Pension reform: Turner delivers tax warning

Reforming the pensions system will have "significant implications" for tax, National Insurance or public spending, the head of the Pensions Commission said today.

In its final report, the Commission confirmed that its proposals for a more generous state pension would lead to a higher proportion of GDP being devoted to pensions.

But it warned that if the state pension system was not reformed and the spread of means testing reduced, its proposals for a new system of private pension saving would be undermined.

In its previous report, the Commission proposed increasing the state pension in line with earnings, rather than prices, and raising the state pension age to as high as 69 by 2050 to help finance this.

Head of the Commission Lord Turner said this would lead to the percentage of GDP spent on pensions rising by 1.5% between now and 2050, from 6.2% today to 7.5% to 8% by 2050 depending on the age at which people could start drawing their state pension.

He said this was not significantly higher than the expenditure suggested by the Treasury, but would still carry significant implications for either tax or National Insurance contribution rates, or for other categories of public expenditure.

He said: "The Government now faces the difficult challenge of deciding how far and how fast it can move towards the reform of the state pension system we proposed, in the light of other claims on public expenditure."

In its final report, which responds to the issues raised about its proposed reforms, the Commission said its proposals had received wide consensus.

It added that criticism had come almost entirely from experts and interest groups who believed it should have suggested more radical measures to reduce means testing, even at the expense of much higher increases in public expenditure.

But it remains to be seen if the proposals will be accepted by Chancellor Gordon Brown, who is reported to have dismissed them as being unaffordable, and who is understood to favour a means test-based system.

In its November report, the Commission also proposed the introduction of a National Pensions Saving Scheme (NPSS) into which workers who did not have access to a better occupational scheme would be automatically enrolled, although they would still be able to opt out. Individuals would contribute 5 per cent of their salary, of which 1 per cent would be made up of tax relief, while employers would pay in 3 per cent.

But business groups expressed concern about forcing employers to make compulsory contributions, warning it could lead to job losses and wage cuts.

Lord Turner said today that he thought the overall impact of the proposals would be a 0.6 per cent rise in labour costs for companies, rising to 1 per cent for smaller firms. He said the cost impact was a concern but the matching contribution was essential to encourage people to save.

He said: "We continue to believe that the employer contribution is a vital element in the integrated package we have proposed, but also that the Government should identify ways in which the cost to small employers could be mitigated, at least for a transitional period, and perhaps permanently."

He said the Government could use the additional revenue which would be created by the declining level of contracted-out rebates for the state second pension which the Commission proposed in its second report.

He said this could increase Government cash flow by about £800 million by 2015 and by £1.9 billion in 2020 in real terms.

Lord Turner declined to comment in detail on alternative models put forward for an NPSS, but said the Commission continued to think its proposal was the best one, as it was likely to have the lowest costs over the long term, with annual charges of just 0.3 per cent.

He said: "Where the alternative models put forward by the financial services industry and trade bodies might have advantages, however, is that they build on existing infrastructure - IT systems, call centres and communication mechanisms already in place - so that operational set-up risks may be reduced.

"Government will need to make the trade-off between such set-up risks and the likely long-term advantages of the NPSS approach."

Lord Turner told a news conference in central London to launch the report that he did not believe there was any possibility of the Government kicking the issue of pensions reform into the "long grass".

He refused to be drawn on speculation that Chancellor Gordon Brown and the Treasury would oppose many of the suggestions because of the impact on public spending.

"It is not surprising that the Treasury is most concerned about the public spending impact - that is its role."

Lord Turner said the Commission firmly believed that its final report had to be the "direction of change" in tackling future pensions provision.

"It is now for the Government to come forward with proposals that take us in that direction."

A White Paper setting out the Government's proposals on pensions is expected to be published next month.