Pension reforms involve difficult choices, says report

There are "significant problems" in the current pensions system which require a new settlement, the Pensions Commission said in its 460-page report.

The present state pension system, combined with private schemes, were "not fit" for the purpose of looking forward.

The Commission said two main elements were now needed - a new policy for helping workers save in private schemes which stopped short of full compulsion, coupled with reform of state pensions.

There were "difficult but unavoidable" choices ahead and it was not possible to make the changes without an increase in spending on pensions over the next 45 years.

"We believe that increases in state pension ages will be essential to keep that increase within levels which are fair between generations and sustainable over the long term.

"We present a range of possible combinations of public expenditure and state pension ages around which public debate is now required. That debate needs to commence now.

"While the most important problems in the UK's pension system relate to future rather than present adequacy, these problems will get worse unless reforms start soon."

The Commission - made up of Lord Turner, Jeannie Drake, Deputy General Secretary of the Communication Workers Union and John Hills, a professor based at the London School of Economics, said its recommendations on the thrust of pension policy reform were clear.

"The establishment of a National Pension Savings scheme into which individuals are automatically enrolled but with the right to opt out, and changes to make the state system less means-tested and simpler than it would be if current indexation arrangements continued."

The report said that the current system of private occupational schemes combined with the state system would deliver increasingly inadequate and unequal results.

Voluntary private pension provision was not growing and was in "serious and probably irreversible decline".

The report went on: "Employers' willingness voluntarily to provide pensions is falling and initiatives to stimulate personal pension savings have not worked.

"Reforms to the state system are needed, not only to address the significant gaps in provision for people with interrupted careers and caring responsibilities but also to create a more understandable, less means-tested platform on which individuals and employers can build private provision."

The Commission said it believed attitudes to compulsory saving for retirement were ambivalent with many people saying they wanted to be forced to save but were then not happy with the idea of compulsion.

Changes that were needed had to maintain employer involvement in good quality pension schemes as well as preventing the spread of means testing.

The Commission added that pension schemes should be less complex and more understandable while maintaining improvements in the standard of living of the poorest pensioners.

"To achieve these objectives we recommend two key elements of reform - 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 contribution.

"Reforms to make the state system less means tested. 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."

The Commission said it was not possible to design a coherent state pension system without an increase in public spending on pensions between now and 2050.

But increases should be kept "within limits" which were fair between generations as well as being sustainable over the long term.

According to the report, if the rise in the state pension age after 2020 was in proportion to rising life expectancy, the retirement age would rise to 66 in the year 2030 and 67 in the year 2050.

The Commission said it was vital that jobs were made available for people who wanted to work longer even if that meant going beyond the pension age.

It was also essential that options available to people were as flexible as possible to help them move from full-time to part-time work before retirement.

"Achieving these objectives is a major challenge," said the report.

The Commission said that the timing of its suggested changes were open to debate, but it stressed it was "essential" that action was taken as soon as possible.

"Current pensioners are as well provided - relative to average earnings - as any previous generation and many will continue to be well provided over the next 15 years.

"There is therefore no general and immediate crisis. But current trends in voluntary private pension provision, and in state pension provision if current indexation arrangements are continued indefinitely, will result in major and increasing problems after 2020. To fix these long-term problems requires action now."