Political comment:
Pensions minister Alan Johnson told Parliament: “In this initial baseline report, the commission has made a number of recommendations about how the government collects and analyses statistical information. I welcome and accept these.
“The report stresses that whilst some major advances in pensions have been made in the last few years, pressures on private pensions have been building up since the early 1980s. As the commission says, we need “well-founded policy recommendations’ rather than “immediate conclusions”.
He added: “The report recognises the importance of strengthening private pensions. The Pensions Bill and other forthcoming measures – outlined in the report – will restore public confidence in pension saving, whilst making it easier for firms to run good schemes.”
David Willetts, pensions spokesman for the opposition Conservative Party, said: “Adair Turner’s report is a powerful wake-up call. His analysis shows that we can’t carry on like this. That’s why we have produced our eight-point action plan.
“We need to reform the state benefit system, which he shows is far to complicated. We need to provide better incentives to save. And we need to tackle the most pervasive form of discrimination in our country today – age discrimination.”
Industry groups
Terry Faulkner, chairman of the National Association of Pension Funds, said: “This excellent report gives the government the opportunity to overhaul its present pensions strategy. If the political will exists, this report can provide the catalyst for a shift in emphasis away from complex means-tested benefits, which cloud the picture for consumers and which have contributed to Britain’s yawning savings gap.
John Cridland, deputy director -general of the Confederation of British Industry, said: “This appears to be a spot-on analysis. The report shatters the illusion that there is a single magic solution to the pensions crisis. Compulsion would be a complete blind alley.”
Mary Francis, director general of the Association of British Insurers, said: “Three years ago the ABI (Association of British Insurers) calculated that there was a savings gap of £27bn e39bn each year. This now looks like an under-estimate. There are no easy answers to the pensions crisis, but the bones of a solution are emerging.”
The ABI recommends putting employers “back at the heart of pension provision”. “We want to see a package of employer-focused incentives aimed at getting people to save. Where an employer makes even a modest contribution, pension scheme take-up increases five-fold.”
Graeme Leach, chief economist at the Institute of Directors, said: “We need to see a savings renaissance in the UK. The government has an important role, but ultimately it is a matter of individual choice. Where the government does play a fundamental role is in deciding the retirement age and the generosity of the state pension. Here, the government is going to have to make some tough choices. The commission’s second report, due in 2005, will need to be bold and brave.”
Lane Clark & Peacock senior partner Martin Slack said the contents of the report were “not unexpected” and added that “it could be a useful piece of basic research”.
But Slack said what people had failed to pick up on was the comparison between problems for private sector pension problems and the public sector. Public sector workers “continue to sit there with their pensions guaranteed by the tax-payer,” he said. The Turner report, he argued, had “sidestepped” this issue to some extent, although the report does mention the amount of GDP devoted to public sector schemes.
“There is a real danger here of a two-tier structure emerging down the line,” Slack said – adding that this would
not help to encourage private sector pensions.
Slack raised the spectre of political paralysis: “It may well be that politicians say we cant do anything before the recommendations. It could be five years before changes start to filter through.”
“The tragedy is that in the meantime there will be another generation going through not saving adequately for their retirement.”
John Shuttleworth, a partner at PricewaterhouseCoopers, commented: “None of the commission’s conclusions are new but they are rigorously arrived at. Adair Turner has correctly identified that the issue is persuading people. In pensions, fuzzy thinking is endemic; weak arguments are hidden behind dubious data. The commission’s focus on hard facts is therefore refreshing.
“The situation may be desperate but it is not yet serious. The report is a wake-up call. Without realising it, millions who used to have low-risk defined benefit pensions now have volatile and unsuitable DC equity investments.”
Raj Mody, principal consultant at Hewitt Bacon & Woodrow, said: “Companies should be increasingly searching for a middle-ground solution, where risk is shared and retirement options are more flexible, catering for different working patterns such as part-time working in a different role as an individual gradually phases into retirement over a period of several years.”
Deborah Cooper, senior research actuary at Mercer, said: “The report shows we have to save considerably more if we want to meet our retirement aspirations. Those who want to maintain a relatively high standard of living in retirement need to work longer or save more while in work – and probably both.”
The Trades Union Congress said: “The voluntary approach to pensions saving has had its day. The country faces a stark choice. We either save more now or pay a high price later. For a decent retirement for all, either all employees and employers start paying enough into pensions, or everybody will end up paying more tax and working for longer.”
Consultants unscathed
Consultants to pension funds appear to have emerged unscathed from the Pension Commission’s report – with observers welcoming its focus on the future.
The report makes no reference to investment consultants or actuaries and is largely keen to avoid apportioning blame for the current state of pensions in the UK.
“The problems of the British pension system today reflect the cumulative impact of short-term decisions, of commitments made, and of policies rejected, sometimes under the pressure of electoral cycles, by governments over several decades,” the report states.
“I don’t think it’s Adair Turner’s remit to be critical,” said Joanna Livingstone, principal at actuarial consulting firm Punter Southall. “It’s his remit to look forward.”
That view was backed by John Shuttleworth of PricewaterhouseCoopers. “There’s not a lot to be gained by apportioning blame. We’ve got to move forward.”
The report says the government and employers were both “over optimistic” about the sustainability of long-term pension returns – with the government increasing tax on pension fund investment returns and companies taking contribution holidays.
“The most useful response to this report by politicians of both government and opposition and by other interested parties would not entail immediate conclusions,” the report says.
“There are no easy answers to the problems we face. It would therefore be unfortunate if initial debate on this report, particularly in a pre-election period, led to any options being ruled out. We are not making specific recommendations, but we know already that it is impossible to deal with the challenges facing us without making difficult choices. We need to develop an approach which can command consensus across parties, and which can be sustained across parliaments and governments.”
One of the key elements, the commission says, is trust – or the lack of it. “The retail financial services industry has lost the trust of customers as a result of a sequence of mis-selling scandals and problems (such as pension mis-selling, endowment mis-selling, Equitable Life, split capital trusts).
“And the government is not trusted either, probably because of the frequency with which governments over the years have changed state pension promises.”
The three-person commission, headed by Adair Turner, the former head of employers group the Confederation of British Industry, says survets suggest that employers are still trusted on pensions.
“Only employers still show up in surveys as trusted on pension matters at least by those who are actually members of occupational pension schemes,” the report states.
“While this may seem surprising in the light of the major, highly publicised, and tragic cases of pension fund insolvency, it may reflect understanding of the reality that the vast majority of employer defined benefit promises have been met.”
The commission added: “Trust in DB schemes may also grow in future to reflect the insurance provided by the Pension Protection Fund.”
The group is now launching the consultation phase its work and
would like to receive written submissions by the end of January 2005. It will produce specific policy proposals in about a year.