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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". Copyright
© 2002 Global Action on Aging
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