Britain’s pensions pickle

Lord Turner proposes a simpler, fairer pensions system. The government should go for it

UNTIL quite recently, pensions mattered to two small and politically uninteresting minorities: actuaries and old people. Anybody who raised the issue of pensions could be certain of emptying the House of Commons and ensuring a mass switch-off of televisions and radios across Britain.

Demographics have changed that. The ageing of the population has both made the current pensions system unsustainable and swelled the numbers of people worried about their future. More than half the voting-age population is over 45, which means that most voters are either retired or worried about retirement. For the first time ever, pensions are as hot as an issue can get. That is why the chancellor of the exchequer took the trouble to rubbish the report of the man the government asked to think about the issue even before it came out.

It is to be hoped that the government can put Gordon Brown's unfortunate intervention in the debate behind it, because Lord Turner's report, published on November 30th, sets out the right framework for reform. If politicians reject it, future voters will not forgive them. But that's the trouble with the pensions issue: by the time the scale of the disaster becomes clear, this lot will be long gone anyway.

Where did it all go wrong?

Britain's pensions system was once the envy of Europe. Based on a partnership between the government - which spends relatively little on state pensions - and companies - which have been funding ample private-sector pensions - it seemed to be both generous to pensioners and affordable to taxpayers.

That partnership has broken down. Companies that once helped shoulder the retirement burden through funded pension plans are cutting back their commitments now that low investment returns, low interest rates and higher life expectancy have created frightening deficits. And the government's strategy of targeting cash on poorer pensioners through means-tested top-ups is discouraging saving.

So who should pay? If firms are burdened with too many employment-related costs, they will stop hiring. If the burden is put squarely on individuals (and Britons, who place too much faith in their houses, are not great savers), some will prove unable and others unwilling. If the government has to raise taxes sharply to pick up the tab, the economy will become less productive; what's more, using taxes to pay for pensions shifts the burden between generations, and it is unfair to make young people pay for their elders' thriftlessness.

Lord Turner, who offers a three-part solution, has got it broadly right. The first part is to raise the state pension age (now 65 for men and rising from 60 for women) to 68 by 2050. This must be correct. The current limit has been stuck at 65 since 1925, despite galloping advances in life expectancy. Higher tax revenues and lower pension spending would then bring a double dividend for the public finances.

Raising the pensionable age would therefore let the government take Lord Turner's second step: making the state pension more generous. This is crucial. If the state pension were broadly sufficient to meet pensioners' basic needs, the pension credit introduced by Gordon Brown to help the poorest among them would wither on the vine. The idea behind the credit was a decent one: to target more money at poor retired people than at better-off ones, while keeping down the cost to the Treasury. The problem is that, because the pension credit is means-tested, those who think they will get it have no incentive to save. And as companies cut back on pension provision, more and more workers will become eligible for this top-up - 70% of all pensioners in about 30 years' time, on present trends. That will discourage the accumulation of retirement nest-eggs right up the income scale. So whittling back the credit is an important element in overall reform.

Realistically, however, even an improved state pension would not be enough to take up all the slack left by retreating companies. So the third part of Lord Turner's solution is to get individuals to save more at the same time as ensuring that companies still chip in. To encourage people to save, employees would be automatically enrolled in "Britsaver" accounts modelled on New Zealand's plans to introduce a "Kiwisaver" scheme. Employers would have to contribute too. By collecting these payments through the tax system, and channelling them to private funds chosen by employees, the state will cut the cost of saving and increase its value. Evidence from America suggests that automatic enrolment, with a voluntary opt-out, is likely to boost participation sharply compared with requiring people to opt in. Unlike full compulsion, it won't feel like just another tax.

There is disagreement over how much these proposals would set back the public purse ()see page 31. Any calculations of the cost of the new system need to be set against realistic estimates of the current one, however. The Treasury projects that, without reform, state pension spending will remain unchanged as a proportion of GDP while the number of pensioners soars, which is clearly nonsense.

The government should not only accept Lord Turner's proposals but also address the disparity between pension arrangements in the private sector and those for public-sector employees, confirmed just a month ago. Over the past five years, the number of those on public payrolls has risen sharply; so too has their pay. They also have greater job security than their opposite numbers in the private sector. Though this will change for new recruits from next year, existing public employees retire at 60, and on index-linked salary-related pensions. Such pension schemes now cover far fewer workers in the private sector and soon will cover hardly any.

This disparity cannot be allowed to persist. Any pensions solution depends crucially on forging consensus, across parties, sectors, generations. Gas workers, in the public sector till 1986, are already planning a series of strikes to protest the closing of their once-generous company pension plans to new workers. When others are being asked to slog on until 67 and more, public-sector employees cannot swan off at 60. Whatever the pain, this decision must be reversed.

Editorial argues that the UK government should support and implement the recommendations of the Turner Commission.

• Prif ffynhonnell