Listen to this article
Adair Turner, chairman of the UK Pensions Commission, has unveiled his controversial final report on the future of pensions. His proposals could shape retirement for millions of people in Britain for decades to come.
The pensions tsar answers your questions in an exclusive live Q&A on FT.com along with Nick Timmins, the FT’s public policy editor whose ground-breaking reporting and analysis have shaped the debate.
Click here for more FT readers’ views and questions for Lord Turner
Who is right about the costs of this - you or Gordon Brown?
Caroline Greenland, London
Adair Turner: There is no dispute about the mathematics of the financial projections. These have been agreed with Treasury officials. But the cost impact of our proposals depends crucially on what you think the base case is, and on whether you think of the costs in real (i.e. today’s money) or nominal cash terms. In the figures below I use real terms.
Our core proposals (i.e. not including the Basic State Pension universal in payment for over 75 year olds, which we have described as desirable but not essential) would add £2.1bn above the present level of pension expenditure as a percentage of National Income.
If, however, we do not implement these proposals, the increase in women’s state pension age (from 60 in 2010 to 65 in 2020) would produce a fall in public expenditure on pensions as a percentage of National Income. Relative to this falling base our proposals could add £7.1bn.
And it would of course be possible to cut the baseline expenditure even further. If for instance we only linked the value of the Guarantee Credit to prices, expenditure as a percentage of GDP could fall from 6.2% to 5.5% by 2020. This would however reduce the relative standard of living of the poorest pensioners by around a quarter. Against this poorer pensioner scenario, over proposals would add costs in real 2005 terms of £14bn.
This is what the debate is about - what is the baseline assumption. There is no ‘correct’ way to measure the increase: we just have to be clear about what any particular figure represents.
How can we help to keep the broad pensions debate on target, and prevent people picking out and getting sidetracked by certain elements of your report?
Gordon Lishman, director general of Age Concern
Adair Turner: I think the key is keep reiterating the main points. Whatever the disagreement on details, there is widespread consensus that
• We need to make the state pension system more generous and less means-tested than it would be if current indexation arrangements were continued indefinitely.
• A purely voluntary system of private pension provision will not produce an increase in saving and the state needs to play a role in encouraging it and enabling it at low cost.
Nick Timmins: The only way the debate will be kept on target is if all the various interests in the pensions business are prepared to compromise: giving up some of the things they want to get an overall reform. There hasn’t been a pensions act passed yet that left everybody happy.
The Commission report attaches importance to ensuring that the NPSS does not disrupt existing attractive pension arrangements, or lead to “levelling down”.
However, the NAPF’s recent Annual Survey shows that:
• fewer than 40% of occupational schemes currently offer auto-enrolment;
• average employer contributions to DC pension schemes are currently 7%, and
• average employer contributions to Defined Benefit schemes are currently around 20%.
Given the proposal that existing occupational schemes should enrol all employees automatically how, in practical terms, do you propose to avoid “levelling down”, or even abandonment of more generous, good quality occupational schemes in favour of a less attractive statutory minimum?
Christine Farnish, head of the NAPF
Adair Turner: There are 11 million workers who are not in a private pension scheme or policy at all: and it is very difficult for a purely voluntary system to reach them in a cost efficient fashion. Therefore we have suggested an automatic enrolment scheme, which, necessarily, defines a minimum default standard.
Whenever you define a minimum standard there is a danger that some employers might choose to level down. We recognise this. But if we had to choose between the dangers of levelling down versus no action the social priority would surely have to be ensuring some pension provision for people who currently have none.
Clearly however we would like to minimise levelling down. The most effective way to do this is to that employers and employees are aware of the fact that remunerating people via employers contributions rather than cash wages is highly advantaged by tax relief and relief of National Insurance contributions. People are 30% better off if they save in this form rather than out of cash earnings. That a message which has to be communicated strongly as the NPSS is launched
Has Lord Turner assessed the financial impact on small firms in making it compulsory for them to contribute towards their employees’ pensions?
Nick Goulding, chief executive, Forum for Private Business
Adair Turner: Yes, we have thought hard about the financial impact on small firms and we are very aware that our proposals of a 3% compulsory matching contribution will have, at least initially, more effect on smaller firms than large. We estimate that the increase in private sector labour costs will be 0.6%, but 1% for firms with 1-5 employees.
We recognise that this is a concern, but we feel that a matching employer contribution is required to ensure high participation rates, and to make saving so clearly favourable that we can eliminate expensive advice costs. If we do not stimulate private saving, the costs of the state system will need to be even higher, and higher taxes will need to be raised, which could mean a burden on business via another route
And there is a good case that in the long term the effect of the cost on business will be offset by lower cash wages - that is the Australian experience.
But obviously there is a problem of the different initial cost impact by business size. We therefore argued in the report that government should consider ways of ameliorating the cost impact on small business, for instance by subsidising the first several hundred pounds of contributions for each business, a benefit which would be important for small firms but of minimal value for larger.
Nick Timmins: Yes. Obviously for employees who opt to stay in, employers will have to contribute 3 per cent of salary. That, however, is a tax efficient way of paying people as employers do not pay national insurance contributions on pension contributions. Across the whole private sector, Lord Turner has calculated that the extra costs would amount to 0.6 per cent of total labour costs.
Many businesses would be forced to cut wages, and even jobs, to foot the bill for compulsory pensions. So, won’t the nation’s workers end up the real victims?
Richard Smith, Employment Services Director, Croner, management consultants
Nick Timmins: It may not feel like it to most people, but pension contributions are simply a part of pay.
Indeed, during the great rise of occupational pensions in the 1950s and 1960s, unions used to campaign for pensions as pay for old age. In practice, therefore, (and in economic theory) pension contributions come out of workers’ pay.
Interestingly, this means that economically there is no difference whether employers contribute or not (it all comes out of pay). But there is of course a big psychological difference. Employees are likely to feel more valued if an employer contributes.
And they feel they are paying less towards their pension, so it is a sort of free ride. It’s not in practice.
Without the benefit of reading the report and being totally reliant on media reports, I would like to know why the report did not recommend that abolition of the Brown pension tax introduced in 1997.
Also why not introduce tax cuts allowing people to save more? Instead of raising income tax by at least one pence? Surely this will have the opposite effect by leaving people with less money to save! Any increase in taxation will be spent on public sector workers who are allowed to retire earlier.
Adair Turner: The pros and cons of the removal of advanced corporation tax in 1997 can be debated: a case can be made that it created greater equivalence of tax treatment between retained and distributed earnings.
In retrospect however it was one among a large number of measures which increased the strain on Defined Benefit schemes - the Lawson tax changes of the mid-80s, the Lamont reduction in the dividend tax credit in 1993, the extra regulatory requirement - indexation - and the contribution holidays and early retirement packages. All were based on assumptions about future equity returns which, in retrospect, were irrational.
Should the UK adopt a version of the United States 401(k) savings plans?
These plans are subject to various limits and conditions, but the key characteristics are very sound and stimulate savings across a wide spectrum of the population:
• Prescribed limits on annual pre-tax contribution to savings plans
• All income and capital gains in the plan accumulate tax free
• All income and capital is taxed when distributed to the pensioner.
Did Lord Turner consider this approach when reviewing our rather confused incentives on savings?
Anthony G. Bird
Nick Timmins: I think he did. And they work pretty well. But their charges are not particularly low and one of the key things Lord Turner was looking for was a very low charge investment product so that those on lower incomes get to keep more of their money. In other words, they get to enjoy the 0.2 to 0.3 annual management charges, or lower, that institutional investors get. Difficult to see how that can be achieved via the 401(K) route.
As an informed professional, I have taken the deliberate decision not to invest in a pension product but to put my money elsewhere: pensions are unduly restrictive and the tax incentives insufficient to persuade me. Do the proposed reforms allow for people to make their own judgement?
Adair Turner: Yes the proposals we have made clearly allow you to continue making that choice.
We propose that people, not already in good pension schemes, should be automatically enrolled into the National Pension Saving scheme, but they would be totally free to opt-out if they wish.
Lord Turner’s report notes that smaller firms would see a higher proportional rise in their costs. Given the importance of these firms in total employment, and their higher average labour-intensity, did he consider making minimum employer contributions variable across firms by size rather than proportionate to gross salary, with variable government contributions ensuring equal minimum treatment for employees at any size of firm? How does Mr Timmins see this issue?
Alex Cobham, Oxford
Adair Turner: We have not thought of the specific proposal you make here, but we have said that the government should consider whether there are ways of subsidising the smallest firms, for instance by paying the first £300 or £500 of contributions per firm, a measure which would significantly benefit the smallest firms, while being of minimal benefit to large.
Nick Timmins: I fear it would be too horrendously complicated to administer. And it would certainly produce some odd step effects.
For example, supposing the government subsidy was (purely hypothetically) 4 per cent for firms with fewer than 50 employees but only 3 per cent for those with more. As the firm grew by one employee to 50 there would suddenly be a huge extra bill as the subsidy dropped for everyone. So they wouldn’t want a 50th employee. Perverse incentive, that.
Why do we not just bite the bullet and say that everyone under 35 will have to work until they are 70 to receive their pension. As a 32 yr old it is what I expect to have to do anyway. I will have to work even longer to pay for the public sector retirees at 50 if we don’t sort this out soon.
Charlie Johnstone, ECI, Brettenham House, London
Adair Turner: Of course whatever the normal state pension age in 2043, you will be free to retire aged 70 if you want, and you will be able to get the benefit of the option to take a higher state pension at a later age and the fact that the later you delay annuity purchase the higher annuity you get.
Best of luck for a rich retirement!
Why allow any employer to opt out of contributing to the cost of maintaining decent pensions? The 3% should be levied whether or not the employee opts in. In this way all employers have an equal cost just as all pensioners have an equal chance of being that business’s customers.
Employers with more generous schemes should be rewarded / encouraged. If employers don’t wish to contribute to pensions perhaps all their products and communications should state this fact so their customers can make an informed choice.
Doug Stokoe, Financial & HR Director, Company Secretary, Schroff UK Ltd
Adair Turner: We want to create a strong incentive to individuals to stay enrolled within the Scheme, and making the employer contributions contingent on the employee contribution achieves that effect.
On your second suggestion, I am doubtful whether communication to customers would produce a change in behaviour (i.e. more buying from firms with good schemes) but we think that communicating to employers and employees (at the time of Scheme launch) the strong advantages arising from tax relief and NI relief, and therefore the benefits of remunerating people via pension contributions, will help maintain good employer provision.
Nick Timmins:You have a point. But unfortunately a 3 per cent contribution on its own is not going to build much of a pension. Your second point sounds like a great campaign to mount.
Interestingly, in recent years, some employers who do provide good pensions have started underlining that in their job advertisements - something that rarely happened in the past. And (I may be wrong about this) but I think Jobcentres now require employers to state what sort of pension, if any, they provide when they advertise posts in the Jobcentres: about a third of all vacancies go through them.
Do you think there should be strong penalties for employers who discourage employees from joining the NPSS?
Michelle Lewis, TUC pensions policy officer
Adair Turner: It is fair in the sense of people get the benefit of their own saving. The issue of distributional fairness is however primarily an issue for the state system
It is fair in the sense of people get the benefit of their own saving. The issue of distributional fairness is however primarily an issue for the state system.
Nick Timmins: They should be taken out and shot! I suspect it would be difficult to apply any sort of civil or legal penalty because of the difficulty of “proving” discouragement. One of the biggest encouragements to employers to provide pensions would be if employees took more interest in them - and favoured employers who do provide good schemes. Instead most people seem to regard pensions as something they would rather not think about.
Questions on residency:
• Could you give some examples to explain what the statement ‘Basic state pension to be a universal citizen’s pension, paid based on residency . . . ‘ actually means?
• Is there a minimum residency requirement?
• Is it pro-rata?
• Would the state pension be payable to UK domicile status citizens living in the EU?
John Chambers, UK
John Steward, Steward & Co, Chartered Accountants
Priyadarshini Raykar, Business Analyst, ICMA
John Charles Griffith, Costa Blanca, Spain
Keith Hoddinott, Spain
Christopher Hodges, Madrid, Spain
Adair Turner: The proposal is that rights to the Basic State Pension would be accrued according to the number of years of residency prior to retirement. Several other countries have this system (e.g. New Zealand and Sweden) though with a variety of different approaches to the number of years required to achieve a full pension.
The purpose of this proposal is to sweep away the complexities of the existing credit and Home Responsibilities Protection system, which attempt to ensure that people with interrupted careers and caring responsibilities (in particular women) are able to accrue a full pension.
We have not specified the details of the approach, e.g. number of years required for a full pension, but, yes, in principle, the pension would be pro-rata to years of residence. Once the pension had been accrued (via residence prior to retirement) it would be payable to UK domicile status citizens who choose to reside elsewhere in the EU during retirement (as is the existing state pension)
Please could Lord Turner and Mr Timmins suggest how these proposals might be ‘sold’ to the wider population? It will be politically difficult to steer any proposal through that would require people to work longer/save more/pay more tax, yet diluting the proposals will not solve the problem.
Adair Turner Focusing on the state pension age rise, I think the key to selling the approach is two-fold:
• Reassuring people that we are not planning a rapid increase in retirement age which would actually cut years in retirement. An average man aged 65 today can expect to live 19 years in retirement. If the state pension age in 2050 were 68, the best estimate is that he could then expect to live 21 years. The principle we propose is that extra years of life need to be split in a sustainable balance between more years in retirement and more work.
• Convincing people that an increase in state pension age is the only way to afford a state pension the value of which rises in line with earnings. The deal is a higher state pension at a later age.
Nick Timmins: Not easy, of course. But the basic equation remains that from the first report: if pensioners on average are not going to end up poorer then the work longer/save more/pay more tax formula has to apply. But I’d guess that if you explain the effects of rising longevity to people, the message will begin to get through.
With education longer than it used to be for most people, the maths simply don’t add up. Few people earn enough to fund two-thirds of a life (education and retirement) from the earnings made in the other third.
Furthermore, longer working lives are (very slowly) beginning to emerge.
Some who retire early discover there is only so much pleasure to be had pursuing a small white ball around a mix of grass and sand, or even cruising the world, and opt to go back to some sort of part time work.
And my father in law (an accountant) worked into his eighties slowly cutting back to just one day a week before he stopped. My mother too worked way beyond the state pension age of 60, but I’m not allowed to reveal her age!
Do you think the government will act on your recommendations or duck the tough decisions?
Adair Turner: I am confident that the Report will stimulate a more informed debate on the pension challenges facing us. And while I am sure that many details will and should be changed on further reflection, there is quite wide consensus that the broad thrust of what we have proposed - both for the state pension system and for private pension saving - makes sense. I am by nature an optimist, and believe that where there is a strong rational case for something, at least in some form it will come about.
On a first read of the executive summary of your report, I have two questions:
Am I right to understand that freezing the Upper Earnings Limit for the State Second Pension in cash terms would lead to a short-term loss of revenues for the Exchequer, and if so have you estimated the impact?
What type of fiscal sustainability analysis underpins your recommendation of trading off higher State Pension Age against uprating the Basic State Pension with earnings?
Does your proposed system of uprating State Pension Age with life expectancy assume a decrease in morbidity proportional to the rise in longevity?
Pietro Toigo, European Commission
Adair Turner: We have said that the upper limit for State Second Pension accruals, currently the Upper Earnings Limit, should be frozen in cash terms. The issue of the evolution of the Upper Earnings Limit as it relates to national insurance contributions is separate.
We have illustrated different combinations of higher State Pension Age and higher taxes which are required to support the earnings indexation of the Basic State Pension . The reason why both are required, is that the demographic change we are facing involves both increasing longevity and the delayed effect of the late 20th century fall in fertility. If there had been no fertility effect, a rise in State Pension Age proportional to life expectancy would be sufficient to make an earnings-linked Basic State Pension sustainable within a stable expenditure share of GDP.
Beyond 2050, when the fertility effect has worked through, we say that the public spend burden as a percentage of GDP should remain stable. This would require proportional rises in State Pension Age thereafter.
We believe that the balance of evidence suggests that extra longevity is being associated with extra years of healthy life. Our implicit assumption is that there is neither compression nor extension of pre-death morbidity.
The most thought-provoking online contributions may be published in the Financial Times newspaper, so please supply your full name and location.