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Solutions to the shortfall

Early feedback to the Pensions Commission report on improving provision in the UK suggests the industry staunchly opposes compulsion but want to see the state pension system reformed, says Philip Scott

The first report of the independent Pensions Commission on the adequacy of pension provision and saving in the UK is beginning to draw responses from the industry.

The report was published last October and a cursory glance would lead any reader to conclude there is not much in the way of pension provision in the UK.

When weighed by the commission, chaired by Adair Turner, the amount of provision was found to be significantly lacking, with a shortfall of around 57bn.

Apart from illustrating the dire nature of the situation, the report put forward a number of ideas to help tackle the crisis. However, the industry was not going to accept these notions easily, if at all.

Four theories put forward by the commission were that:The UK could let pensioners become poorer relative to the rest of society.Taxes and National Insurance devoted to pensions could rise.Savings could increase.People could retire later.

The report said the solution must involve a mix of a major revitalisation of the voluntary system, changes to the state system and increased compulsion beyond that already implied by the state second pension and contracting-out arrangements.

The industry retreated to absorb the document’s contents and official feedback started to trickle through at the end of last month.

The Association of Consulting Actuaries favours a mix of higher savings and a higher retirement age but accepts that higher taxes and/or NI contributions might also be necessary.

Chairman Adrian Waddingham says: “The other option – allowing pensioners to become relatively less well off compared with the working population – is unacceptable although this will happen if the Government is indecisive in addressing the hard choices raised by the commission’s report.”

The ACA opposes compulsion and believes contracting out should be abolished as it says the public would find it easier to understand a regime where private pensions are built on top of a consolidated state pension.

It acknowledges that the means-tested pension credit, implemented by the present Government, has helped to address low incomes for existing pensioners but it feels means-testing should be phased out over a period of years. It is concerned that moves to increase the benefits it pays through indexation suggest it is being embedded in the system.

It suggests the state pension age should be increased gradually to 70 over a transitional period to help finance such a change.

National Association of Pension Funds chief executive Christine Farnish believes a better level of state pension would do away with the need for compulsion.

She says: “Our proposals for a Citizen’s Pension would provide the necessary clarity and, with a simpler system that people can understand, Governments would find it much harder to fiddle with the rules, thus helping to achieve stability.

“If we had a decent universal state pension, the debate over compulsion would fall away. The incentives system could be streamlined and there could be significant deregulation of private retirement savings, which would bring down costs and promote innovation.”

The ABI has called for saving targets to be met by 2010 and the Pensions Commission to be made a permanent body with a mandate to keep a watching brief on the achievement of those targets. Its suggested targets include a 50 per cent cut in the number of people not saving for retirement and those at risk of under-saving, as well as an increase to 75 per cent in the number of workers who receive an employer pension contribution of at least 5 per cent of earnings.

The Pensions Policy Institute believes more focus is needed in certain areas from the Pensions Commission. For example, it says there is sparse discussion of the future distribution of pensioner incomes or pensioner poverty as well as no analysis of the impact on individual incomes of longer retirement periods.

The PPI believes reform of the state pension system is the necessary first step before tackling issues in the private sector such as voluntary or compulsory pensions. It also doubts that a practical system of compulsion can be designed that will achieve the objective of good pensions for all.

For the longer term, the ABI suggests that Government policy should have the objective of achieving a replacement income in retirement, from the state pension and private savings, of at least 40 per cent of previous earnings for everyone, rising to 70 per cent for lower earners.

It says compulsion should be considered as a last resort and instead wants to see voluntarism based on state pension reform, employer-centred solutions, explicit incentives for individuals to save and wider availability of advice and information.

Financial services consumer panel vice-chairman Dianne Hayter believes education and information are the vital elements missing. She says: “Impartial advice for consumers on planning for their retirement is the missing link at present. Consumers will be encouraged to save if they can work it through with some person or system which is well informed but not interested in selling a certain financial product.”


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