Wyn Derbyshire, Head of Pensions at SJ Berwin LLP looks at the pensions’ options as recommended by Adair Turner in his much-awaited report on how to fill the £57 billion a year retirement black hole.
In a blaze of publicity, the second report of the Pensions Commission, established to make recommendations into the future of the UK pensions system and chaired by Lord Turner, was released to the waiting world on 30 November 2005.
Since then, there have been innumerable articles, commentaries and television interviews from all manner of people connected with the pensions industry, myself included, all commenting on the Report’s recommendations, and its implications for the future.
In fact, it’s not impossible that more words have been written about the Report than are contained in it and this notwithstanding that the Report is contained in two volumes.
Essentially, however, the Report’s main recommendations can be summarised as follows:
- The state pensions system must be reformed, with the phasing out of means-tested benefits and the acceleration of the evolution of the state pension scheme towards flat-rate pension provision.
- There should be a gradual increase of the age at which an individual can claim a state pension, rising to 66 in 2030 and possibly to as high as 68 in 2050, depending upon actual demographic experience over the next few decades.
- The right to a basic state pension should become universal, and based on UK residency, and universal pensions for all pensioners aged over 75 should be introduced.
- There should be encouragement of private pension savings by individuals (and their employers). To facilitate such savings, the Report recommends the creation of a National Pension Savings Scheme (NPSS).
Of all the recommendations (and there are other interesting ideas on the fringes of the main recommendations which are not mentioned above, for example, extending age discrimination protection to people of all ages – as we are all living longer, this is surely an idea where time has come), it is probably the suggestions of increasing pension ages and the creation of the NPSS which has attracted the most attention.
As far as raising the pension age is concerned, the timing of the Report was interesting, as it was released a few weeks after the Government found itself agreeing to protect the rights of public sector workers to continue to retire at age 60.
This of course immediately caught the eyes of both unions and employers organisations with the former vowing to protect public sector workers’ pension rights, and the latter pointing out the cost implications and the inequities of private sector workers being taxed to support public pension promises.
Ultimately, regardless of any other considerations, it seems that a rise in pension ages is inevitable, given the rise in our life expectancies and it seems unlikely however that this can be achieved without considerable financial and possibly industrial strife. This of course is not a problem restricted solely to the UK, as evidenced by the strike of the New York transport workers just before Christmas.
As regards the NPSS, the proposals have been described as constituting soft compulsion – individuals will be enrolled in the scheme unless they specifically ask to opt-out (or are otherwise offered membership of another employer-sponsored pension arrangement, offering comparable or better benefits.)
NPSS benefits will of course be money purchase in nature, with recommended minimum default contributions of 8% of earnings above the primary threshold and below the upper earnings limit, broken down as follows: 4% from the employee, 3% from the employer and 1% as a result of tax relief. Employees would of course be able to contribute to the NPSS at a higher rate if they wish; if they do so employers would not be required to increase their contributions above the minimum threshold.
Inevitably, there have been some concerns from employers about the NPSS proposals, some regarding the proposals as a new stealth tax whilst others expressing concern that future governments may increase the minimum mandatory contribution rates in due course.
In contrast, unions have expressed some degree of disappointment that a soft compulsion approach has been adopted, and some commentators have pointed to the Australian experience of mandatory pension contributions which now appear to be bearing financial fruits.
The reality is that the Turner Report was never going to fully satisfy everyone and the fact that most people can point to some aspects of the Report they like, and some which they oppose probably means that the Pensions Commission achieved a viable balance in its recommendations, which will assist in the stimulation of the UK pension’s debate. The next question is where we go from here; we now await the Government’s considered response to the Report, expected to be delivered in the Spring 2006.