Britain’s pensions crisis is significantly worse than previously thought, with an annual savings gap of almost £60 billion in danger of consigning millions to a bleak future and the government unable to make up the shortfall.
Tomorrow’s report by the Pensions Commission, chaired by the former director-general of the Confederation of British Industry (CBI), Adair Turner, will reveal that gap between how much Britons save and how much they should be saving is far wider than previously thought.
Earlier this month it was revealed that basic errors by the Office for National Statistics (ONS) meant that the government had been consistently over-estimating the amount that people save.
While the ONS suggested that £86 billion a year was being saved annually in private pensions schemes, the revised figure was close £40 billion.
But the Turner report will paint an even bleaker picture, showing that individual pension contributions have fallen sharply over the past five years and that official claims that they have risen 16 per cent in that period are incorrect.
Contributions have only risen because companies have been pumping money into their schemes to make up big deficits, the report will show. New CBI figures show that employer contributions rose from £18 billion in 1997 to £37 billion in 2003.
To make matters worse, both the government and employers have underestimated the effects of increased longevity, while falling investment returns and punitive tax changes have further reduced incentives to save.
As a result, the government faces a stark choice. Encourage individuals to work longer, force them to put money aside for retirement, raise taxes to pay for a higher state pension or accept that millions will face an impoverished old age.
Raising taxes looks unlikely. Even to boost the proportion of gross domestic product devoted to savings in Britain from its current six per cent to the European average of 11 per cent would cost £57 billion a year.
To make up this gap through taxation would require a politically suicidal increase in income tax of 17p, something that the Chancellor, Gordon Brown, seems to have already ruled out.
“The Chancellor has made clear that we will do nothing to put the public finances at risk, including increasing public spending on pensions to European-style levels,” a Treasury spokesman said.
Compulsion is also unlikely. Forcing employers to make pensions contributions would be seen as tantamount to a government-enforced pay cut by many employees while in Australia, where compulsory pension saving was introduced several years ago, the net household savings ratio has actually fallen.
The CBI said compulsion could cost businesses up to £22 billion a year.
"Compulsion would present the government with a hostage to fortune," said its director-general, Digby Jones.
"It may be politically difficult but it's a government responsibility to show leadership and so far this has been insufficiently forthcoming. I have high hopes the new secretary of state will move the situation to new ground."
"If an individual's fund failed to deliver after compulsion, they might seek compensation from the government who had made them enter a scheme in the first place," Jones added.
The CBI has proposed increasing the basic state pension by a third to eliminate means testing while gradually raising the pension age to 70 between 2020 and 2030, an approach echoed by Blairite think-tank, the Institute for Public Policy Research (IPPR).
The IPPR has proposed raising the basic state pension, abolishing means testing, raising the state pension age to 67 by 2030 and restoring tax incentives for savers to make pensions the most tax-efficient form of saving.
Peter Robinson, IPPR senior economist, said: "An enhanced basic state pension is the best way to tackle pensioner poverty whilst providing an environment in which people can plan with confidence and be rewarded for saving.
"So a significant increase in the basic state pension now can be paid for by reforms within the state pension system, it does not have to come from elsewhere.
"After 2020, government will have to grasp the nettle of an increase in the state pension age for men and women."
But while the TUC’s Brendan Barber agreed that means testing discouraged saving, he said that "voluntarism has failed" and rejected raising the retirement age as a "work till you drop" approach.
"Every sign is that this report will confirm that Britain is heading for a major pensions crisis, which may be even worse than previously thought,” he said.” The only conclusion can be that there are millions in work today who have little, if any, proper provision for when they retire."
"If we are going to get a new pensions settlement that lasts, we will need to take some tough decisions," he added.
"Unions are prepared to play their part, and provide real leadership by telling people at work that nearly all of us need to save more."
So with the average British retirement age having fallen to 62, it looks inevitable that encouraging people to work longer will be the only politically viable solution. Raising the retirement age to 67 in line with rising rife expectancy could come some time after the next election.
And there are signs that policy is already moving in this direction. Under provisions in the Pensions Bill that will become law next week, people will be able to defer their retirement and receive a lump-sum payment when they do start claiming their pension.
The system means that a man who put off retirement for a year will receive £5,000 or £30,000 if he works for a further five years. A married couple who both worked an additional five years would receive £48,000.
But despite pointing the finger of blame for the crisis at the government’s failure to take difficult decisions, the report will not make any firm recommendations. Those will come in the commission's final report, published in a year’s time – probably after the next election.