EurWORK European Observatory of Working Life

Pensions Commission issues final report

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At the end of November 2005, a Pensions Commission appointed by the UK government published its final report. This article highlights some of the key issues raised in the report and reviews the responses of employers and trade unions.

On 30 November 2005, the final report of the Pensions Commission was published. The Pensions Commission was established in December 2002 with a remit to monitor development of the UK pensions system over time and make recommendations for future reform. The Commission issued an interim report in October 2004 (UK0411107F), which outlined the scale of the challenges posed by increasing life expectancy, an ageing population and low levels of personal saving, and warned that unless people were willing to pay more tax, save more or retire later, pensioners would face substantial cuts in their retirement income by 2035. The 400-page final report, A new pensions settlement for the 21st century, widely referred to as the 'Turner report', recommends reforms to the state system that involve a gradual move towards a more generous state pension, with the state pension age also increasing over the long term - in essence a higher pension at a later age - and the establishment of a new national pensions saving scheme.

The report’s key findings and recommendations

The report found that although average pensioner income today compares well with that of previous generations, the distribution income is highly unequal. The state system has left major gaps in provision for people who have interrupted paid working lives and caring responsibilities (mainly women). In the future, the state plans to play a reduced role in pension provision and policy has been based on the assumption that private provision will grow to offset this decline. However, initiatives to stimulate personal pension saving have not worked. Employers are no longer convinced that there are self-interested reasons to provide good pensions to achieve recruitment and retention objectives, and cost barriers for employees on average and lower earnings working in smaller and medium sized companies, and for the self-employed, remain. While particular groups of people (those in the public sector, those in still open direct-benefit schemes and many high earners) are on target for good pensions, an increasing number of people will face pensions that they will consider inadequate. Finally, any new pension arrangements must be achieved through a transition which is acceptable in terms of cost, distributional impact and administrative complexity.

In light of these findings, the report makes a number of recommendations, as follows.

  • The state pension age, which is due to be equalised for men and women at 65 in 2020, must be slowly raised. The report recommends that it should rise to 66 by 2030, 67 by 2040 and 68 by 2050. The precise age would depend on rises in life expectancy.
  • A new national pension savings scheme (NPSS) should be set up. Employers that do not offer other adequate pension arrangements would be required to enrol new workers in the scheme automatically. Employees would retain the right to opt out. Employees would contribute a minimum of 5% of gross pay above GBP 5,000, of which 1% is effectively paid by tax relief, and employers would be required to make matching contributions of 3%. The self-employed should be able to participate on a voluntary but cost-effective basis. The costs of operating the scheme would be kept to a minimum.
  • The basic state pension would become a universal 'citizen’s pension' with payment based on residence rather than a record of national insurance contributions (a poor contributions record being the reason why many women do not receive decent pension provision). It would also be linked to average earnings and the value increased over time. The second state pension should be gradually turned into a flat-rate benefit, rather than being means tested, and the role of other means-tested benefits, such as the pension credit, should be reduced.
  • Age discrimination legislation which comes into force in October 2006 has a default retirement age of 65. The report recommends that there should be no age limit and that, in relation to age discrimination, occupational health, and education and training of older workers the government should adopt and disseminate best practice. The report also recommends that people should be able to phase their retirement, taking some of their state pension whilst working reduced hours.

The government’s response

A week before the report was published, John Hutton, the new Secretary of State for Work and Pensions, made his first major speech. In it he argued that any changes must meet five tests: to promote personal responsibility and be fair, affordable, simple and sustainable. He said that there would be no rush to judgment once the report was published. Subsequently, the government gave the report a subdued welcome. The main concerns raised have related to cost. The government is due to produce a white paper on pensions in the spring of 2006. In the meantime, the public are being invited to take part in the 'national pensions debate' by completing an on-line questionnaire.

Employer reaction

Sir Digby Jones, director-general of the Confederation of British Industry (CBI), welcomed the Turner report, saying that it was clear that there is no alternative to saving more and working longer and that the UK simply cannot afford for people in the public or private sector to retire at ages set decades ago. However, he described compulsion for employers as the 'sting in the tail' which would upset many small and medium sized businesses and lead to wage cuts and job losses.

However, the Engineering Employers’ Federation (EEF) applauded the Pension Commission’s proposals. Director-general Martin Temple said that 'we support the idea of soft compulsion for employers and employees but recognise that some smaller companies will find this problematic'. The EEF has backed compulsion as the best way to stop good employers who provide adequate pensions being undercut by those who do not. The EEF called for the government to assist smaller firms with the transition to the new scheme.

Union reaction

Brendan Barber, general secretary of the Trades Union Congress (TUC), called the report 'bold and hard headed' and said that the clear majority of the report’s conclusions were undoubtedly progressive. Linking the basic state pension to earnings and introducing compulsory employer contributions were both welcomed by the TUC, as was the proposal to remove a formal default retirement age. The TUC warned, however, that if people were to work longer then major changes in employer attitudes and new routes through part-time and changed job roles to a flexible retirement would be needed.

The TUC has been at the forefront of those arguing for compulsory contributions from employers and this is seen as a major victory for TUC campaigning. The TUC is also pleased that the report offers women a better pensions deal. In this regard the report has also been praised by the Equal Opportunities Commission (EOC) for offering a fairer deal for women and establishing the principle of universality.

Commentary

The agenda set out in the Turner report is one of radical change, supporting as it does an increase in the retirement age, universal entitlement to the basic pension and compulsory contributions. In particular, retirement age remains a contentious issue, not only because there are notable differences in life expectancy dependant upon social class. In October 2005 the Secretary of State for Trade and Industry, Alan Johnson, struck a deal with unions which means that all current public sector employees are still able to retire at 60, with all new staff retiring at 65 (UK0511101N). Some people have expressed the view that the Turner report could be used to reopen these negotiations but Brendan Barber has warned of strikes if the government reneges on the deal. (Helen Newell, IRRU)

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