The Turner Report which filled the week’s newspapers with gloomy headlines about our pensions is the sixth pension report commissioned by the government over seven years and by far the best. It is a goldmine of facts and figures on pensions. It makes a compelling case for urgent action. It provides an admirable basis on which to make decisions. Unfortunately, it is being used not to make decisions but to delay them. We must now wait until next year – conveniently after the election – for Adair Turner to produce yet another report spelling out the recommendations which are implicit in this volume.
When your house has got dry rot you don’t spend seven years commissioning reports and then insist that the consultants refrain from recommending what needs to be done! However, using it to avoid taking tough decisions ahead of the election may backfire. Turner paints such a cogent picture of the problems in store that people will wonder how any Party can enter the next election without policies to tackle them.
The Pensions Commission was set up under Adair Turner’s chairmanship specifically to advise whether “the voluntary approach” to saving is adequate: will people save enough without an element of compulsion. We don’t need to wait for next year’s report: the answer is “No”. Savings were inadequate particularly for those on average incomes or below even before the government’s £5billion a year Pension Tax reduced the yield of savings and the spread of means testing penalised the majority of those who do save. Turner demonstrates that “as a result of the introduction of the Pensions Credit … 40% of all pensioners face combined tax and benefit withdrawal rates of over 50%. As Turner rightly says – Financial Advisors “will be wary of selling to people potentially affected by Pension Credit withdrawal for fear of future mis-selling accusations”. This week the Pensions Minister refused to give me an assurance that IFAs would not risk charges of mis-selling if their clients found the return on their savings reduced by withdrawal of benefits. It has long been an adage of the savings industry that savings products are sold not bought. So if advisors won’t sell, people won’t save.
Turner is clear that the option of Revitalised Voluntarism will make little impact. Boosting tax relief in the face of means testing is like fitting buoyancy tanks to a vessel with too much ballast. Unfortunately means testing cannot just be swept away.
Once Gordon Brown set a Guaranteed Minimum Income substantially higher than the Basic State Pension (nearly £30 a week higher for a single pensioner) those with income from savings of up to £30 a week was no better off than those who had not saved a penny. So reduce the 100% disincentive on the first £30 of pension to a lower rate over a far wider range of incomes. The only way to reduce the range of people caught within this means testing net is to reduce the gap between the contributory state pension and Guaranteed Minimum Income. The only realistic option is to raise the level of mandatory contributory pensions. Hence the growing consensus extending from the Conservative Party to Help the Aged that the Basic State Pension should again be raised in line with earnings. But this would take a long time to eliminate the gap and will only do so if in future the MIG is only raised in line with prices. Moreover, it involves an increasingly costly tax burden.
I would propose filling the remaining gap by mandatory savings. As Turner points out, we already have a mandatory additional pension called the Second State Pension. I would convert that into a fully funded system so that every one had a pension pot, financed by flat rate rebates from National Insurance, sufficient to float them off dependence on means tested benefits and guaranteed by government just as employers underwrite occupational schemes. The Pensions Credit could then be allowed to wither away. The incentive to save additional amounts voluntarily would be restored without new tax incentives. Australia discovered that voluntary additional contributions doubled once every one was required to have their own pension pot.
The logic of Turner’s analysis is brutally clear. If government is not prepared to require people to save more it will have to persuade them to work longer – in the last resort by raising the State Pension Age.
I would much rather require people to save more than compel them to work longer. For most people working longer is reasonable as life expectancy increases. But for those doing heavy manual work, for example, it is already unrealistic to continue much beyond their mid fifties and hard to find lighter work later.
One advantage of mandatory savings is that once everyone has their own pension pot they should be free to retire whenever they have accumulated sufficient savings to be able to avoid dependence on means tested benefits. Moreover, possession of a pension fund gives people a double incentive to work longer. Each extra year they work they can make an extra contribution into their fund and will have one less year of pension to finance. The Report suggests that this incentive can be quite powerful. A third more of those with defined contribution schemes remain in work into their sixties than those with defined benefit schemes.
Although I would prefer to avoid raising the State Pension Age, Adair Turner clearly believes it is on the cards sooner or later. The conventional wisdom is that it is political suicide for a government even to consider. I am not so sure. I speak with some experience having introduced the legislation to raise the State Pension Age of women to that of men. Polls showed that the idea was extremely unpopular. Both men and women wanted to see the State Pension Ages equalised at 60. But over an eighteen month period I kept floating the arguments for moving to the higher age so that eventually it became accepted as inevitable. When the final decision was announced it rated barely a few column inches in the inside pages. Yet it will bring the largest single saving in public expenditure of any reform. If this government really is thinking of following in the footsteps of the Scandinavians and Americans who have already legislated to move gradually to 67 they should have the courage of their convictions and start spelling out the arguments now. The electorate is far more rational than politicians often give it credit for.
Turner’s diagnosis of the underlying reason we face a pension crisis is correct. We are living longer but not retiring later. Occupational schemes were sheltered from that by the long stock market boom. At the same time the actuarial profession consistently underestimated the improvement in life expectancy. I came across this professional blindness as Secretary of State when I drafted a speech including the, to me, uncontentious phrase that ‘we are living longer because of improved health care’. It was automatically sent to the Government Actuaries Department for clearance. They wanted to excise the phrase because, they maintained, increased longevity was due to better diet, eradication of infectious diseases etc., not health care and so would soon taper off. I told them that was bunkum and relished reminding them each time they had to raise their estimates of the number of pensioners.
Turner usefully debunks a number of apparently painless solutions to the pension crisis. Though his magisterial demolition of the idea that we can pay for our pensions by large scale immigration which he gave in a recent lecture to the LSE I s reduced to a small paragraph – presumably to save the embarrassment to his political masters who still appear to believe it.. As he points out immigration has only a temporary effect unless it increases exponentially since immigrants grow older at the same rate as the rest of us.