Turner Report - the future of pensions?
Wednesday, 30 November 2005 12:00
Adair Turner, chairman of the pensions commission, has today outlined the findings of his three-year inquiry into the future of UK pensions.
It recommends that the state pension is not paid until later in life (up to 69), that all workers are automatically enrolled in a National Pension Savings Scheme, that the basic state pension is increased, and payouts should rise in line with average earnings.
Lord Turner explained: "People are living longer: together with the retirement of the baby boom generation this will put the pensions system under significant strain.
"People are not saving enough for retirement, the state and employers are planning to play a decreasing role in pension provision for the average earner, and the current system will deliver increasingly inadequate and unequal pensions. There are no easy answers. But an integrated set of policies can ensure that increasing life expectancy becomes not a problem but an opportunity for everyone."
In an earlier report, Lord Turner identified that as the ratio of pensioners to people of working age increases, pensioners will get poorer unless one of three things happens.
Firstly that taxes on those of working age increase; secondly that people save more for their retirement; or thirdly that people retire later.
In its final report, the pensions commission tries to find a compromise solution, so that a little of each of these solutions is enacted and no single one is taken in entirety.
MyFinances analyses the implications of today's report for both existing and future UK pensioners, if the recommendations of this report are brought into effect.
Auto-enrolment pension scheme
The pensions commission recommends that in future all employees are automatically enrolled in either a high-quality work scheme or a new National Pension Savings Scheme.
People could opt out of this scheme, but if they stayed in they would pay four per cent of their salary into the scheme, with the government adding another one per cent of their salary as a contribution, and their employer paying an amount worth three per cent of their salary.
The pension scheme would be the property of the person paying in. They could choose between available funds and take it with them when they changed jobs.
The contributions would be deducted directly from salaries and, because of the size of the fund, costs for managing it would be incredibly low.
Annual management charges could be lower than 0.3 per cent, the pensions commission predicts.
This lower running cost could see the final size of the fund 25 to 30 per cent larger than for a fund with current average management costs of 1.3 per cent.
State pension reform
Lord Turner's commission calls for a reduction in means testing, an increase in the basic state pension, and a link between pensions payouts and earnings.
However, it stops short of calling for a universal or citizens' pension and says that the existing means-tested and contribution-based payouts should be retained - at least for the immediate future.
The existing second state pension should, however, be changed over time into a flat payout model by freezing the upper earnings limit for the state second pension accruals.
Pensions credit for people in poverty would be maintained, but means testing would be limited by freezing the maximum level of savings credit payments.
Over time the pension would move towards a universal scheme, but in the interim a universal payout for people over 75 to address pensions inequality - especially for women and those with patchy contribution levels due to work breaks - is seen as "highly desirable" although admittedly expensive for the state.
To pay for these more generous schemes, the government would have to increase the amount of money it spends on pensions to between 7.5 per cent and eight per cent of GDP, from 6.2 per cent, and Britons would have to retire later.
Retirement age
One of the most controversial aspects of the Turner commission's report into pensions is the conclusion that the age at which you can claim a state pension will have to rise.
The pensions commission finds that in order to prevent either taxes rising or pensioners becoming poorer the retirement age will have to rise after 2020 (the year in which men and women will both start claiming pensions at 65).
The report says that the state pension age should rise, but only in line with life expectancy.
This would see the state pension age rise to about 66 by 2030; 67 by 2040; and 68 by 2050.
But this would not be fixed. People should, however, know what their state pension retirement age is at least 15 years before they retire.
This would mean that there will be no increase in retirement age for anyone over 50 and those in their 40s would have to work a maximum of one year longer.
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