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Turner paints a bleak picture

Iain Anderson is director and chief corporate counsel at Cicero Consulting Pension Commission chairman Adair Turner signalled in his interim report that he wanted to spark a major public debate on pensions and, to judge by the headlines over the last few weeks, he has certainly achieved that objective.

Turner stated: “The big problem lies in 15 to 25 years time, if policies and individual behaviours do not change.” The evolving demographics of the UK mean that very significant changes must be made.

The most likely policy solution is a mix of remedies to the current system. The question is when these solutions will emerge. They are likely to include more devoted resources from the state, a higher retirement age and greater personal savings.

Before Turner publishes his final report next October, a consensus must be established on what is the right degree of each element in his policy recommendations.

Contrary to leaked reports, the Pension Commission did not publish a figure for the savings gap. Instead, it said that taxes would have to rise by 57bn to fill the gap. However, it did conclude that at least nine million people are failing to save adequately for their retirement income.

Retirement ages, including the state pension age, may have to rise but this cannot alone solve the problem. The current and projected resources will not be sufficient to sustain the increased number of dependents in the future.

There must also be special consideration of the evolving role of women in our society – a fact which the new Work and Pensions Secretary Alan Johnson recognised in his first appearance before the DWP select committee last week.

Demographics mean there will have to be a major adjustment to current pension policy in the UK.

The UK has long had one of the least generous systems of state pension provision in the developed world. However, this was usually compensated for by extensive private pension provision from what were largely defined-benefit schemes.

Turner takes the view that the greatest problem for pensions is not now or in five years but in 15 to 25 years. The opposition parties do not, of course agree. They believe a real and present crisis looms right now.

This brings the Pension Commission to the conclusion that private, voluntary funding streams are quintessential to the retirement provision of the future. But why has the voluntary system not delivered the level of provision required?

The report clearly states that incentives for saving are undermined for some people by means-testing, which will apply to an increasing number of people should current trends continue and is providing a disincentive to save. Incentives available through the tax and benefit system are far too complicated. For some people, usually lower-earners with less to save, incentives are fleeting and they may even be advised against making provision by their IFAs because to do so would risk their ability to claim the pension credit.

The commission broadly identifies four possible solutions. These include a major revitalisation of the voluntary system, significant changes in the state system, an increased level of compulsory private pension saving beyond that already implicit within the UK system and, finally, doing nothing and allowing those who do not save to face the consequences – not the most politically appealing option.

Many interest groups and coalitions from across the political spectrum have voiced strong opposition to one or other of the solutions. The Confederation of British Industry (of which Turner used to be chairman) has said that compulsion would effectively be a tax on jobs, leading to very significant job losses. Old Labour is strongly opposed to raising the retirement age, saying it would condemn some of its members with extremely physically taxing vocations to work until the end of their lives.

But there is a broad consensus that something must be done if pensioners are not to be left in poverty.

Johnson has indicated his full-fledged support for some degree of reform although most observers do not expect a root and branch retooling of the system until after the general election.

The most pressing political questions surrounding this issue will, at least in some part, play out over the next few months leading up to the general election and immediately thereafter. The Blair-Brown tensions are probably exacerbated by the search for a solution to this issue. While the Chancellor is determined to keep a hard line on public spending – which would definitely preclude a massive infusion of public funds into the pension pot – the Prime Minister needs to find a solution to what is becoming one of the most highly-rated issues in the run up to the general election. Previously, Blair has left the pension issue to the DWP under the guidance of the Treasury. However, it seems as if he will position himself to take a more hands-on role, especially after the election.

Recently, Brown has argued very forthrightly that he will not allow European-style public expenditure on pensions. In the past, he has preferred tinkering with the system using minor tax incentives and things like the pensions credit. As a result, the pension system has become increasingly complex, much to the annoyance of Blair, if we are to believe reports from insiders.

This is likely to be one of the most contentious policy debates to follow between now and mid-May but at least the debate has come alive.


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