A New Pension Settlement for the 21st Century
The Second Report of the Pensions Commission

Mr Turner's Report
Mr Blair's Challenge, and
Mr Brown's waste paper basket

With Adair Turner's fine report and even finer appearance in front of the UK’s media – he refused to give them a single sound-bite – the Government has started a process of Pension's reform not seen since Beveridge. Tony Blair paved the way for the publication of this landmark report by backing its central recommendation that the UK should move to a more generous earnings-linked basic state pension, he declared earlier this week "the basic construct of Turner is right” and added "the UK needs a system that enshrines a decent basic state pension, funded by the taxpayer."

The Government is set to follow with comprehensive, detailed proposals in the spring… though some suspect a rather later response is favoured by the Chancellor who, after all, is looking to have a new role by Autumn of next year and is known to disagree with some of the key recommendations within the report.

Andy Dean

NEWS FOCUS in this edition

The Problem

Rising life expectancy means that the state pension is being drawn by more people and for longer, and the trend looks set to continue. According to the Government Actuary's Department (Gad), by 2050 the average 65-year-old male will expected to live until he is 83, while the average 65-year-old female will be expected to live until she is 90.
Under the current system they are unlikely to qualify for the same state pension. Women who take career breaks to look after children are missing out on the national insurance contributions vital to make up the full state pension. As a result, just 30% are entitled to a full state pension when they retire.
Added to this, voluntary pension provision has been in decline. The cost to employers of offering final salary pension schemes which offer a set payout to employees when they retire has increased, leading many firms to pull out of providing them. And individuals have become nervous about investing their own money in pension schemes, following poor stock market performance and miss-selling scandals.

The Recommendations

· The introduction of a more generous, flat-rate universal pension which is paid to those who qualify on the grounds of residency in the UK, not on the grounds of national insurance contributions, as currently happens

· The pension would rise in line with earnings, not prices

· An increase in state spending on pensions, from the current level of 6.2% of GDP to a level closer to 8%

· The pensions credit should be retained as a tool for targeting pensioner poverty, the report said, but its future spread could be limited by freezing the maximum real value of the savings credit

· An increase in the state retirement age from the current age of 65 to 68. This would be introduced gradually over three decades, starting in 2020 when women's pension age is aligned with that of men

· The introduction of a national pensions saving scheme (NPSS), which would be offered through employers, and would automatically enrol workers unless they requested to opt out. Employers and workers would be compelled to pay in 3% and 4% respectively, to which 1% would be added by the taxman

Turner’s central argument is that policymakers must agree on a trade-off in which the basic state pension is raised more generously in line with earnings, while the state pension age is lifted to at least 67 by 2050.

In a comment that appeared directed at Mr Brown, Lord Turner said: "Unless people are willing to discuss [that trade-off], they are not serious participants in this debate. They are indulging in fairy-tale economics in which a fairy godmother makes all difficult choices disappear." Difficult as it may be to see Gordon Brown dressed as a Fairy Godmother (no don’t even try…) it is difficult to dismiss Treasury concerns so swiftly, particularly with the record of the Chancellor’s button-crunching when compared to most other pundits…

In greater detail the report suggests the following (with thanks to Philip Inman’s article on the Guardian Unlimited Website):

A citizen's pension

The move to a basic state pension based on residency rather than national insurance contributions would tackle most of the anomalies in the current system that depress women's retirement income, Lord Turner said yesterday.

Changes to the system over the years have brought in partial mechanisms to compensate for years when women care for children or elderly relatives. But if someone has worked for less than 10 years, they will not receive any state pension on the basis of their contributions. Home responsibilities protection offers some help but it is a complicated calculation that only works on whole years of caring and so fails many women who take shorter career breaks. If their job is poorly paid, they can also miss out on the national insurance stamp, even if they work in several such jobs with combined earnings above the lower earnings limit. More than two in five women aged 55-59 have fewer than 10 qualifying years. A further 622,000 (43%) have missed from one to 10 years.

Only 14% of women aged 55-59 have a full contributions record. In total there are 2.22 million women who are not accruing a basic state pension. The pension would rise in line with earnings, not price inflation (currently 4% against 2.5%). However there would be a 20-year period before means-tested benefits disappeared.

'Britsaver'

Employees would be obliged to pay 5% of gross pay above £5,000, of which 1% would effectively come from tax relief. Employers would contribute 3%. Further voluntary contributions would be allowed.

The new scheme would be run through PAYE. Contributions would be sent on to the Inland Revenue and then to the pension fund industry. The pension fund industry argued yesterday that it should handle payments, not the government. Finance companies said they had streamlined and could handle the funds at commission levels to suit the Turner proposals. Others argued the 0.2% commission was unrealistic and whatever system was agreed could never reach this figure. Running payments through the national insurance system or one run by Revenue & Customs could also be fraught with difficulties. The Revenue has experienced terrible computing problems and experience says government projects can be more costly than planned.

State second pension

The earnings-related top-up for the basic pension is unloved and ripe for reform. Many groups argue that it should be abolished altogether and future government payments put into an enhanced citizen's pension. Lord Turner says that would give too much money to the richest third of pensioners - better to freeze it and let it become a flat-rate top-up, rather than earnings-related, by 2030.

Critics say the second pension underpins the final-salary schemes that provide workers in many blue-chip firms with gold-standard pensions - the pensions we should all aspire to. Lord Turner's move would lead to further closures. On the other side of the fence stand the so-called "realists" who say final-salary pensions will be history in 10 years and this move would make little difference to a trend already in motion.

Working to 68

Life expectancy for men in Glasgow is now 69. That would leave just one year of retirement on a state pension. Given that many men in Glasgow are out of work before they are 55 and never work again, the move to increase the pension age appears particularly harsh. Of the 10 areas of the country with the lowest life expectancy, seven are in Scotland. Manchester, Blackpool and Liverpool are the others.

Lord Turner argues that life expectancy is rising faster among men on lower incomes who have quit smoking and stopped manual work. By 2050, when he thinks the state pension age should be 68, pollsters and advertisers will see 68-year-olds as "middle-youth".

The system already allows people approaching pension age to "roll up" their state pension and take it later in life but few take the option - the compensation for forgoing payments fails to make up for the loss of the £4,266 a year.

Lord Turner says the quid pro quo for ministers before they raise the retirement age is boosting jobs for older workers. More than half of over-55s are currently out of work and a whole chapter of the Turner report deals with ideas that employers could adopt to encourage the over-55s back into work.

When will this happen

Not in the immediate future - if at all. The government has said it will hold a national pensions debate, which will result in a white paper in the Spring. Any changes outlined in that will have to go through parliament and be voted on by MPs before they can become law. Even if Labour adopts all of the report's recommendations and they sail through parliament, it will still be the middle of this century before the system has been overhauled. But changes will have to start in the next few years. The commission says that while a short delay beyond 2010 would not seriously undermine the direction of reform, a five-year delay probably would. And it suggested that the problems faced by the poorest pensioners could be tackled immediately, with the introduction of a flat-rate universal pension for the over-75s. This would address some of the discrepancies between the income of male and female pensioners that have resulted from the current system.

Reaction

Outside parliament, pensioners' groups decried his view that current incomes are adequate and his blueprint should address problems arising after 2010. The National Pensioners Convention said one in five older people still lives below the official poverty line. NPC president Joe Harris said: "Lord Turner may talk about not wanting to engage in fairytale economics, but his recommendations for today's pensioners look like they have been written by the Brothers Grimm” and that Turner was too timid and should have gone straight to a citizen’s pension.

Trade unions said the proposals offered a significant move forward, but allowing employees to opt out of the new Britsaver pension scheme would result in many vulnerable and low paid workers refusing to join. The commission's decision to fix employer contributions at a relatively low level of 3% of salary, and its support for raising the retirement age to 68, were also weaknesses in the report, they said.

Employers' organisations took the opposite view and said the commission's demand for 3% compulsory contributions from employers into the Britsaver could tip smaller employers into insolvency. But while the Confederation of British Industry and British Chambers of Commerce adopted this line, the Engineering Employers' Federation broke ranks and backed the Turner proposals. David Yeandle, director of pensions at the EEF, said his members agreed it was essential to encourage savings through a higher basic state pension, an end to means testing and a compulsory scheme that included employers' contributions. The CBI chief Digby Jones disagreed. He said compulsion was the sting in the tail of the report and might prevent small firms from supporting pensions reform.

The insurance industry is angry at the prospect of some of its business being replaced by the proposed national savings scheme.

Battles Ahead (or… Gordon’s calculator says NO!)

Gordon Brown last night warned Cabinet colleagues that Lord Turner's proposed reform of UK pensions would require a decade of higher taxes, starting early in the next parliament, with the chancellor believing the basic rate of income tax would have to go up by four pence to pay the full £16bn bill by 2020.
Mr Brown's calculations were immediately challenged by Lord Turner and branded "unrecognisable" by the Department for Work and Pensions… there’s joined-up Government for you… Other senior government sources also sought to challenge the Treasury briefing as "designed to mislead" and said the cost of the proposals would at most be 1p on tax by 2020.
Lord Turner released figures showing that if the pensions system was left unchanged between now and 2020, the Treasury would be able to afford a 3p income tax cut, largely due to savings created by raising the pension age for women to 65. "My plans would therefore involve the equivalent of at most one penny on income tax", he said, adding that it was only possible for the Treasury to reach its "really large figures" by assuming the government would cut spending on pensions, with the result that "we make poorer pensioners very much poorer".

The row over cost looks set to be the battlefield in which government decides whether or not to endorse the Turner plans, which include a basic state pension rising in line with earnings, not prices.

The bulk of his proposals, including a later retirement age, were endorsed by Tories and Liberal Democrats, as both parties called on Tony Blair not to give the chancellor a veto. However, the Treasury said its baseline for the public finances over the next 15 years did not include the three central planks of Lord Turner's report: restoring the link between the state pension and earnings, making the state pension payable to everyone over 75 and continuing to update the pensions credit in line with earnings.

"There is a substantial gap above that baseline that would need to be filled. This is what we keep telling Lord Turner", a Treasury source said. In the first year, the Treasury said it would be faced with an additional £2.6bn bill, but this would rise to £8.1 bn by 2015 and £16.4bn by 2020. A small tax increase of less than one penny on income tax would be needed early in the next parliament, but would rise every year, sources said. By 2020, according to the Inland Revenue, the cost of the changes would require four pence on income tax or an increase in VAT from 17.5 to 22.5%.

Despite a meeting last week with Lord Turner about the package, Mr Brown refused to accept his argument that the short-term cost to the public purse from the reform would be offset by savings from bringing the pension age for women in line with that for men at 65 in 2020. He will tell colleagues that the only alternative to higher taxes would be to reallocate money from other areas of public spending.

Ed Balls, the chancellor's former economic advisor, who is now an MP, told BBC Radio 4's Today programme: "Our approach has always been based on fiscal discipline ... the key issue is: is it affordable, do the sums add up?"

SLIM Comments

The looming pensions crisis needed addressing and Adair Turner’s report is detailed (472 pages… plus the rest…) and well thought out. Opposition will come from those that perceive they will need to pay more, whether businesses or individual taxpayers. But ultimately more must be found. The biggest concern is, of course, the worrying criticism from the Chancellor, a man whose calculator seems more accurate than most and a man who may be charged with getting this legislation moving. How the report emerges as a concrete set of proposals will depend upon lobbying and the South West needs to ensure that its voice is heard.

Amongst issues that seem to need addressing is the employees opt-out, which may result in many of those most needing to be in the scheme, opting-out. There is a case for a greater compulsion here. Isn’t much of the current problem down to many of us ‘opting-out’ of responsibility for our pensions in the current system?

Some experts believe between one and three million pensioners would still be eligible for means-tested help during the first 10 years of the scheme. This could discourage workers from saving in the new "Britsaver" national pensions scheme if they believed that means testing would affect them. The Pension Reform Group say: "The dilemma for the individual and the financial industry is knowing when this break will occur. Swaths of workers now do not save because they cannot make themselves better off by doing so. No financial company will sell pensions to this group for fear of miss-selling. But when the pension credit's link to earnings is broken, many will become ineligible and find themselves in a position of never being able to make up the savings they have been advised not to make over past years."

Life expectancy averages hide many inequalities and raising the retirement age could well impact most upon those expected to live the shortest. There are good arguments for sticking with 65 years as the basic state pension age, at least for longer than is suggested in the report. Gordon Brown will no doubt be aware that Scots' life expectancy is low and may react accordingly.

The CIPD continue to argue for the abolition of mandatory retirement ages and this should be re-addressed and included within future anti-discrimination legislation.

Whatever they choose to do, the Government should look to recent examples from abroad in pensions and health and realise that often, if you give people more options – sometimes they'll do less.

With our striking age demographic this debate will impact most upon the South West Region. Once the numbers have been agreed upon and the figures finally add-up… we need to ensure that the equalities issues are not forgotten. If they are not addressed, you can tear up all the calculations once and for all, there’s no point in extending retirement age if employers still see 60 year olds as 'past-it'.

Read the Executive Summary at The Guardian

Times article

Financial Times article

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