The long-awaited and much leaked Turner Report has now been published. It appears an intelligent and well-argued report on the state of British pension provision, as is reasonable to expect from the resources made available to produce it. Tempting though it may be to select a few bullet points, it would not do justice to the balanced sensible approach it takes to the problems and proposed solutions to over simplify its recommendations.
The UK pension problem is not capable of a solution as if it were a quadratic equation with just one answer. Rather it is a situation which is a compromise between the workers and the retired, between the well-off and the hard-up, and between the salaried, the self-employed and the unpaid workers (housewives and carers).
So far as state benefits are concerned, there is the unavoidable trade-off between higher tax, later retirement and higher pension. The suggestion of putting state pension age back to 67, 68 or later is well argued. However this cannot be seen as carved in stone. The public must accept this will be a moveable feast and will be reviewed again and again in the long term.
The current state pension age was introduced early last century when the UK was a different place. According to the government actuary, as recently as 1981 a man aged 65 had a life expectation of 13 years. In 2005 this has increased to 16.8 years and alarmingly (or reassuringly) by 2050 will have increased to an estimated 21.1 years. With such a large change something has to give.
If, by whatever means, the basic state pension is increased to the currently regarded minimum means tested benefit, and it applies to all, then a safety net is in place. It would be nice if it could be put in place soon, but the suggestion in the report that it could be phased in gradually by absorbing the second tier state pension over time, is probably a reasonable compromise.
The Government must not lose sight of their main responsibility, which is a moral one, to ensure that all UK citizens have sufficient income in their declining years to live with dignity above a minimum subsistence level. This should be paid to all on equal terms from a certain age and paid for from general taxation. Means testing will occur automatically via the tax system so that the better off pay back up to 40 per cent. There will be a significant saving by dismantling the current bureaucratic means testing machinery and scrapping the second tier State pension which nobody understands.
The third main proposal to introduce a simple low cost top up pension which relies on inertia (auto-enrolment) may not work in practice. The poorest may still opt out, and it may further work against the provision of the “good” occupational pension scheme. Employers may see it as a cheaper alternative that has the official seal of approval. Furthermore, what can be provided for less than 0.3 per cent per annum other than take or leave it tracker type funds? Who will be responsible for advising or educating the public so they can make sensible choices of investments?
The report places emphasis on the benefit of low cost charges as available to large institutional investors but does not give equal weight to the benefit of successful active fund management over the passive. If the results are regularly and officially monitored and the results published, the public could vote with their cheque books. But active management is much more expensive so they must be allowed a choice of funds with higher charges if they want to consistently outperform.
The difficulty with pension provision is that it is a 30-year problem being faced by a 5-year government wanting to be re-elected. If they do the sensible thing it may be unpopular and result in their downfall. This happened recently in Finland, which was in a state of economic decline. The then incumbent Government introduced stringent reforms which happily resulted a complete turnaround in the country’s fortunes, but which resulted in the party being kicked out of power. Such altruism is perhaps too much to hope for in politicians in the UK.
Furthermore, with one person, one vote, if the electorate are driven by self interest (which it would not be too cynical to suggest they are) the greater number lies with the “in work” at present. This suggests the interests of the retired may take second place, but with the “baby boomers” as “soon to be retired” this balance of voting power may be shifting.
It is going to be quite impossible for the Government to do anything that will make everyone happy. It seems to me, therefore, they will miss an opportunity if they do not go along with the general proposals in the report because it gives a double benefit. It enables the Government to take action which will be seen to be a version of what is sensible; and it will to some extent reduce the full weight of the blame and pass it on to the Turner Committee which is a non-party body.
Overall, Gordon Brown cannot simply shelve the report because in doing so he would be turning his back on a balanced appraisal of the problems and reasonable suggestions in addressing them. What is his plan otherwise?