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Turner’s retirement plan, age 67

The Turner report: A new Pensions Settlement for the 21st Century ­ the
second report of the Pensions Commission, was launched on Wednesday 30 November.

Even before its official appearance, perhaps the most noticeable fact about
the report was that its key ideas were being leaked and spun in all directions.
Already, Turner’s stated view of what a commission is supposed to do, namely to
stimulate sensible debate by analysing a difficult case so that the key
implications can be clearly seen, looks more hopeful than achievable.

Consider the following “sound bite” reactions to the report:

• Already it has been said that the Turner report will be the ruin of the
financial services sector, putting 50,000 jobs at risk (because the state will
administer Turner’s proposed new individual state pension, taking work from the
financial services companies).

• Turner’s proposals will provoke mass pensions migration to the UK (because
Turner favours a universal pension based on residency rather than on NI

• It flies in the face of existing government policy (the government has been
trying to pass responsibility for pensions to the man and woman in the street;
Turner dumps the burden straight back on government as far as a large tranche of
the population is concerned).

• It will bankrupt small businesses and penalise families with nannies
(because Turner wants all employers without exemption to contribute at least 3%
of the employee’s salary if the employee signs up to contribute to Turner’s
proposed national pension).

This brief summary demonstrates some of the main lines of the controversy
that already surrounds the report. However, Turner starts out from a standpoint
that no one can argue with. The actual context for Turner’s report is precisely
that the government plans to play a diminishing role in pension provision for
the average earner.

This, after all, was the whole point of the government’s introduction of
Stakeholder pension schemes, to get average and below-average wage earners to
take more responsibility for their own pension provision.

Private pensions in decline

However, as Turner observed at the official launch of his report, “private
pension provision, far from growing, is in underlying decline”. In fact, in the
executive summary of the report, he states that the decline may already have
reached a “potentially terminal” stage.

“Employers have a declining interest in providing pensions for self
interested reasons: personal purchase of pensions is not growing and the most
dynamic element in private pension saving, special contributions to plug pension
deficits inherited from the past, does not create new pension rights for the
future,” he reminded his audience.

Turner argues that the private pensions sector can be made to work only if
radical measures are taken. Keeping on as we are now will not arrest the
“terminal decline” in private pension provision. The government, perhaps
understandably, having recently introduced the radical measure of Stakeholder
pensions, with a cap on administrative fees, has so far not been enthusiastic
about still more new radical measures.

The ratio of pensioners to those in work is set to rise from 27% today to 47%
by 2050. That is just too many state pensioners to be supported comfortably out
of tax revenues.

Facing the facts

Turner says that anyone who is serious about the pensions debate has to face
up to the fact that there are only two options. Either the age of retirement has
to rise, or the provision of state pensions has to rise relative to total GDP.
At the same time, he proposes a wholly new pension saving vehicle that could be
attractive to employees on the average wage or better. This is the National
Pension Saving Scheme (NPSS).

Turner’s solution is a well thought through and original set of proposals.
To the amazement of many in the industry, with the NPSS, Lord Turner has simply
decided to ignore Stakeholder, treating it as a failed experiment.

Instead, the report proposes that individuals who are not already in
“existing high quality employer schemes” be auto-enrolled in the NPSS, though
they will have the option of opting out. Auto-enrolment has long been recognised
by the industry as key to boosting the numbers of people in a scheme. It works
because inertia keeps the indifferent in the scheme and swells the numbers.

When people have to actively opt in to a scheme, inertia keeps the
indifferent out. In his recent pre-Budget report, the Chancellor recognised the
importance of the inertia principle and said that the government plans to
introduce auto-enrolment for occupational schemes in future. This can perhaps be
chalked up as one small, early victory for Lord Turner. It might well end up
being the only one.

One of the more clever recommendations in the report is that there should be
a default contribution rate from employees of 4% of salary (5%, but with 1%
being paid by the government in the form of tax relief on the contribution). The
employer would be compelled to pay a minimum of 3% if the employee signs up for
the four plus one formula.

To most employees this looks as if their 4% is being matched, with the
employer paying 3% and the government 1%. Getting pound-for-pound matching
payments from third parties, be it the government or the employer, has
historically been quite a good incentive for people to save long term. Employers
may be expected to feel less hard done by through having this “tax” imposed on
them, because 3% is miserly, even by defined contribution scheme standards.

The not so clever part of this proposal is that there is no attempt to
deflect the predictable cries of outrage from the small business lobby, for whom
a new 3% “tax” is simply 3% too much.

No great shakes

What the Report also does not address directly is the laughable inadequacy of
the pension that is likely to result from this formula. On the nowt-for-nowt
principle, there is very little chance that someone on average earnings looking
to save a pension that they will draw on in “x” decades time, will save enough
to buy themselves a weekly milkshake on retirement, when one considers the
likely price of milk in 2045.

The figures given by Turner are as follows: For someone on £23,000 a year
(today’s national average wage), their contribution to the NPSS would be £730,
which would be matched. Assuming modest growth, the fund would be worth £55,000
in 30 years. At today’s annuity rates, that would generate a pension of about
£3,000 a year. Those who can do the maths could try discounting this for
inflation and working out the likely buying power of £250 a month in 2035. It
won’t be a lot.

Turner wants the state to administer the NPSS in the first instance, perhaps
contracting the administration out to one or two major providers, so that
administration costs can be knocked back to 0.3%.

However, if one is talking about low levels of pension contribution,
maximising investment return by reducing the impact of administration costs is
clearly important. If the government decides to go for something like Turner’s
NPSS, this idea will be attractive and the industry will just have to bear the
pain as best it can ­ for the second time.

What Chancellor Gordon Brown has already indicated he does not like about the
Turner report, however, is Turner’s analysis that means-testing works against
encouraging long term savings. The Chancellor likes means-testing, arguing that
it “targets” state spending on the most needy.

Turner dislikes it because no streetwise person saves only to have the
government step in and, in effect, snatch their savings as they reach

The most equitable outcome according to Turner, is to make the state pension
“more generous and less means tested” than it is today, “accepting that in the
long term this means a somewhat higher public pension spend as a percentage of
GDP and a higher state pension age.

Turner favours getting to this desired outcome by “evolving from the present
two tiers of BSP and S2P” towards a flat rate universal pension based on
residency. He also wants the BSP indexed to earnings from some date in the
future to be defined. That proposal is said to have particularly annoyed the
Chancellor, who pronounced it “unaffordable” even before the report was
launched. The S2P, while it exists, would remain based on contributions.

Impact on GDP

The impact of all this would be a modest increase in public expenditure from
the present 6.2% of GDP, or £77bn. Turner puts the additional amount required at
£1.5bn by 2020, a rise of 0.1%, hardly wildly unaffordable, as intimated by the

Clarifying his position here post the report, Turner says: “We can imagine a
system in 2050 where in expenditure terms the pensions cost are somewhere
between 7.5% of GDP and 8%, and where in State Pension age terms it’s somewhere
between 67 and 69.” Neither of those options sounds too frightening.

The Government has promised a full consultation on the future of UK pensions
in the first half of 2006. Much remains to be fought over here, but if sanity
prevails, some elements of this report may well re-emerge as the building blocks
of a future pensions policy.

Not too many people are betting on Turner’s NPSS concept surviving, though.

Arguments for raising the age of retirement

The mortality debate – the fact that we are all living longer – is key to
Turner’s thinking and to his evaluation of the likely cost to the state of his
suggestions about the basic state pension (BSP) and the state second pension

“An average man age 65 can today expect to spend 19 years in receipt of the
state pensions, about 29% of his adult life,” Turner says. If you play around
with this percentage by balancing out increased life expectancy with slightly
later retirement, it has implications for the cost to the state of providing the
state pension.

“If, in 2050, the SPA (retirement age) was 67, the best expectation is that
the average man would then enjoy three more years (22 rather than 19) receiving
the state pension,” he says.

Even if you raise the retirement age to 69, the “average man” would still
enjoy 20 years of retirement versus 19 today. This makes the argument for
raising the retirement age more palatable, Turner argues, because, in effect, it
simply maintains the status quo. “All classes and ages can enjoy (slightly)
longer retirement, even as the retirement age rises,” he suggests.

Again, this is something we are likely to see the government responding to

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