On the eve of his retirement from Westminster politics, veteran backbench MP David Willetts tells Louise Farrand how he considers the world of pensions to have changed during his 20 years in office

It is ironic that on the afternoon when I interview David Willetts MP in Parliament, I have to fight through an angry crowd of firefighters protesting about pension cuts outside.

Willetts is ensconced in his office, next door to chief whip Michael Gove's. He has had the same office since the 1990s and it shows. Landscapes painted by his wife, the artist Sarah Butterfield, decorate the office and a well-stocked bookshelf dominates one wall.

The books are no surprise; Willetts is known for his intellect and has written books which span a range of subjects, from political philosophy to economics and intergenerational equity.

"The Pinch: How the Baby Boomers Took Their Children's Future - And Why They Should Give it Back" is his treatise on fairness between generations, including the issue of declining defined benefit (DB) benefits. It's essential, if depressing reading; a cogently argued and unexpectedly accessible thesis explaining why the post-baby boomers are going to be poorer than their parents which weaves in strands of political philosophy, economics and cultural trends.

He steps down at the general election in May, but two cardboard boxes are the only sign he's on his way out. He doesn't strike me as someone who is taking his foot off the pedal: he's short of time and answers questions quickly and coherently, demonstrating an experienced politician's ability to skirt delicate subjects.

Pensions and politics have rarely been more interlinked – and views are polarised on whether that's a good thing. Pensions minister Steve Webb recently questioned the wisdom of separating pensions, long-term care and other savings into different policy silos. Is government set up in the right way?

Willetts says: "That certainly is a long-standing issue and the fact is, pensions policy is divided between the Treasury and the Department for Work & Pensions. That's before you include other things like healthcare – or, indeed, education. You need some boundaries, you can't have government as one big splodge.

"I've looked at this from time to time and the fact is that the Treasury is never going to relinquish the lead on tax decisions, so then the only option becomes [delegating pensions policy to the Treasury] and that would be a very peculiar arrangement.

"So I personally think that a Treasury and DWP shared responsibility is the best that we can hope for, given the nature of the pensions issue."

I think there is a case for a long-term commission"

Meanwhile, the National Association of Pension Funds has called for a long-term commissioner to steward pensions policy.

"I remember the original Turner commission on pensions and I thought that part of his effectiveness came from the way it assembled a large amount of data that hadn't been properly brought together before. I think there is a case for a long-term commission to provide material evidence so that you've got a solid, analytical base, especially as it is shared across at least two government departments," says Willetts.

He qualifies this by saying: "However, looking back now on my political career over 20 years, every area that I've worked in, the elite wisdom has been 'Take the politicians out of it, hand it over to a commission'. Voters actually expect when they vote to be changing the government, they don't vote for power to be continuously in the hands of a group of arm's-length commissioners.

"I don't think that somehow decisions won't be taken by elected politicians – that's what a democracy is."

Consensus politics can be achieved in pensions – just look at auto-enrolment. "That is a great example," says Willetts. "When I was in opposition, I supported the early stages of auto-enrolment, I advocated something that became a lot like the Pension Protection Fund. So my view is that in those types of areas, if you've got a good enough policy, you will find in normal circumstances it does survive across governments and it has done."

A changing landscape

Although his peaceful office seems a world away from protesters, one imagines Willetts might have some sympathy with the firefighters outside. A former shadow secretary of state for work and pensions, he has witnessed defined benefit schemes losing favour and defined contribution schemes becoming the standard offering.

One of my regrets is that Lord Adair [Turner], between his first and his second report, pretty much gave up on any form of DB"

Webb has been searching for a middle ground. Will a compromise emerge?

"I do think that pure DC ends up with too much risk being borne by the individual. In fact ? one of my regrets is that Lord Adair [Turner], between his first and his second report, pretty much gave up on any form of DB," he says. "I accept that conventional old-style final salary is on the way out. But Career Average Revalue Earnings, collective DC in various forms, hybrid schemes? I personally think that that's the best way of having some pooling of risk. So I do think we need to be imaginative in promoting these types of instruments."

Willetts thinks that although restoring more generous pensions isn't on the agenda of many companies, the issue could come full circle when employers find older workers can't retire.

"Older workers now have very strong rights to carry on working and employers will find themselves making ad hoc severance packages, assembled in order to encourage someone aged 67 to leave the company to make room for younger people.

"At that point someone will say 'Hang on we're spending quite a lot on these severance packages, why don't we create some kind of formula?' Oddly enough that's actually where company pensions began over 100 years ago. So I think that there will come a point where companies see an advantage in them."

Another declining concept is annuities, which are decidedly not flavour of the month after last year's Budget announcement. Willetts says: "The problem was that because they became compulsory, there hadn't been enough effort put into developing them. As they are essentially becoming voluntary, I think a lot of effort will go into designing smart, attractive annuities."

As they are essentially becoming voluntary, I think a lot of effort will go into designing smart, attractive annuities"
He supports the new pension flexibilities introduced in last year's Budget. "The reason for the requirement to annuitise went back to mass means testing of pensions – the Treasury was worried about people spending down into means-tested benefits. Once you moved to a higher value single-tier pension, at that point the Treasury interest in requiring people to annuitise was gone."

But isn't there a clash between auto-enrolment, which promotes inertia, and at-retirement freedoms, which necessitate informed choice? "It is true? clearly financial education is going to be a very important as part of this."

When asked if the guidance guarantee will be enough, Willetts says. "I think there's a recognition in the industry now that this is one of the big gaps."

I think that in the past ten years we've made some real progress on pensions"

He moves swiftly on. "Actually I am leaving this place in a slightly optimistic frame of mind. I think that in the past ten years we've made some real progress on pensions."

What would his priorities be for the next government? "I think we haven't made it easy enough yet for pension funds to invest in housing," he replies. "Affordable rental housing cries out for pension fund investment in suitable instruments. That's a challenge.

"I think secondly because our pension fund structure is rather fragmented, most conspicuously on the local authority pension schemes, it's hard for them to make some of the big, bold investments in venture capital which I think they would otherwise do.

"So I think also it's for government to make investment in all sorts of physical infrastructure easier for our pension schemes. Connecting them up would be my personal priority."

David Willetts will be giving a keynote address, giving his verdict on what the General Election means for pensions, at Workplace Pensions Live in Birmingham, on 13 May 2015. To find out more about how to attend Workplace Pensions Live please visit www.workplacepensionslive.co.uk