Pensions chief delivers his cure: work longer, save more

People in Britain may not be allowed to claim a state pension until they are 69, under plans for reform announced yesterday by Lord Turner of Ecchinswell.

Lord Turner, the chairman of the government-appointed Pensions Commission, said "a more generous state pension in the long term at a later age" should be the centrepiece of an overhaul of Britain's pension system. The commission's recommendations include the launch of a new national private sector savings scheme for millions of workers.

The commission's report offered the Government a blueprint for reform designed to head off a pensions crisis in the face of rising costs in both the state and the private sector.

"There are significant problems in our pension system, there is a major demographic challenge," Lord Turner said. "People are living longer and, together with the retirement of the baby-boom generation, that will put the pensions system under significant strain."

He warned that the number of working people paying tax to support pensioners would decline steadily in the next 50 years. The ratio of working people to pensioners is expected to fall from 2.7-1 today to 1.1-1 by 2050, as average life expectancy increases, placing a huge strain on the tax and benefits system.

"Both this government and the previous government have proposed that private pension provision should grow to fill a gap left by a declining state role," Lord Turner said. "But private pension provision, far from growing, is in underlying decline - employers have a declining interest in providing pensions for self-interested reasons, and personal purchase of pensions is not growing."

The Pensions Commission was appointed by the Government in November 2002 to advise on whether Britons were making sufficient private savings for old age. Lord Turner said it would be impossible to propose meaningful reforms of the private pensions without also improving state pensions.

State pensions

"We are convinced a state system that is fair to all and a sound basis on which private pension saving can build, will require some mix of higher public expenditure as a per cent of GDP and a rise in state pension ages," Lord Turner said.

The commission refused to recommend a specific new retirement age but it said raising the age at which people could claim their state pension to between 67 and 69 by 2050 would be an affordable solution. Lord Turner said the increases could be phased in over several decades from 2020.

The commission called for the savings generated by that measure to be reinvested in a more generous basic state pension. Lord Turner said the link between the basic state pension and average earnings, abolished by Margaret Thatcher in 1983, should be restored as soon as possible.

In addition, the basic state pension would become a universal benefit, paid to everyone above state retirement age, irrespective of the National Insurance (NI) contributions they made. Currently, while 87 per cent of retired men have made sufficient NI contributions to qualify for the basic state pension, only 46 per cent of women get the benefit.

Lord Turner said the second state pension, once known as Serps, would continue to be paid to those who qualified but at a flat rate, rather than the earnings-related benefit on offer to those who make sufficient NI payments.

Eventually, all those who qualified for a second state pension would get the same amount from the scheme.

"The state pension should become more generous and less means-tested," Lord Turner said. "State pension expenditure should be concentrated on providing as generous and as non means-tested flat-rate provision as affordable, ensuring people are kept out of poverty in retirement and creating a sound base on which private savings can build."

The commission said its reforms would mean the Government could continue to offer the pensions credit benefit, paid as a top-up to the poorest, but fewer people would need to claim.

Private pensions

Lord Turner said, in addition to his state pension reforms, the launch of the national pension savings scheme (NPSS), a nationally run private-sector pension scheme, would enable more people to save for old age.

All workers starting a new job would be automatically enrolled into the scheme and required to contribute at least 5 per cent of their pre-tax salary. In return, the Government would provide tax relief to cover a fifth of the cost of the contribution and employers would be required to pay at least 3 per cent of their staff's salaries into the fund. Employees would be given an opportunity to opt out of the NPSS but Lord Turner said auto-enrolment would "harness the power of inertia to encourage people to save".

The commission's report pointed out that of the 11.7 million people currently in work, 47 per cent of the working population, have not signed up to existing occupational pension schemes.

Lord Turner said the NPSS could be launched as soon as 2010. Employers and employees would be allowed to make additional contributions to the fund, which would be invested by government-appointed fund managers and administered by a single central agency, in order to reduce costs. Self-employed workers could also be allowed to join the scheme.

The Pensions Commission said the net effect of its reforms would be that the average worker should be able to retire on a pension worth about 50 per cent of their pay. The figure would rise to two-thirds for those who made voluntary contributions to the NPSS.

Lord Turner said: "A system built on these principles will, we believe, help ensure there is no future pension crisis and help ensure that increasing life expectancy can be seen not as a problem but as a wonderful opportunity."

Cost of reforms

However, the commission now faces a battle to persuade the Government that its proposals are affordable and politically acceptable. Lord Turner said the net additional cost of its proposals for state pension reform would rise from £200m in 2010 to £2.1 bn by 2020.

But the commission acknowledged those figures assumed the Government was prepared to reinvest the savings it is due to make between 2010 and 2020 from the equalisation of the state pension age. Without the savings generated by raising the retirement age for women to 65, the proposals would cost an additional £7.6bn.

Gordon Lishman, director general of the charity Age Concern, urged the Government not to reject the commission's recommendations. "The Pensions Commission has provided us with a once-in-a-generation opportunity to reform our pension system for today's and tomorrow's needs," he said.

However, while John Hutton, the Secretary of State for Work and Pensions, promised to consider Lord Turner's report carefully, the Government is concerned about the cost of the proposals.

The CBI's director general, Sir Digby Jones, said: "This reform could form the basis of a new deal on pensions but that deal cannot come at the expense of jobs and competitiveness among Britain's small firms."

The National Association of Pension Funds warned that employers who provided pension schemes more generous than the NPSS might be tempted to reduce their benefits.

"Many employers could level down existing, more generous, workplace provision" said its chief executive, Christine Farnish.

The key recommendations

* Increase the state pension age from 65 to up to 69 by 2050.

* Increases to be phased in gradually from 2020.

* Restore the link between the basic state pension and average earnings, increasing the value of the benefit over time.

* Turn basic state pension into a universal benefit payable to all, irrespective of their NI contributions.

* If possible, convert the basic state pension into a universal benefit for pensioners aged over 75.

* Gradually turn the second state pension into a flat-rate benefit, rather than earning-related.

* Reduce the role of means-tested benefits such as the pension credit.

* Launch a new nationally run pension fund, with employers that do not offer generous schemes required to automatically enrol new workers in national scheme.

* Employers to pay 3 per cent of staff salaries into national scheme. Employees to pay 5 per cent, including tax relief.

* Introduce age-discrimination laws to protect workers over 65.