Mubin: I think what people worry about with the state pension age is, you know, it's going to reach 80 85, that sort of length of time before we get a state pension. Do you think there's any risk of that happening?

David: To be honest. If we get to that stage, you know, life will have been very, you know - so transformed, and we can talk about the increases and, and what have you. But this is a debate that's been going on for decades. And it took a long time to respond to changes in life expectancy. But we're still talking about you know, when do we move it up to 68? And, and this isn't, I mean, I can remember debate about sort of state pension age - Oh, it's going to be 70 - I remember that debate in the early 90s.

And yet, you know, we're going on be, almost 50 years later, before it has moved from 65 to 68. So, so the point at which it gets to sort of 80 or 85, we're going to have to see a   transformation in life expectancy and health that will be tremendous and worth celebrating. But it's going to be a very different world to where we are today. 

Mubin: Yeah. So really, what you're saying is that this is really quite glacial how this, it's changing slow periods. Apart from what happened with women. And that was quite a big increase. 

David: Yeah, no, that's right. And yeah, I made myself entirely popular with some of the people campaigning on this issue. But you know, that was all right and necessary. And women should have the same state pension age as men.

I think we were, we were slow as a country, after we'd introduced the state pension regime in the 1940s. We were very slow in subsequent decades to reflect, change in life expectancy. And so we made some changes, perhaps more quickly than would have been ideal. But we still needed to make those changes. 

Now we recognise that the state pension age has to reflect life expectancy. As long as governments show the necessary discipline and fortitude to to keep updating, to not fall behind, then this can change is, to use your word, glacially. We can move slowly here, not have any shocks, give people notice. That's great. Where you end up with problems is if governments put it into the sort of too difficult box for a few decades, and then they come back to it. And then they have to say, “Oh, crikey, we're going to have to do this much more quickly”. And that's what we should avoid. 

Mubin: So one of the big changes that happened whilst you were in government was auto enrolment, and this brought in pensions for many, many more people, particularly in the private sector. Could you just explain a bit about that. And then we've not really had much change since. 

David: Yeah, so to start off with what is also enrolment? And it’s essentially a system whereby people are automatically enrolled into a workplace pension so that it's some of their earnings go towards it, it's also topped up by an employer's contribution. You can opt out of it. So it's not compulsory pension. But it's essentially made use of the power of inertia, which is very strong. And it's been a great success. Take up has been very high. People, by and large, aren't opting out of it. And it is contributing towards their savings. And, , that is all very beneficial, the whole process stemmed from the Turner review. It was introduced by the coalition government, but there's been cross party support for it. 

There are a couple of issues, however.  Should it be expanded. One, it only comes into operation for those 22 and older, up to the state pension age. And secondly, there ia certain amount of income that you get before it applies? I can absolutely understand why governments, particularly in recent years, when there has been real pressure on living standards haven't looked to expand it to low paid and younger workers. Because we also, you know, we have to be honest about this.

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You know, even the employer's contribution, essentially, this is coming out of take home pay. So as a consequence of auto enrolment, people have had less money in their pocket at the end of the week or at the end of the month, than they otherwise would have done. But they have got a big, they've got a bigger pension ‘s pot. 

I think it probably will require some sign of improved living standards and steadier economic growth, before any government will be brave enough to go down this route. But the point at which we do start to see the living standards improving, I very much expect that moves will be taken.

Mubin:  So talking about taxes, and those potentially going up. Do you think we're going to see any changes to some of the tax reliefs on pensions, because we actually give out quite large sums, which run into the billions in terms of these tax reliefs? Any change there?

David: We do, you know, they are, tax reliefs are quite expensive. I mean, there are different ways of looking at it. And you can say, you know, to some extent that what tax relief does is if you like sort of equalise matters over the course of a lifetime. There are some arguments on that particular front. It is an immensely complex area. I was in the Treasury, working for George Osborne when we spent an enormous amount of time looking at reforming tax reliefs and considered some really radical proposals of fundamentally shifting the way in which we provided support to pension saving. But if ever there is an area where you might have lots of winners and losers. And you'll hear much more noise from the losers than you will from the winners. It does make it very, very difficult. 

There's sort of one live issue that perhaps we've had of late has been the lifetime allowance that was put in place and then substantially reduced and then scrapped recently by Jeremy Hunt.  Labour saying that they would then bring it back in, they've looked at it again, and concluded that it's all too difficult, given that quite a lot of the impacts of the LTA is on, for example, doctors and consultants and so on, and trying to try to carve them out of the system probably wasn't a good idea. So they've sort of stopped on that. But you do wonder whether a government coming in is going to look to see if they can find something in which they can reduce the cost of pension tax relief, I do wonder whether the lump sum might be at risk to some extent, you know, whether that might be capped in cash terms.

And so that, you know, those with particularly large pension pots won't be able to get access to all of that sort of 25% tax free lump sum. 

Mubin: Just coming back to the lifetime allowance, can you just explain what it is? Because it was quite a big giveaway to those with, who are the wealthiest in our society?

David: Yeah, so the lifetime allowance, essentially, was a cap on how much you could, have saved in your pension pots benefiting from full tax relief. And once you exceeded the limit, then you lost some of the benefits. 

There was a big fuss, really, particularly coming from doctors and consultants saying it really no longer made it worthwhile for them carrying on working, that it was driving people out of, forcing them to retire essentially. And given concerns about shortage of doctors and consultants, Jeremy Hunt scrapped the lifetime allowance. And the benefits of that went to people who were highly paid. It was, it was certainly not a progressive reform. 

And if an incoming government wants to find other ways in which it restricts the benefits that the wealthiest get from pensions tax relief, I think they'll be looking for different mechanisms. 

Mubin: Yep. And it's it - I mean, there's quite a good possibility, we may see some movement here. I know, like you get winners and losers. But given they've ruled out so many other taxes that they’re not going to touch, this might be an area? 

David: Well, yes, I mean, to be to be fair, the government  I was a part of really, very substantially restricted pensions tax relief for the wealthiest with both lifetime allowance and an annual allowance, that means that essentially, the highest earning people in this country don't really get any benefit from pensions tax relief now.

And that was politically deliverable. I suppose that that's the challenge in a way is that because the annual allowance has now tapered away to a large extent for the highest earners, if you're going to restrict the pensions tax relief, even further, you're probably not looking at the highest earning people. You'll still be looking at people earning a good living, but not the very highest earners, because they've already lost most of the benefits of the pension tax relief regime. 

Mubin: Yeah. And that might come as a surprise to people that that happened under a Conservative government in terms of taking away some of those reliefs from the highest earners. 

David: We were a much more progressive government than anyone ever gave us credit for.

Mubin: Well you heard it here. 

David: Yeah, on that controversial point, Mubin

Mubin: Can I ask about one thing, though, that was an unintended giveaway, which is what's happening to pension pots when you die. So my understanding is that these can be passed on,
free of inheritance tax. And also if a person passing on dies before 75, the person claiming the inheritance doesn't actually have to pay any income tax either. is that correct David? 

David: That is correct. And, you know, part of the thinking there was to make sure that we got an attractive regime for people by which to save for a pension. But I do think that that's got to be at risk. And, you know, it is it is generous. And I think an incoming government may well look at that, again, and say that can't be justified. I'm not sure that there are going to be vast sums of money that will be raised as a consequence of it. But I'm pretty sure that's going to be on the on the list of measures that are put forward to an incoming Chancellor of the Exchequer  It'll get criticised and inheritance tax is a very emotive subject. And, you know, I can see the Daily Mail, The Daily Telegraph going to town on it. But if you're if you're looking at a potential tax changes in this space, I think that's going to be a very high chance that this will be reformed. 

Mubin: I mean, I think no one was expecting that people would be stuffing their pensions and not touching them, in order to pass them on as an inheritance. This seems to be a real unintended loophole that's been created. Are you in favour of that being closed now? 

David: Look, I'd want to look at all the arguments here and you know, whether there are any unintended consequences in terms of reforming it. I can absolutely see why an incoming Chancellor of the Exchequer would want to look very closely at this and consider reforming it. 

Mubin:   so let's go back to the state pension. We did some polling a little while back, and we found that only 11% of people think that the state pension will definitely exist in 30 years' time. And 33% of people think it won't exist. Are you surprised at that?

David: I'm not altogether surprised. I mean, I think it's, I think it's wrong. I mean, I think the state pension will be there in 30 years’ time. And as I say, I'm pretty sure I can remember debates from 30 years ago. And there was a debate then, “Oh, you know, state pension is not going to be around in 30 years time”. There are reasons why it's there, it's very hard. I mean, you know, look in fact at what's happened since then we've made it much more generous. There is a, politically, there is a lot of pressure, not just to have a state pension, but to make it generous.

And when one looks at some of the alternatives, there are some real downsides with for example, means testing for state pension, you know, that that would bring in a great deal more complexity,
and potentially have some quite unfortunate incentives within it. So I think the state pension will be there in 30 years' time.

Mubin: Okay, so just a couple more questions, David.
You've been in government, and we've had a Conservative and a coalition government for, you know, nearly 15 years. What do you think they got right in relation to pensions policy over that period? And what do you think they got wrong?

David: So I think if we look at pensions policy, and I want to, I don't agree with him on everything, but you know, pay tribute to Steve Webb, who was Pensions Minister for five years, really knew the subject and was a very effective Minister,  had an agenda that he wanted to pursue and went about and pursued it. So you know, the progress on auto enrolment, we introduced it, got it in place, I think that was very important. The single state pension, important reform, simplified the system, and has resulted in a more generous state pension for people who needed it. I think that that was very good and a worthwhile reform. So I think those are substantial achievements. I think in terms of the triple lock, but you can absolutely make an argument for saying, from where we were in 2010, the state pension needed to go up more, but I think that's run its course.

And I think we made the right decisions in terms of increasing the state pension age in a way that previous governments hadn't taken on. And they were big brave, important matters that have made our public finances more sustainable for future generations. So, I look back on that, and I have a sort of somewhat ambivalent relationship with the sort of 14 years of Conservative rule, despite the fact that I was a minister for nine of those years. But I think on pensions, actually it’s not a bad record. 

Mubin: Yeah. And if you had your old job back as Work and Pensions secretary, what's the one pensions policy idea you'd really like to take forward? 

David: I don't know whether I’d put it down to one, but that combination of, of fiscal responsibility. So I would be, if I was Work and Pensions Secretary, looking to make that announcement of the move up to 68 in the late 2030s. So I'd absolutely do that. But looking to find the right moment to extend auto enrolment. And I absolutely think you have to be sensitive in terms of timing. But you should be ready to seize the moment when the timing is right to extend it, potentially put up the rate, I think that depends on other factors in terms of the economy and tax policy.

Mubin: Yeah. And expect a call I would think in terms of sharing some of your wisdom. David, thanks so much for joining us today on this chat. 

David: Thank you, Mubin.  It’s been a great pleasure.