The Turner Report has had wide press coverage, although that does not necessarily mean that it has served to straighten out the problems that exist in the pensions industry. And with the very clear internal tensions within the government it is a little uncertain how much of the report will be adopted in some future Pensions Act, but the diagnosis seems uncontentious – longer living being the key to it.
Some observers have suggested that living longer should not be a problem with growing living standards, but experience in the US indicates that such increases in living standards are not guaranteed. And, of course, the mortality statistics may be misleading. Nonetheless, there is a growing consensus that while in 1908 people were expected to live for 3 years on pension when the pension age was 70, life is likely to last for nearly three decades when the pension age is 60. To have around half the population walking around on zimmer frames and contributing nothing to the national economy seems a generosity too far. The complaint from the unions that it is unfair to expect lower earners and manual workers to work much past 65 is not unreasonable – but ignores the fact that there are less strenuous occupations which can involve older employees as time goes on.
By and large Turner has produced a sensible and balanced survey of the issues. But it is not without its idiosyncracies, largely driven one suspects by the facts that its authors have had little involvement in either working at the metaphorical workface, or actually running a business.
The one major objection to the report is the complete failure, other than in the odd throwaway remark, to examine why there has been such a rapid decline in workplace pension provision, despite the fact that such provision survived previous stockmarket collapses and demographic shifts. The one common factor of complaint amongst employers, employees and IFAs is that the pension system, both state and private, is far too complicated.
The state system, with a basic state pension in at least four different varieties, and based on an uncertain contributions record, especially for carers and women, and with a second state pension comprising a mix of SERPS and S2P of earnings related and flat rate and either contracted-in or contracted-out, and with a third state pension which is means tested in two ways (one for the lower-paid and another for the higher-saved) is complex beyond belief. And to have around 80 per cent of people over 65 with a cost approaching an increase of 13p in income tax is clearly unsustainable and unmanageable. It has to be simplified – and the Turner Report accepts that – but does little about it apart from phasing in changes over thirty years in an even more complicated fashion and adding a fourth semi-state pension with another form of contracting-out.
The soft-compulsion arrangements (NPSS) sound superficially attractive. But with a decent state scheme, why should the state be involved in private provision, in running or even sub-contracting a national system with all the EDS, NIRS2, CSA and tax credit risks attached, and distorting investment of UK capital markets (towards gilts and away from risk capital). It seems unattractive.
The report also ignores the complexity of the incoming tax arrangements, so encouragingly called simplification. By April 2006 we will have 200 pages of impenetrable primary legislation, 150 pages of statutory instruments, similarly complex, and 1000 pages of guidance notes to explain it all. One of the reasons that people prefer property as an investment is the fact they can understand a house, but are deeply confused about a pension. There will be little future for the pensions industry without some serious simplification – and the Report does little to address that this fact.
And most curiously the report distorts the issue of annuities. The real reason why annuities are so difficult to obtain, and are perceived to be so expensive, is the bizarre regulations concerning the kinds of annuities that can be issued, the highly complex and confusing alternatively secured provisions, and the regulatory requirements for capital and reserves. The suggestion that the government issue a new form of bond may be helpful, but addresses the symptoms rather than the cause.
One of the remarks made by Lord Turner was that once the report was out in the public domain, he expected to move on from pensions. This reflects one of the essential drawbacks to the report – it lacks practicality. Lord Turner has the strengths and weaknesses of management consultants, which is where he spent his working life – brilliant on ideas and presentation, slightly less involved in implementation. The next report, perhaps a white paper or a green paper from the Department for Work and Pensions, needs to take the best from Turner and eradicate the second state pension, eradicate contracting-out, and simplify, truly simplify, the tax and DWP rules for pensions. Then the industry can get its teeth into the problem, and make sure that with an understandable system, people will be prepared to look after themselves in their old age.