Inherent barriers complicate pensions reform

Sep 15 2005 by Nic Paton Print This Article

By 2050, people could be living for as long as 22 years beyond their retirement age of 65, creating a huge challenge when it comes to solving the UK's pensions' crisis, Pensions Commission chairman Adair Turner has warned.

Turner, who will make his report on the UK's pensions crisis at the end of November, was speaking to the TUC Congress this week, and outlined the stark, tough choices industry, employers, workers and Government will have to make.

Earlier this week, the TUC accused Britain's employers of walking away from the country's pensions' crisis, urging there to be a new obligation on employers and employees to contribute to a pension.

Trade and industry secretary Alan Johnson, also speaking at the Congress, stressed the Government's commitment to preserving high-quality public sector pensions, whether available at 60 or 65.

But he added: "But we can only deliver this within a scheme that is capable of withstanding the demographic changes that are bound to have a radical effect on pension provision."

Ultimately, argued Turner, it is simple, there are only three solutions to the pensions' crisis: pay more taxes or NI contributions to fund more generous state pensions, increase savings flowing into private pension funds or raise the average retirement ages.

Fewer benefits relative to average earnings, higher taxes or a higher pension age
And when it came to the state pension system, the trade-off would a three-way choice, he suggested: fewer benefits relative to average earnings, higher taxes or a higher pension age.

"Present policies, if continued indefinitely, will means substantially smaller pensions on average relative to average earnings," warned Turner.

Means-testing pensions, one answer mooted, posed a dilemma, he suggested. "Pensioner groups dislike it. And the private pension industry tells us that it is a disincentive for private pension saving," he said.

Similarly, many people and many business groups would oppose any significant increases in the level of tax or national income devoted to pensions.

"And we are also left in no doubt that there are many people and institutions who do not want an increase in state pension ages," he stressed.

"But the state pension system is either going to become more means tested, or it's going to require higher taxes or NI contributions, or there are going to be higher state pension ages, or some mix of all three," he warned.

"There is nobody clever enough to design a state pension policy in the face of the demographic challenge, which doesn't involve one of those three things or some mix," he added.

"Whatever choices we make on the state system, it is clear that increased pension saving into funded pensions will also have to be part of the response to the demographic challenge if people are to achieve what that they are likely to consider adequate pensions," he continued.

It was however clear that the UK was not on target for a sustained rise in private pension income, whether from occupational pensions or from personal pensions. In fact the opposite was happening, with participation rates in private sector pension schemes in slight decline as were contribution rates.

"The state is planning to do less for the average earner, but neither the average earner herself nor her employer are doing more to fill the gap," he warned.

The pensions system has three inherent barriers, he added: first employers often believed it was not their role to provide pensions simply for reasons of social responsibility and, second, individuals were often unable to make sensible decisions because the system was so complex.

Third, it was difficult for the financial services industry to sell pensions to people of average earnings and below working for small and medium size companies or even to sell pension schemes to their employers at charges sufficiently high enough for them to make a profit but sufficiently low enough to represent good value for money for the person saving.

"Some people and institutions, faced with those barriers, urge the Pensions Commission to recommend compulsion. And we know that many individuals say that they would like to be compelled to save: but we also know that many say very clearly that they do not want to be compelled," he said.

Whatever the commission reports in November, there will be no easy answers, he warned.