Pensions report: The details

Key details from Lord Turner's report on the reform of Britain's pensions system.

Lord Turner said that policies would need to be "integrated" to address the consequences of a population that lives longer.

He also urged politicians and experts not to make instant judgements on individual points but to consider the package in the round.

Principles

• The need for an increase in state pension expenditure as a percentage of GDP between 2020 and 2045.
  
  
• The need, after that gradual but one-off increase, to achieve long-term stability in pension expenditure as a percentage of GDP, secured by the principle of pension ages rising proportionately with life expectancy.

Objectives

• Deal with the major gaps which exist in the current state system for people with interrupted careers and caring responsibilities.
  
  
• Overcome the barriers of inertia and high cost which deter voluntary private pension provision.
  
  
• Maintain employer involvement in good quality pension provision.
  
  
• Prevent the spread of means-testing which would occur if present indexation arrangements continued indefinitely.
  
  
• Be sustainable in the face of rising longevity and of uncertainty over how fast that rise is occurring.
  
  
• Be less complex and more understandable.
  
  
• Maintain the improvements in the relative standard of living of the poorest pensioners which the present means-tested approach has achieved.
  
  
• Entail a transition from current arrangements which is acceptable in terms of cost, distributional impact and administrative complexity.

Key reforms

• The creation of a low cost, national funded pension savings scheme into which individuals will be automatically enrolled, but with the right to opt-out, with a modest level of compulsory matching employer contributions and delivering the opportunity to save for a pension at a low annual management charge.
  
  
• Reforms to make the state system less means-tested and closer to universal than it would be if current indexation arrangements were continued indefinitely. In order to achieve this while maintaining the standard of living of the poorest pensioners it will need to be more generous on average. In the long-term this implies some mix of both an increase in taxes devoted to pensions expenditure and an increase in state pension ages.

Entitlement

• The state pension age for men and women should rise to 66 by 2030, to 67 by 2040 and to 68 by 2050. But final decisions should be taken closer the time based on more up-to-date information on life expectancy.
  
  
• Increases in the state pension age should be linked to rises in life expectancy.
  
  
• Entitlement to the state pension should be based on residency rather than national insurance contributions, ending the disadvantage for those, mostly women, who take time off work to raise children or act as carers.

Savings plan

• The creation of a National Pension Savings Scheme which would see employees not covered by other adequate pension arrangements automatically enrolled but able to opt out.
  
  
• As a minimum, total default level contributions (arising from employer and employee contributions and from the benefit of tax relief) should be around eight per cent of earnings above the level of income at which Income Tax and National Insurance become payable, currently £4,888).
  
  
• Contributions would be made up of four per cent contributions from employees' post-tax pay, one per cent from tax relief/tax credit and three per cent from matching compulsory employer contributions.
  
  
• Assumed that this might secure the median earner a pension at the point of retirement of about 15 per cent of median earnings on top of the 30 per cent which state provision will deliver under the proposals.
  
  
• The scheme should aim to deliver to all employees and the self-employed the opportunity to save for a pension at an annual management charge of around 0.3 per cent per year or less, boosting the value of pension saving by up to 30 per cent.
  
  
• The National Pension Savings Scheme would have to use a national payment collection system, such as Pay As You Earn or a newly created pension payment system, to collect contributions in a cost-effective fashion and in a fashion which imposes minimal administrative burdens on business.
  
  
• The National Pension Savings Scheme would have to provide members with the option of investment in very low cost funds bulk bought from the fund management industry.
  
  
• Individuals in the NPSS should accumulate clearly defined property rights, with accumulated funds directly linked to contribution levels.
  
  
• The self-employed would be able to join on a voluntary basis.

Second State Pension and Pension Credit

• The commission recommends building on the existing two-tier basic state pension (BSP) and State Second Pension (S2P) system, rebates will continue to be paid to employers and employees contracted-out of the S2P. But by freezing the upper earnings limit for S2P accruals the importance of these rebates will decline over time.
  
  
• Accelerate the evolution of the S2P to a flat-rate system by freezing in nominal cash terms the upper earnings limit for S2P accruals. This would enable concentration on the use of constrained tax resources on the provision of as generous and non-means-tested, flat-rate provision as possible.
  
  
• Over the long-term, link the value of the BSP to earnings and freeze in real terms the maximum amount of Savings Credit payable. This would stop the spread of means-testing which would occur if present indexation arrangements were continued indefinitely.
  
  
• In future the Pension Credit should rise by less than average earnings.

Costs

• Current government plans and private savings levels imply that total pension income flowing to normal age retirees would rise from today's 9.1 per cent of GDP to a mid-point estimate of 10.8 per cent by 2050 and that there will be no significant shift in the balance of provision from state to private sources.
  
  
• This level of transfer in turn implies either poorer pensioners relative to average earnings or significantly higher average retirement ages.
  
  
• Not possible to design a coherent state pension system for the UK without some increase in public expenditure on pensions as a percentage of GDP between now and 2050.
  
  
• If the rise in State Pension Age (SPA) after 2020 was in proportion to rising life expectancy, it would rise to about 66 in 2030 and about 67 by 2050. With this SPA a coherent and less means-tested state pension would probably cost about eight per cent of GDP, versus today's expenditure of 6.2 per cent. This would impose the costs of falling fertility on taxpayers rather than pensioners.
  
  
• If SPA rises after 2020 were more than in proportion to anticipated life expectancy, reaching 69 in 2050, the cost could be limited to 7.5 per cent. This would impose the costs of the fall in fertility on pensioners rather than taxpayers.