22 October 2004
When Adair Turner published his interim report on the UK's escalating pension crisis last week, he no doubt sent civil servants at the Department for Work and Pensions scuttling back to their offices, pausing only to stock up on headache pills.
Whichever way you look at it, a national retirement savings shortfall, estimated at £57bn per year in tax spending terms, or £40bn per year against individuals' savings, is enough to give even the most battle-hardened mandarin a migraine.
Pity the DWP. It must soon make sense of what Turner, chair of the government's advisory Pensions Commission, described in his post-publication interview with Public Finance as the 'complicated web' of policy, savings traditions and demographic changes that have discouraged 11 million people from saving enough for retirement.
Turner's interim study makes no firm recommendations: proposals will follow next year. But he acknowledges that the most likely outcome will be a combination of policies designed to encourage us to work longer, save more and, possibly, pay more tax.
What does that mean for the public sector? Speaking to PF on October 15, Turner issued a wake-up call. Long viewed as insulated from ailing pension provision elsewhere in the UK, the public sector is suddenly experiencing a palpable sense of unease.
In the past month alone, the Office of the Deputy Prime Minister has outlined plans to make the giant Local Government Pension Scheme and firefighters' pensions 'more flexible and sustainable'. Critics claim that means 'cheaper'.
Among the most significant change is an end to public servants retiring and drawing their pensions at or before 60.
Turner is adamant change must follow. 'Public sector defined benefit schemes… were established with a retirement age of 60, when we understood that someone aged 60 would live for another 18 years. But now they're living 23 years beyond 60. So schemes have become 25% more generous than was intended,' he explains.
Consequently, the public sector now has a disproportionate share of total pension rights. It accounts for 18% of all employees and 17% of UK earnings, but eats up 36% of all accrued pension rights.
Turner says: 'In that environment, I think it's absolutely right that the government is being up-front about raising retirement ages in the public sector from 60 to 65, which is standard in the private sector.
'It would be quite wrong for public servants to think that it is either acceptable or politically feasible to recognise the pension problems facing the rest of society, and yet expect for themselves a disproportionately generous pension funded by taxpayers.'
But that does not spell the end of defined benefit pensions. Instead, Turner's focus, like the government's, is on the long-term affordability and sustainability of public sector schemes.
This close to a general election, Turner is understandably cagey about his final proposals for state pensions, too. But like Work and Pensions Secretary Alan Johnson, he is adamant that there is no need to raise the basic state pension (BSP) age from 65.
Incentives to encourage working past 65, already outlined by the DWP, could allow for a large injection of cash into national and occupational pension plans that would offset negative pension flows elsewhere.
Turner also believes that the current, confusing means-tested elements of the state pension now 'need to be looked at'.
His report cites means-testing as a major disincentive for people to save. 'Some people are attracted to a higher, less means-tested BSP. But we've got to be honest: if that's what people propose, they've got to put their hands up for higher taxes or a higher state pension age,' he warns.
So means-testing, and other 'add-ons' to the BSP, such as the second state pension, could be scrapped in favour of a flat-rate, higher and simplified BSP?
Turner says: 'If you look at what some people will get from the state by 2020, [including all additions to the BSP], it's actually remarkably close to a reasonably generous flat-rate pension. It's just not called that.'
Ministers must be relieved that Turner's final report will follow next year's election. But that won't cure the headaches at the DWP.
PFoct2004
