In spite of much speculation on the report and its contents over the past week it is fair to say that Turner has pulled no punches, and has laid out ideas which now need to be turned into workable and affordable proposals by the government working closely with employers, unions and trade bodies.
Although not within the original brief for the Commission we acknowledge the balanced way in which Turner has addressed the difficult issue of State Pensions reform. Highlighting that a direct trade off exists between extending the state retirement age and increases in public expenditure (which are ultimately funded through higher taxation) is easy to say, but the report expresses this trade off well. It demonstrates that currently state benefits cost approximately 6.2% of GDP, and that different phasing to later retirement ages of between 66 and 69 years between now and 2050 could result in the cost moving to between 7.5 to 8% of GDP if current demographic estimates for the ageing population are borne out. The challenge of managing the balance on this issue falls squarely to ministers and will be the main subject of fiscal debate over coming months as will be the reform of means testing and the second state pension.
The recognition by The Commission that means testing needs to be removed as a barrier to saving is positive, although the proposal to maintain both BSP and S2P in the transition to a flat rate state pension could prove confusing. Coupling this with the proposals to remove contracting out for DC schemes, whilst retaining the facility for DB, and it is clear more detailed work needs to be done here to avoid confusion. Not least because this appears to remove the capacity to contract out of S2P without a quick transition to a flat rate USP which would provide a clear distinction between the role of the state and the private sector.
However, Turner recommends that the role of state provision should be to remove people from poverty, and do so on a universal basis in future with qualification for benefits based upon residency not contribution history. This is consistent with AXA calls for a Universal State Pension, although the timescales over which the transition to a flat rate benefit takes place are likely to be long, if pursued, and this may cause confusion during that period. In addition the role of state reform in addressing the most disadvantaged under the current system, namely women, carers, and those with incomplete contribution records will also need to form a key element within these proposals.
The proposals for a National Pensions Savings Scheme are more contentious. Not in the objective of providing a viable second tier to cater for those individuals who do not currently benefit from adequate company provision, but in the assumptions which have been made about how this might operate on a low cost basis, and what format this might take.
The commission has focussed on cost as the key driver to providing value to those areas of the market who do not currently have quality company provision. Coupling this with a proposal to auto enrol employees at a proposed level of contribution of 4% of post tax pay (+1% tax relief) and then compelling employers to match this with a 3% contribution will (if adopted) present small and medium sized businesses with a significant financial challenge which is likely to be reflected in wage settlements in future, or in more immediate impacts on workforces prior to then. We continue to favour a voluntary approach over compulsion, not least now because many UK companies are competing across Europe against businesses from developing European countries with a lower overall tax burden.
In addition AXA challenge the assumptions made regarding costs in overseas models. The costs inherent in establishing state run, central collection mechanisms are often underestimated and hidden. Here in the UK we have a highly developed private sector, capable of providing low cost, high volume solutions for pensions administration and fund management through existing infrastructure. We would urge the government to look at using existing structures, such as stakeholder pensions, as the most effective use of resources in which UK pensions providers have made significant investment. Indeed there is evidence that administration costs in the UK are highly competitive compared with overseas models on a like for like basis.
However, our main concerns arise from the exclusion of the cost of advice from the ‘pensions’ decision. People should plan for retirement and a pension is only one element of this decision.
If auto enrolment is used to enrol staff into pension schemes the decision as to whether to remain in or opt out needs to be considered against the background of:
- Low earners who may be covered by state benefits anyway
- The need to reduce debt which for many low earners will be a key priority.
- Attitudes to timing and phasing of retirement which will impact funding decisions.
- Taking other assets into account such as property in the retirement decision.
- Consumers’ personal attitudes to risk.
For employees there is a risk that the auto enrolment level could be seen as ‘adequate’ when in fact considerable additional contributions will be required to take replacement rates beyond 50% of median earnings. How will individuals put this decision in context? Who will assist with this? These are important issues which will form a key part of the forthcoming debate.