Despite being sniped at by the Treasury and financial services companies and criticised by pensioner groups for not going for the Big Bang solution of a high, citizen’s pension for everyone over 65, Lord Turner seemed remarkably jolly when I met him.
The Chairman of the Pensions Commission is charged with sorting out retirement income for the next fifty years, and he explained to me his two key thoughts. "We have to make the state pension system simpler, more generous, less means-tested and starting at a later age. And we’ve got to do something to encourage people to save and to enable them to save at low cost."
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Few people disagree with the problems as he sets them out. It’s when he starts proposing solutions that the difficulties start. His mantra is this: we are living longer and from 2020 the number of people in work for each pensioner will decline sharply. If tomorrow’s pensioners are not going to be a great deal poorer we have to have some combination of higher taxes, more savings, and working longer. "Different people will make different judgments on that trade-off. But unless people are willing to discuss it, 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." |
Lord Turner – or Adair as he still prefers despite his elevation to the House of
Lords in September – was appointed in 2002 and it was three years later, 30
November 2005, that he produced his report. He admits there is relatively little
in it for today’s pensioners.
Though one thing is his controversial proposal to raise the basic state pension each year in line with earnings rather than prices. Earnings rise by around 2 per cent a year more than prices so over time that would lead to a big rise in the state pension. And that is one of the things he says would help people in their fifties.
"There will be a clear benefit for people over 50 because starting to index
the basic state pension to earnings from around 2010 will make quite a lot of
difference in mid retirement. Someone who is 55 today will not be 80 until 2030
and the difference between indexing to prices and indexing to earnings even by
2020 will be big, possibly about 40% in the real value of that pension. And of
course the good news for that age group is that the issue of raising the state
pension age is not for them because we’re not proposing any move on the state
pension age, which is not already happening, until after 2020."
The press of course had a ‘work til you drop’ field day when Turner’s plans were
revealed. But Turner is at pains to make clear even people in their forties now
would only see one extra year added to their pension age, those in their
thirties an extra two years, and those in their twenties perhaps three years or
maybe four. And he explains that will not reduce the length of time they draw
their pension. Because under his plans the state pension age will rise more
slowly than the increase in life expectancy.
"We’ve suggested a principle. As life expectancy goes up we should put the extra
years of life in a balanced mix of some more years in retirement and some more
years in work. A man today retiring at 65 can expect to live 19 more years. If
the age in 2050 was 68 he could expect to live 21 years."
He also points out that state pension age is not the same as the age you stop
work.
"Let’s be clear that what happens to the state pension age is not necessarily
the same as what happens to the age of retirement. There’s no such thing as an
age to which people have to work."
But he accepts that we will need to change our attitudes if people are to work longer. "The issue of working longer is very important. State pension age for women will rise from 60 in 2010 to 65 in 2020. Unless those women are able to get jobs all we will have done is move them from pensions to less generous benefits. We have to make sure there are jobs available."
Many people hoped that Turner would propose a radical change in the state
pension, raising its value to around £109 a week and paying it to just about
everyone over 65. Either on the basis of citizenship or at least with new rules
to allow many more women to qualify for a full pension – currently only one in
four newly retired women has paid enough National Insurance contributions to get
a full pension in her own right at 60. But he didn’t, leading one commentator to
say he had ‘bottled out’.
Instead he proposed a full state pension for everyone at age 75, based on the
condition that they had lived in the UK for 10 of the previous 20 years. But he
also suggested that qualification for the basic pension in future years should
be on the basis of presence in the UK rather than paying National Insurance
contributions. Both changes would particularly help women. It is the present
link between the amount of paid employment and the level of the pension that
means very few have a full state pension.
But it was his suggestion that the basic state pension should be raised each
year in line with earnings rather than prices that caused apoplexy in the
Treasury. By 2030 that could raise the real value of the basic state pension
from £82 today to the equivalent of £134 a week in today’s terms. And even
before the report was published Treasury officials were quietly briefing
journalists that these plans were unaffordable. On publication day itself
unnamed Government sources suggested they would add 4p to the basic rate of tax.
Now Turner doesn’t mind people disagreeing with his solutions. But one thing
guaranteed to annoy this meticulous number cruncher is the accusation that he
has got his sums wrong. In reply Turner accused the Treasury, if not the
Chancellor himself, of producing figures that bordered on insanity. Five days
later the Treasury quietly revised upwards its figures for the cost of pensions
into the future, reducing the extra cost of implementing Turner’s proposals.
It is not just the Government that has challenged his maths. The financial
services industry is very afraid of his estimate of how cheaply a new National
Pension Savings Scheme could be run. Everyone in work would be automatically
enrolled in the scheme unless their employer already provided a better pension.
Individuals could opt out. But if they did not then they would pay it at least
4% of their take home pay and their employer would cough up 3% of their gross
pay. With tax relief at least 8% of pay would be going into a pension and there
would be the opportunity to pay in up to 16%. So far so good.
The Scheme would invest the money in a new low cost pension fund which Turner
reckons could be run for around 3p a year for each £1000 invested. At the moment
stakeholder pensions cost on average 13p a year per £1000 and personal pensions
can cost a lot more than that. The financial services industry thinks Turner’s
figures are too low. But he points to Sweden where a similar scheme costs only
1.5p per £1000 and one in America which costs just 6p for each £10,000 invested.
The Government has welcomed Tuner’s report and promises a White Paper in the
spring – perhaps in May – covering all the topics in the report but "some will
be firmer than others" Pensions Minister Stephen Timms told me. On the key issue
of linking pensions to earnings rather than prices Gordon Brown stands in the
way – as Chancellor or Prime Minister. He prefers to target money on less well
off pensioners through the complex pension credit rather than paying a universal
rise to benefit rich and poor alike.
Turner believes his changes are essential. But what if they don’t happen?
"It will be unfortunate. Now I say ‘unfortunate’ not ‘disastrous’ because this is not like climate change or war in Iraq or the economic failure of Africa or AIDS. People won’t die. But it will be a missed opportunity to have a coherent approach to how we deal with the challenge of an ageing society. We are quite capable of sitting down as a society and think these things through and have a more coherent policy than we have at the moment."
Eventually, probably in 2007, the Government’s plans will go through Parliament. There they will now meet their most testing critic – the new peer Lord Turner of Ecchinswell himself.
February 2006