Turner's choice: retire later, save more, raise taxes or face future on the poverty line

Adair Turner's Pension Commission published the most detailed examination of the British pensions scene for a generation yesterday. Whatever the commission recommends in a year's time, industry experts were agreed that the interim report would become a bible of reference for everyone involved in pensions. It describes the present situation, trends and challenges in an eight-part analysis.

Adair Turner's Pension Commission published the most detailed examination of the British pensions scene for a generation yesterday. Whatever the commission recommends in a year's time, industry experts were agreed that the interim report would become a bible of reference for everyone involved in pensions. It describes the present situation, trends and challenges in an eight-part analysis.

The demographic challenge

The post-war baby boom delayed the effect of underlying increases in life expectancy and lower birth rates, but once baby boomers begin to retire in 2010 there will be a rapid increase in the proportion of pensioners for the subsequent 50 years. "The adjustment now needed will have to involve some mix of four options," Mr Turner said. These are: pensioners becoming poorer relative to the rest of society; more taxes and national insurance contributions devoted to pensions; higher savings; people working longer.

Average male life expectancy at age 65 has grown from 12 years in 1950 to 19 today, 21 by 2030 and 21.7 by 2050. Female life expectancy is also rising, but more slowly. The birth rate has fallen to 1.7 children per woman, compared with 2.07 to maintain the population.

These trends mean that there will be little change in the number of 20- to 64-year-olds, but a 78 per cent growth in those aged 65-plus by 2050. If pensioners are to maintain their standard of living, the percentage of gross domestic product going to the retired would have to rise from 9.9 per cent to 17.5 per cent in the next 46 years. If that is to be done without raising taxes or savings, the average retirement age would have to rise from 63.8 to nearly 70.

The chances of people working longer

The feasibility and desirability of later retirement depends on whether people grow older healthier, and many are. And the long-term trend for more people to retire in their fifties is being reversed. Fewer have been made redundant, pensions are less reliable, companies provide less generous early retirement packages and the Government has been taking people off incapacity benefit and back to work. The introduction of laws banning age discrimination should add to the trend for working longer.

The commission also wants the Government to consider letting people defer part of their state pension instead of the present "all or nothing" deal. They could then work, take some pension and have some more to look forward to.

The report warns: "It seems unlikely that the increase [in retirement age] which most people will wish to choose will be sufficient" to make up for the rise in the number of over-65s. So this solution will not be enough on its own.

The present pensions system

The UK pension system seemed to work well because an ungenerous state pension was balanced by the most developed system of voluntary private pensions. "This rosy picture," says the report, "always hid multiple inadequacies relating to specific groups of people, but on average the system worked." But the state plans to contribute less and the private pension industry is in decline.

Overall funded pension saving is not rising to meet the demographic challenge, but is at best flat. The report concludes: "A major shift of risk is occurring, from the state, employers and the financial services industry, to individuals, some of whom are ill-equipped to deal with it."

Outlook if nothing is done

Many people - at least nine million, or a third of the workforce - will face inadequate pensions unless they have large non-pension savings or are intending to work a lot longer.

And pension provision is becoming increasingly unequal. Those heading for wealthy retirements include members of final salary or defined benefit schemes, public sector employees and senior company executives. But the state is becoming more generous to the worst-off, so the biggest losers are middle and lower-middle earners.

For the next 10 years, average pensioners' incomes relative to the workforce will be higher than 20 years ago. But those retiring in 15 to 25 years will suffer unless something is done to help them.

These inequalities, says the report, could lead to civil unrest. The losers in this lottery will be a powerful political force, given the growing numbers of elderly. They are likely to lobby and vote for "quick fix" solutions, rather than the intelligently planned changes Turner would like to see.

Other types of saving

Individuals own non-pension savings and other assets totalling £1,150bn, compared with pension funds and entitlements worth £1,800bn. Some of these non-pension savings are being earmarked for retirement, but the report argues that they will make only a modest difference to most people. Housing assets are much bigger and more equally distributed, but the outlook for prices is uncertain, those with least pension rights have the smallest houses and some value may be diverted to pay for long-term care.

Mr Turner concludes: "We find that while housing assets will clearly be an important source of retirement income for some people, they cannot be considered as providing a general and sufficient solution."

Barriers to a voluntary system

When the Turner report was first commissioned, it was assumed that its main purpose was to weigh up the pros and cons of compelling people to save. In the end, it turned out to have a much wider remit.

Mr Turner focuses on the poor incentives in private pensions, as well as highlighting the complexity of pensions and the lack of trust in both financial advisers and pension providers - all of which work against a voluntary savings system. The report also seizes on the lack of understanding and interest in pensions.

Mr Turner also touches on the fact that while the pension credit system incentivises some people, it discourages many others from saving. He concluded that "unless latest government incentives can produce significant change in behaviour, it is unlikely that the present voluntary system, combined with the present state system, will solve the problems we face".

A tough choice

Having concluded that either the voluntary system or the state pension must be overhauled, or that we must give in and introduce a greater degree of compulsion, the report evaluates these three options.

To revitalise voluntarism, Mr Turner suggests that employer contributions would have to be increased, tax incentives and education improved, or costs would have to come down. He stops short of recommending which combination, if any, of these options might provide the solution.

Mr Turner believes that Australia is the only country which provides a truly useful comparison for compulsory savings, but points out that since compulsion was introduced more than a decade ago, the savings rate has plunged.

The third option - to overhaul the state pension - would come at a cost. For the Government to raise the basic state pension significantly, it would have to increase taxes significantly too - a sure-fire vote loser.

Mr Turner will publish recommendations next autumn.

Women's pensions

Women pensioners are significantly poorer than their male counterparts. The reflects the fact that they have lower pay rates and lower average earnings and do more part-time work, as well as the fact that most women have received pension income through their husbands. The report calls for the system to be reformed so that most women accrue pension entitlements, both state and private, in their own right.