Adair Turner speaks at Cass

First Pension Commission report discussed

Thursday, 21 October, 2004

Adair Turner, Chairman of the Pensions Commission, unpacked the commission’s first report to full house at Cass on 14 October.

The report was released earlier in the week and the event at Cass allowed Turner to go into more detail about the deeper implications of the report. He was joined on stage by Deputy Dean of Cass, Professor Steve Haberman and Pensions Institute Director, Professor David Blake. Professor Blake responded to Turner before questions were taken from the audience.  

The event was also used to announce that Turner has been made a Visiting Fellow of the Pensions Institute.

The report, Pensions: Challenges and Choices, presents the commission’s conclusions on the adequacy of pension provision and saving in the UK. It sets out the major challenges society faces and the unavoidable choices which need to be made.

The report was deliberately detailed and wide-ranging, examining all the different elements of the pensions system. Pension policy has too often in the past been designed piecemeal: the report argues that we need a comprehensive approach which can be sustained over the long-term.

Speaking on the day the report was released, Turner said:

“Society and individuals face a huge challenge, but one that can be overcome.  Longer lives and low birth rates will change dramatically the ratio of older to younger people. Major adjustments to average retirement ages and to pension provision are required. Over nine million working people will face pensions they may consider inadequate, unless they save more or retire much later than their parents.

“The underlying problems have been getting worse for 20 years at least, but were masked by the temporary impact of the baby boom generation, by a failure to anticipate the scale of life expectancy increases and by the irrational equity market exuberance of the 1980s and 1990s.

“We must now make adjustments which we should ideally have begun 20 to 30 years ago. And to get policy right we need to look comprehensively at all aspects of the problem. Too often in the past, under successive governments, pension policy has addressed specific problems without a clear overall context. This has had unintended and adverse consequences.”

The report explains that faced with the increasing proportion of the population aged over 65, society and individuals must choose some mix of four options. Either:

• Pensioners becoming poorer relative to the rest of society; or
• Taxes/National Insurance contributions devoted to pensions rising; or
• Savings rising; or
• Average retirement ages rising;

The report argues that the option of poorer pensioners is the least attractive and that some combination of higher taxes/National Insurance contributions, higher savings and/ or later average retirement age will be required.

It also argues that no single solution makes sense, and therefore does not present a figure for a ‘savings gap’ but illustrates the trade-offs involved between different combinations of response.

Key points in the report include:

• Public expenditure constraints and an increasing number of pensioners mean that state pension provision per pensioner will decline relative to average earnings. But rather than increasing to fill the gaps, private pension saving, and in particular employer provision, is in significant long-term decline as provision shifts from final salary (“Defined Benefit”) schemes to less generous money purchase (“Defined Contribution”) schemes. (This is commonly called the ‘DB/DC’ shift).
• As a result, if current trends continued over the long-term, future pension income would be deficient in total and increasingly unequally distributed.
• And many individuals will face more risks, for example on investment returns, that they are sometimes ill-equipped to deal with.
• Home ownership could provide important retirement resources for many people, but it is not a sufficient solution to the problems and entails significant risks.
• The problems will be more severe in 15 to 25 years time than in the next 10 years. A ‘muddle-through’ option does exist but it would be less socially equitable and less economically efficient than we could achieve if we now thought through a planned and comprehensive policy for the long-term.
• There are four barriers to the success of a voluntary pensions saving system; most people do not make ‘rational’ decisions about pension saving; the cost of advice significantly reduces the return on saving; the UK pensions system is extremely complex – leading to confusion and mistrust; and means-testing increases this complexity and for some people reduces the incentives to save which the tax system provides.

This means that unless new government initiatives can make a major difference to behaviour it is unlikely that the present voluntary private system combined with the present state system will solve the problem of inadequate pension saving.

The Commission is not at this stage making recommendations on specific policy changes but the Report does call for improvements in data sources.

And it states that the way forward must involve some mix of:

• A major revitalisation of the voluntary system;
• Changes to the state system;
• Increased compulsion beyond that already implied by the State Second Pension and contracting-out arrangements;

These options will be the focus of the Pensions Commission between now and the publication of the Second Report, which will include policy recommendations, in autumn 2005.

The publication of this report kick starts the consultation process.  The Commission is seeking views on the appropriate role of the Government in ensuring pension adequacy, on whether there is agreement on the facts set out, and on the best mix of the three ways forward identified.

Download a full copy of the report.

Adair Turner (left), Professor Steve Haberman and Professor David Blake take questions from the floor

Adair Turner gives his presentation

Professor David Rhind (left), Adair Turner and Professor Steve Haberman talk pensions