Commission identifies “huge challenge” for pensions
The Pensions Commission has today published its first report on the current pensions situation, saying that the UK faces a huge challenge if it is to improve provision.
It has warned that past reforms have been too piecemeal, and a comprehensive approach, which is sustainable for the long term, is needed. The Commission was set up by the Government as part of its 2002 Green Paper on pensions.
The Commission presents four options to policy makers: that pensioners become poorer relative to the rest of society; taxes/National Insurance contributions devoted to pensions rising; savings rising; or average retirement ages rising.
At this stage, there are no recommendations made on specific policy changes, which will be included in the second report from the Commission, due in Autumn 2005. The Commission is now inviting responses from interested parties.
Chairman of the Commission, Adair Turner, said: “We must now make adjustments which we should ideally have begun 20 to 30 years ago. And to get policy right we need to look comprehensively at all aspects of the problem. Too often in the past, under successive governments, pension policy has addressed specific problems without a clear overall context. This has had unintended and adverse consequences.”
“Society and individuals face a huge challenge, but one that can be overcome. Longer lives and low birth rates will change dramatically the ratio of older to younger people. Major adjustments to average retirement ages and to pension provision are required. Over nine million working people will face pensions they may consider inadequate, unless they save more or retire much later than their parents.
“The underlying problems have been getting worse for 20 years at least, but were masked by the temporary impact of the baby boom generation, by a failure to anticipate the scale of life expectancy increases and by the irrational equity market exuberance of the 1980s and 1990s.”
The Commission suggests that some combination of higher taxes, higher savings and/or a later retirement age will be needed to address the problem. It also suggests that some form of further compulsion may be necessary.
The report examines in detail the reasons for the current decline in pensions provision, highlighting the move away from final salary schemes and the change in population demographics which means that the number of pensioners are increasing, and “state pension provision per pensioner will decline relative to average earnings”.
It warns that the problems will only increase in the next 15 to 25 years.
In terms of the current voluntary system, it highlights a number of drawbacks. Firstly, that people do not make “rational decisions” on savings, secondly that the cost of advice can reduce the return on savings.
Significantly, it also expressed doubt about the means-testing policies followed by the Government, warning that it increases the complexity of the pension system and “for some people reduces the incentives to save which the tax system provides”.
This means that unless new government initiatives can make a major difference to behaviour it is unlikely that the present voluntary private system combined with the present state system will solve the problem of inadequate pension saving.
The Secretary of State for Work and Pensions, Alan Johnson welcomed the report. He said that the report “brings home the message the Government first highlighted in the 2002 Green Paper; that people must either save more or work longer”.
Continuing, Mr Johnson said that the report’s examination of a slippage in occupational pensions and membership showed “why we must continue our programme of rebuilding confidence in pensions, for example through the creation of the new Pension Protection Fund, as well as giving people the information they need to make choices about pensions and rewarding people who choose to work longer.”
The various interest groups have also seized on aspects of the report to back up their cases.
Rodney Bickerstaffe, president of the National Pensioners Convention, welcomed the report. He stated: “A consensus is now emerging amongst many different and diverse groups, who all agree that we need a much bigger basic state pension for every older person, that is linked to earnings and free from means-testing. Britain has the fourth strongest economy in the world and if we put our money into providing a secure and improved state pension, we wouldn’t have to worry about the prospect of millions – mainly women – facing poverty in retirement both now and in the future.”
UNISON’s general secretary Dave Prentis, said that business needs to act. Mr Prentis said: “If we are to avoid the doom and gloom scenario painted by the Turner report, employers should be forced to provide adequate pension schemes with compulsory contributions. If they had paid up in the first place and been prevented from taking pensions holidays, we wouldn’t be facing this pensions time bomb.
“To suggest that those living on the minimum wage should be able to save anything, let alone save more, is totally unrealistic.”
The Liberal Democrat’s pensions spokesman, Steve Webb, said: “Any solution to the pensions crisis must start with a decent basic state pension, payable free of means-testing, on which hard-working people can build their own savings.”
