The Pensions Commission‚ announced by the Government in the 2002 Green Paper and headed up by ex-CBI chief Adair Turner‚ will publish a comprehensive report on the UK pensions system tomorrow. The report is expected to put forward detailed policy recommendations for reform and will provide the Government with a once-in-a-lifetime opportunity to eradicate the deep-rooted injustices in the pensions system.

What is the challenge for Turner?

To recommend an affordable and sustainable pensions system that recognises the needs of people on low incomes and those with interrupted working lives‚ and delivers an adequate pension to all.

Main issues for consideration:

• Women’s pensions
  The gender gap experienced in the workplace continues into retirement and is reflected in both state and private pension provision. Women are not only penalised for taking time out of work to care for their family‚ but are more often than not in low-paid and part-time work so do not have access to‚ or cannot afford to pay into‚ an occupational pension. Women are also largely under-represented in sectors with good pension provision.
• One in five single female pensioners lives in poverty (DWP‚ 2005)
• 24% of newly retired women are entitled to a full basic state pension on their own record (DWP women and pensions report‚ October 2005)
• For every £1 a man receives from a pension‚ a woman receives 34p (Individual income of Men and Women 1996/7 to 2003/4‚ Women & Equalities Unit‚ 2005)
• A third of young women (31%) aged 24-35 plan to rely on their partner for a pension (Age Concern/ ICM research‚ June 2005)
• Just 8% of women from Pakistani origin have a company pension (House of Commons‚ Hansard‚ March 2004)
• Pensions for people on low and modest incomes
  Both the state and the employer have a key role to play in helping people save for their retirement but a withdrawal from this responsibility in recent years has left low and modest income earners stranded. The UK pensions system currently replaces a much lower proportion of final salary than other European countries.
• 9.6 million people may be undersaving for retirement (Pensions Commission interim report‚ October 2004)
• The UK state system as a whole (including basic state pension‚ SERPS and second state pension) delivers the average UK earner a replacement rate of just under 37% of earnings compared with 70% in the Netherlands‚ 76% in Sweden and 71% in France. Even the US system delivers an average 45% of earnings in retirement‚ putting the UK at the bottom of the international league of developed countries (Pensions Commission interim report‚ October 2004)
• 79% of hotel and restaurant workers‚ 60% of construction workers and 54% of wholesale‚ retail and repair workers don’t have access to a pension at work (New Earnings Survey 2003)
• Continuing poverty
  The UK pensions crisis is not one of affordability but one of adequacy. Two million pensioners are living on an inadequate income because the basic state pension is too low (£82.05 per week) and £2.9bn in means-tested benefits are being left unclaimed each year. 
• One in five pensioners lives in poverty in the UK (DWP‚ 2005)
• The minimum level of income guaranteed by the Government is £109.45 p/w - the level of the Pension Credit

What is the overall solution?

In his interim report last October‚ Turner said that the pensions crisis could be addressed through working longer‚ paying more tax or saving more. Age Concern believes the solution should involve a combination of all three. However:

• There must be a clear connection between what people are expected to pay (in terms of working longer and paying tax) and what they get in return (in terms of higher pension)
• Reforms must not come at the expense of the poorest and there need to be safeguards to make sure the poorest are not disadvantaged
• The Government has stalled for three years following the publication of its Green Paper on pensions. It must now put forward clear proposals for action as soon as possible in the New Year

What are the key issues?

1. Means testing or higher basic state pension

Why is this an issue?
The basic state pension is simply not enough. A higher basic state pension is needed to ensure people stay out of poverty and to give everyone a firm foundation on which to save. Industry (e.g. ABI)‚ employers (e.g. CBI) and consumer organisations (e.g. Age Concern) are unanimous in highlighting the disincentive effect of widespread means-testing on long-term saving.

The Pension Credit‚ introduced as a way to target money to the poorest pensioners quickly in October 2003‚ was a good short-term fix to the problem but much more now needs to be done. A long-term strategy is needed to solve the looming pensions crisis and give people an incentive to save for retirement.

In its interim report‚ the Pensions Commission said that if the Pension Credit (guarantee credit) remains linked to earnings and the basic state pension remains linked to prices‚ almost 65% of all pensioner households would be entitled to the guarantee part of the Pension Credit by 2050.

What has the Government already said?
“There will be a proper basic state pension: and alongside it‚ because in the modern world the state cannot provide it all‚ a simple easy way for people to save and to reap the rewards of their savings." Tony Blair‚ Labour Party Conference‚ September 2005

What does Age Concern think?
An adequate basic state pension of at least £109 a week must be at the heart of any pensions reform. It would lift many more pensioners out of poverty‚ provide a solid foundation for retirement and help future pensioners to see how they would benefit from their own private savings. Mass means-testing is a disincentive for low and average income groups to save.

Increasing the basic state pension to a decent level is the best way to ensure that no one has to live on an income that fails to cover basic living costs. But it is crucial that the state pension maintains its real value over time. Rises in the state pension should be linked to increases to earnings or another measure‚ such as GDP growth‚ reflecting the general increase in the prosperity of the nation so that older people do not get poorer the longer they live.

2. Achieving a fair deal for women and carers

Why is this an issue?
The current pension system compounds the inequality that women experience in the workplace and fails to recognise their important role within society as carers. The state pension system‚ designed in the 1940s‚ has not kept pace with the changing lives of women.

Injustice is deep-rooted: low paid women are excluded from building up a state pension simply because they earn too little; pensioners are living in poverty because they have taken time out of paid work to care for their family; thousands of women are paying into a system that doesn’t pay out in return; and older and younger women are finding it difficult to build up secure second pensions.

Women working part time are still at the greatest risk of having an employer who does not offer a work pension. Around 40% of women employed part-time say their employer does not have a pension scheme compared with 25% of women in full time paid employment (DWP women and pensions report‚ October 2005).

What has the Government already said?
“Many policy suggestions that emerged during the consultation [for the Green Paper on pensions] proposed ways in which National Insurance cover could be extended to include more women. We will examine these and other considerations.” Government paper ‘Working and saving for retirement - action on occupational pensions’‚ June 2003

“My enthusiasm has not waned for tackling a real and substantial problem which is that women's pensions are‚ in a sense‚ a national scandal.” Alan Johnson‚ Secretary of State for Work and Pensions‚ Work and Pension Select Committee‚ October 2004

“It’s a challenge that results from so many people having been let down by the system in the past; the scandal of women who have been badly treated because the system is based on dependence on their husbands and they are disregarded in terms of caring duties; the scandal of not recognising the tremendous contribution that people have made‚ not just in bringing up children but in caring for elderly and frail relatives. So one of the key tasks of the Commission will be to bring forward radical proposals to ensure that that historic scandal is overcome.” David Blunkett‚ Secretary of State for Work and Pensions‚ Labour Party Conference speech‚ September 2005

What does Age Concern think?
The gender gap is closing in state pension provision but it is taking a long time to do so and urgent action is needed urgently to tackle the injustices faced by so many women. We need radical pension reform which not only improves the level of the basic state pension‚ but also brings more women into the system. There are still wide gaps in the provision of‚ and access to‚ occupational and private pension schemes. The Government’s legacy must be a pension system that is fair to both women and men.

One option for reform could be to introduce a universal/ citizens’ pension‚ which would certainly bring more women into the state system. However moving away from a contributory system is a big step and although a pension for all sounds simple it would require the Government to have accurate records of residency in the UK for the whole qualifying period which brings in new administrative burden. An alternative could be to keep the contributory system but to make changes to make the pension more inclusive such as reducing the number of years needed to qualify‚ for example from 40 to 25‚ which would immediately increase the proportion of women entitled to the full basic state pension.

The proposed ‘BritSaver’ - a national pensions saving scheme based on the New Zealand model - might also be a good way to ensure more women are covered by a second pension.

3. Working longer

Why is this an issue?
Some commentators have argued that because we are living longer‚ we should work longer‚ and it is widely accepted that encouraging people to get back to work‚ or work for longer‚ will ease the pensions problem. The recent introduction of legislation banning age discrimination‚ together with measures such as being able to defer the state pension in order to receive a lump-sum payment and the Government’s ‘Pathways to Work’ scheme‚ are positive steps towards ensuring that older workers are retained in the labour market.

But the Government’s decision to introduce a mandatory national retirement age from next October effectively means that many employees will not be given the choice to continue working past 65‚ and appears to contradict the ‘working longer’ ethos.

What has the Government already said?
“There is no consensus‚ however‚ around the desirability of raising the state pension age. There is a growing recognition that working longer is going to have to be part of the solution‚ and we have seen in recent years an increase in the average age of leaving the workforce‚ after a long period when that age was falling. But many who would agree that we should be removing the barriers to working longer would strongly oppose steps to compel people to work longer‚ and who can blame them?" Stephen Timms‚ Pensions Minister‚ Launch of IPPR Report on Working Later‚ July 2005

"The state pension age is a very blunt tool for changing effective retirement ages. The report recognises the concerns that many of us hold over the potential inequity of raising the state pension age when people from less well off backgrounds often have lower life expectancy. Even in a future world where there may be fewer people doing manual work and where general improvements in quality of life could narrow this distribution of life expectancy‚ it’s difficult to get away from the objection that an increase in the state pension age would hit the poorest hardest." Stephen Timms‚ Pensions Minister‚ Launch of IPPR Report on Working Later‚ July 2005

“We have received representations for a significant change‚ with persuasive arguments to move to a higher state pension age‚ releasing resources for use elsewhere in the pensions system. I have carefully considered that option‚ but have concluded that it would disproportionately impact on the poorest workers - those most dependent on the state pension‚ many of whom have had hard working lives. As well as being forced to work for longer‚ those people would‚ because of lower life expectancy‚ see a bigger than average slice of their retirement taken away. I have therefore decided that we should not raise the state pension age. Our measures to give people far greater choice about flexible retirement are the right way to address the issue—not raising the state pension age.” Andrew Smith‚ Secretary of State for Work and Pensions‚ December 2002

What does Age Concern think?
We are very supportive of efforts to encourage people to work for longer and think it is vital that age discrimination legislation is enforced to ensure that older workers can remain in the workplace if they are willing and able to. People should be encouraged to work longer through better opportunities‚ support and by tackling age discrimination in the workplace.

We are cautious about attempts to force people to work for longer by raising state pension age. An increase in state pension age would particularly affect the poorest who rely most on state pensions and tend to have lower life expectancies. We will look at the detail of the reform proposals to ensure that the interests of the most disadvantaged are safeguarded.

-Overall people over 50 contribute 24% of total national output - a total of £200 billion (Age Concern‚ The Economic Contribution of Older People‚ January 2004) 
- Age discrimination costs the UK economy £31 billion each year in lost production (‘Ageism: Too costly to ignore’ - S Rikard‚ Cranfield School of Management for Employers Forum on Age)
- Up to one million older people who are currently unemployed could potentially be in employment‚ adding up to £29.7 billion to annual economic output (Age Concern‚ The Economic Contribution of Older People‚ January 2004)
- Out of 3.5 million unemployed 50-65 year olds‚ at least 890‚000 say they want work (Labour Force Survey 2003).
- Over 20% of men now aged around 50 would not live long enough to draw their state pension if state pension age is increased to 70 (Age Concern‚ October 2005)
- Among men who reach 65‚ those in the highest social class can expect to live around 5 more years more than those in the lowest social class – and these inequalities have been widening over time (Age Concern‚ October 2005)

4. Compulsion

Why is this an issue?
Despite high levels of pensioner poverty and a widespread lack of public confidence in the pensions system‚ millions are still under-saving for retirement. Many are failing to make private pension provision because they cannot afford to save‚ cannot afford to shoulder more risk or simply do not have access to a pension at work. Much debate has taken place over recent months about whether people should be forced to save in order to bridge the savings gap‚ and where the responsibility should lie to ensure that people have a decent level of income in retirement. Most agree it should be a combination of the individual‚ the employer and the Government.

What has the Government already said?
“It is Labour that‚ as David Blunkett has said‚ has established the Pensions Commission and asked them to examine the case for moving beyond voluntarism." Gordon Brown‚ Labour Party Conference‚ September 2005

“We are looking closely at the possibility of auto-enrolment – though‚ of course‚ we also have a debate about compulsion and whether employers (and perhaps employees) should be mandated make contributions to pension schemes. This is an issue which the independent Pensions Commission will address when it reports later this year." David Blunkett‚ Secretary of State for Work and Pensions‚ Centre for American Progress‚ September 2005

“The Government must have an interest in lifting dependency – the individual and family want and aspire to a higher standard of living than basic entitlement – and the employer must have an interest in attracting and retaining‚ as well as socially caring for‚ the workforce.” David Blunkett‚ Secretary of State for Work and Pensions‚ Centre for American Progress‚ September 2005

What does Age Concern think?
As there is already compulsion in the pensions system‚ the question should be whether compulsion should be increased and if so whether this should be through state or private provision or both. A reformed system must work for people on low incomes and guarantee they will be significantly better off in retirement.

Age Concern believes that there does need to be more compulsion in the form of taxation. We strongly support auto-enrolment‚ with the option to pro-actively ‘opt-out’‚ as a way of increasing the coverage of pensions provision and the level of savings. Not everyone has access to an appropriate private pension in which to be compelled to save and people on a low income could be made to save but find themselves little better off in retirement if this reduces benefit entitlements. We do not think that the case has been made for private compulsion but will look closely at the detail of any reform proposals. Increased state provision could prove a fairer‚ less risky way of improving retirement income.

The State Second Pension should be enhanced and used by the Government to benefit those not covered by an occupational or private pension or for low-earners who cannot afford to make additional pension contributions.

What is Age Concern's ideal solution to the pension challenge?

FIRST TIER

• Increased basic pension to £109 per week
• Increased coverage of the basic pension (residence or improved contributory system)
• Pension increases linked to earnings or another measure such as GDP growth
  SPA remains at 65
• To be paid for by: people choosing to work longer‚ reform of tax relief‚ progressive taxation (which could include income tax and/or National Insurance).

SECOND TIER

• More employers providing good occupational pensions
• Good value‚ low risk pension options where no access to occupational pension
• Encouragement to save not compulsion (e.g. auto enrolment‚ better promotion)
• Improved financial capability and access to information and advice
• Direct state provision for carers‚ disabled‚ and low income through improved S2P or alternative

Helen Wanless
Telephone:
020 8765 7514
Out of hours:
07071 243 243
Email:
Media Team