Stark choices ahead on pensions

PEOPLE are living longer. In 1950, a man aged 65 could expect to live 12 years in retirement: today, it's 19 years. If this pace of increase continues, by 2050 the figure will be 25 years. Women on average live even longer.

That is wonderful news, but combined with a low birth rate it means that whereas today there are almost four 20 to 64-year-olds for every 65-plus-year-old, by 2050 there will only be around two.

One of four things cannot be avoided. Pensioners will become poorer relative to the rest of society; taxes or National Insurance contributions must rise; more money must go into private pension schemes; or, on average, people must retire later.

The first of these - poorer pensioners - is unattractive. Society as a whole and individuals need to decide what mix of the other three choices is best.

Successive governments have aimed to control public spending on pensions. As a result, Britain does not face the same crisis as some European pension systems, where taxes will soar unless major reforms are made. But controlled public spending and many more pensioners inevitably means less state pension provision for the average pensioner. The plan has been that private pensions must fill the gap.

But private pension provision has been in underlying decline for more than 20 years, as employers have pulled out of final salary pension provision to avoid the mounting costs produced by people living longer.

The stock market boom of the 1980s and 1990s slowed the decline, allowing companies to keep pension schemes open even while cutting the contributions they paid in.

When share prices fell, the closure of final salary schemes to new members became a flood.

Final salary schemes are normally replaced by 'money purchase schemes', but with contributions typically half as large. And there have always been many people, in smaller firms in particular, who receive no employer pension contributions and who do not themselves make private pension provision.

Overall, we estimate that at least 9 million working people are not on target towards adequate pensions even if average retirement ages do rise.

People on average earnings of £21,500 usually need to be saving 10% or more of their salary to secure an adequate pension at age 65: at least three-quarters of money purchase scheme members have contributions less than that.

In autumn next year, the Pensions Commission will recommend how to solve this problem. There are three possible ways forward - but none is easy.

One is to make the present voluntary system work by reducing complexity, improving incentives to save and helping people become better informed about the choices they face.

A second would be to have a higher state pension: but that must mean either higher taxes or a higher state pension age, and either would have disadvantages.

A third is to make pension saving, either via employers or employees, compulsory. But many businesses might object - and many individuals might prefer to work longer.

There are no easy answers. But a way forward must be found.

Adair Turner is chairman of the Pensions Commission that was set up by the Government to review the UK private pension system and long-term savings and to make recommendations for change

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