After a three-year wait, has Lord Turner’s Pensions Commission published a ‘blueprint’ for pension reform, or a ‘mishmash that ought to have been strangled at birth’? Reading the headlines in the days after the publication of the report, one could be forgiven for being confused.
Employers will welcome most of the report: the simplified, enhanced state pension; the new savings scheme for those on low incomes; and measures to encourage people to work longer. But for many smaller firms, Turner’s prescription for compulsion will be the sting in the tail.
So while the report offers the best chance for a ‘new deal’ on pensions for years, if we are to get a consensus on the way forward, we have to put choice at its heart.
Turner says that employees should be able to choose whether to join the new National Pensions Savings Scheme (NPSS). It’s absolutely right for workers to be able to choose whether they can afford this, but companies must also get a choice. Under the commission’s plans, the only opt-out available to some struggling smaller firms may be to shut up shop. The scheme should be voluntary with employees and employers encouraged, but not compelled, to make contributions.
Despite our reservations about compulsion, the CBI believes this earnings-related scheme will offer very real advantages over pay-as-you-go state provision. It can be run without excessive administrative burdens on business; it would have very low charges; and it would provide excellent value for lower-income individuals who, as the commission points out, often end up losing 20% to 30% of the value of their pension pots in administration and management costs.
And automatic enrolment would help overcome inertia and increase the take up of private pensions. CBI research shows that schemes with automatic opt-in have average take-up rates of 93%, compared with an average of 38% across all schemes.
Finally, while it should be a cause for celebration that we are all living longer – and healthier – lives, Turner is right to point out that we can’t indulge in “fairytale economics, where a fairy godmother makes all the difficult choices disappear”. We need to either save more or work longer – or accept an impoverished old age on means-tested benefits.
Raising state pensions will be expensive, and raising the state pension age is the only way to create more generous state retirement funds without a huge hike in taxation. It would be dangerous, though, to offer a cast-iron guarantee that state pensions will always rise in line with earnings – it’s a laudable goal, but achieving it will always depend on economic conditions.
So we must all accept that the nation simply cannot afford for people to retire at ages set half a century ago, and the government must now decide how to phase in a higher state pension age.
Of course, people close to retirement should be protected. But it’s not unreasonable to expect those now in their 20s and 30s to plan for a few more years in work and to start planning for it now. And it’s galling for employers and staff in the private sector to be told they’ll have to pay twice – once for their own occupational pension, and a second time for public sector workers, whose pensions will be protected for another 40 years if the present settlement stands.
We now need a grown-up debate on how to take forward Turner’s proposals. Doing nothing is not an option. Employers will want to play an active part in this debate – and the CBI intends to consult members on the detail of Turner’s proposals.
Susan Anderson is director of HR policy, CBI
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