A timely U-turn

A review of the effect of means-testing on pension saving signals a welcome change of heart by the new minister

The news of James Purnell’s return to the Department of Work & Pensions came as something of a disappointment to me. After all, during his time as pensions reform minister, he had refused to acknowledge the conflict between means-testing and Personal Accounts, and had been procrastinator-in-chief when it came to providing adequate compensation for the 140,000 people who lost their pensions when their employers went bust.

Admittedly, Purnell had a much better understanding of the issues than some of his predecessors. But sometimes the lay politicians, who are more willing to listen to their expert non-political advisers, make for more successful ministers.

During his sojourn at the Department of Culture, Media and Sport, his successor at the DWP, Mike O’Brien, and the new secretary of state Peter Hain, had at least managed to secure proper assistance for the 140,000. Furthermore, the successful founding of Pada meant some more sensible discussions were starting to take place around the many impracticalities built into the framework of the proposed national pensions scheme.

Within days of Purnell’s return, however (this time as secretary of state), it felt like the Department was drifting back in time. After losing the appeal against the judicial review of the Parliamentary Ombudsman’s report into the occupational pensions scandal at the start of February, Purnell once again refused to concede the Government’s culpability, and even suggested that he is likely to take the case all the way to the House of Lords, adding further insult for the thousands affected.

But just as I was about to write off the next few years of pensions policy as a complete disaster – lamenting the appointment of yet another callous Secretary of State at the helm of Whitehall’s biggest department – Purnell made a rather surprising decision. Returning to the debate over means-testing, he agreed to carry out a study to examine just how many people might really lose out on state pension benefits if they also contribute to Personal Accounts.

Although it may now seem a rather tired issue, the clash between means-testing and Personal Accounts is still one of the biggest obstacles to the success of the Government’s new national pensions scheme, and also a minefield for financial advisers. Yet less than two years ago, Purnell was vociferously insisting that no such clash existed, regularly writing muddled posts on the DWP’s blog to explain how means-tested benefits would not create a disincentive for those on low and middle incomes to save.

So his plans for a review mark an astonishing U-turn – the first ever admission from a Government minister that there may actually be a problem.

Given his track record so far, it’s tempting to believe that this new report – not to be published until the end of 2008 – is being commissioned simply to keep the anti-means-testing brigade quiet. By the time its conclusions are unveiled, the Pensions Act will be safely through Parliament. The Government could simply try and bury the findings.

But in spite of all my cynicism about Mr Purnell, I think this unlikely. Even in ten months’ time, the conclusions of this report will be important. The Pensions Act may well have already passed through Parliament, but the new system of Personal Accounts is not due to come into force until 2012, leaving plenty of time to sort out the means-testing problem. Primary legislation was not needed to create pensions credit, and it won’t be needed to make Personal Accounts work alongside the benefits system.

In all likelihood, the findings of this report will be damning. Even if it concludes that only a small proportion of the population will be affected it will be confirmation of a fundamental flaw in the Government’s new system. Given his track record on the issue so far, it would have been far easier for Purnell to continue pretending the problem didn’t exist, rather than commissioning a report which is likely to highlight his previous defence of means-testing as being completely false. It’s certainly the best indication yet that Purnell is willing to take his new job seriously.