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Pensions controversies

Can the country afford a higher basic state pension and is it fair to raise the state pension age across the board, when many manual workers have a life expectancy of little more than the proposed pension age of 68? These were some of the controversies raised by the publication of the widely-discussed Turner Report on long-term pension provision.

The report, which runs to 460 pages, covered more than state pensions and the controversial pension credit. It addressed the difficulties faced by private sector pension schemes, especially the reining back of final salary schemes and the growing cost of providing for an ever-lengthening period of retirement for some employees.

Recognising that some individuals provide for their retirement by putting their money in property and other non-pension investments, the report rejects compulsory pension saving. Instead it proposes a low-cost nationally funded pension savings scheme. Employees with no other pension provision would be enrolled automatically, but would have the right to opt out.

Members of the proposed scheme would contribute at least 4% of their earnings above a threshold of (currently) £94 a week, with a further 3% from employers and 1% from a scheme-specific tax relief. In effect, therefore, this would be a compulsory employer’s pension contribution for any employee who did not opt out. The report suggests that this would secure a pension of around 15% of earnings for individuals who join early enough in their working lives. Investment fund choices would be limited in order to keep costs down.

The report also proposed that the state second pension, S2P, should move towards a flat-rate system instead of being based on earnings within a set band. The aim would be for the state system to prevent poverty rather than provide an earnings-related pension. The entitlement to the basic state pension should simply be based on a person’s residence rather than their (or their spouse’s) national insurance contributions record. Means testing, especially the pension credit, should be reduced, because it discourages private saving.

How much of the Turner Report the government will take on board is hard to guess. What is clear is that currently the only way to achieve the income you want in retirement is to take responsibility for your own savings and make your own choices.