UK: Pensions probe may not please ministers

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UK: Pensions probe may not please ministers

By Nicholas Timmins

Financial Times, May 20, 2003

UK - Adair Turner, the government's pensions supremo, is to scrutinise the impact of the state system on private pension saving, although his terms of reference specifically prevent him from recommending changes to the state pension structure.

The investigation may not please ministers, who insist the present state system does not need changing. But it will be welcomed by the growing number of voices in the pensions industry who argue that private saving is unlikely to be revived without a simpler state system and less means-testing.

The independent Pensions Commission, chaired by Mr Turner, is to carry out the review, which will look at whether the UK needs to introduce more compulsory saving for old age. Mr Turner said that to establish whether the existing, largely voluntary system of pension saving could continue successfully, "we have to understand how the state system works". That included understanding "what the implications for incentives may be" from the growth in means-tested pension benefits such as the minimum income guarantee and forthcoming pension credit.

Although the commission's terms of reference "may constrain our recommendations, they won't constrain our analysis".

Mr Adair said the commission would look at pensions across a wide spectrum, including whether house and share prices might fall spectacularly in two to three decades' time as the baby boom generation retired and tried to draw down its savings.

The commission is shortly to publish a work plan setting out the areas of analysis it will undertake. These include demographics, and whether the recent increases in longevity that have helped cause pension fund problems will continue more or less indefinitely - or whether, as the government actuary's department currently assumes, by about 2025 the rate of improvement will slow down.

"It is possible that is not true," Mr Turner said. Life expectancy could "continue to ratchet upwards". In that case "it is more obvious that part of the response has to be an increase in retirement age". But with that would go an analysis of whether people would undergo "healthy ageing, or unhealthy ageing. If life expectancy increases from 15 to 18 years after age 65, it matters crucially whether that is three more years as a healthy 65-year-old, or three more years as an unhealthy 80-year-old".

The commission will examine retirement behaviour; whether the spate of early retirements, some voluntary, some compulsory, in the 1980s and 1990s was the result of one-off factors such as heavy industry shedding staff and pension funds that were in big surpluses being used to shake out tiers of middle management, and whether they might be repeated. Average retirement age appears to be increasing. "But we need to examine whether there are barriers to that," Mr Turner said, "and how far it is possible to increase participation rates in older age groups."

The commission would also need to look at the state system and how far the current withdrawal rate of state benefits had implications for incentives to save.

The most difficult area would be to examine current stocks and flows of saving and individual behaviour. Here, he said, there appeared to be big gaps in the data. An early possible recommendation is that the government needs to commission more survey work.

The macro-economic impact of pension saving will also be examined, from how far there is a "pension saving gap" and what will happen to asset prices when a whole generation tries to realise its pension savings. "It is obviously true for any one individual that if they save for old age they will be better off," Mr Turner said. "But if everyone does the same thing simultaneously and tries to draw down their savings, can it work? There is a huge literature on this and we will have to get to grips with it."

The commission will study the issue of adequacy - what sort of replacement rates people in different parts of the income distribution need in retirement.

It will examine the impact of different rates of return and the risks for individuals as pensions move from final salary to defined contribution. Mr Turner conceded that the range of work was large, "but we do need to make sure we look at this in the round".

Commission believes its measured approach will pay best dividends, though early decisions are possible

The Pensions Commission plans to produce its first substantive report in two to three years' time, according to Adair Turner, writes Nicholas Timmins. But there are two important qualifiers to that. First, the commission may make some recommendations earlier if the speed of change in pension provision requires it. And next year - probably around June - it plans to set out its first take on the full state of UK pension provision and the challenges it faces. Charged with assessing how well the UK's largely voluntary approach to private pension provision is developing - and to make recommendations on whether there is a case for greater compulsion - Mr Turner said: "We are not in a hurry to produce an answer." Some of the government's green paper proposals will require legislation and take time to have an impact, he said. But there was clearly a trade-off between waiting for the full effect of those "and looking at issues that need to be addressed. So we would expect to make some recommendations on a two- to three-year timescale". Next summer, he said, the commission planned to produce "a clear analysis of the situation and a consideration of the logical options and the pros and cons of different approaches to the problems that are thrown up - but without, at that stage, recommendations. But we don't preclude making recommendations before that". The commission faced "a rapidly changing situation, particularly with the move from defined benefit to defined contribution pensions, which is even more obvious than it was in December when our creation was announced. If there are things we feel we should say, we will say them".