Memorandum submitted by Tomorrow's Company
BACKGROUND AND SUMMARY OF SUBMISSION
About Tomorrow's Company
Tomorrow's Company is a business-led think tank,
working as a catalyst to help realise the Tomorrow's Company visiona
future for business which makes equal sense to staff, shareholders
A not-for-profit membership organisation based
in the UK, Tomorrow's Company publishes research, brings practical
business people together to generate and share ideas, puts those
ideas into the public domain and influences decision makers in
companies, the investment community, stakeholder groups, business
schools, and Government.
Tomorrow's Company achieves this through acting
as a leading and influential networking hub for organisations,
identifying and exploring the future of sustainable success, undertaking
and publishing agenda-setting research, promoting the adoption
of new ideas and concepts. We ask the questions that everyone
knows to be important, but others find too difficult to tackle.
Our interest and credentials
Following on from the agenda-setting work of
the Restoring Trust inquiry in 2004, Tomorrow's Company published
the report "The Ageing Population, Pensions and Wealth Creation"
in October 2005. This was put together by an expert group
led by Philip Sadler who is an Honorary Research Fellow of Tomorrow's
Company and former CEO of the Ashridge Business School.
The expert group of professionals was well placed
from both their experience and their intellectual firepower to
offer a distinctive voice in the debate:
Jason CoatesPartner, Wragge a Co LLP
Polly DrydenTrustee of Tomorrow's Company
Jeremy GofordFormer Principal with Tillinghast-Towers
Perrin and President of the Institute of Actuaries from July 2002
until July 2004
Chris HirstFormer Executive Director Investment
Phil Mullanan economist and business adviser,
and non-executive director of Easynet Group. supported by:
Patricia CleverlyHead of Research, Tomorrow's
Mark GoyderDirector of Tomorrow's Company.
The study examined some of the issues raised
in the First Report of the Independent Pensions Commission and
in particular the affordability of pensions and how they are to
be funded in the context of the nation's long-term economic and
social objectives and taking into account the other claims on
public spending and how these, too, are likely to be affected
by demographic factors.
This submission is the result of further work
by this group, with the exception of Polly Dryden and Jason Coates.
This submission argues that:
(i) The Second Report of the Pensions Commission,
due to its use of an inappropriate measurethe old age support
ratiopaints an unnecessarily pessimistic picture of the
consequences of an ageing population. The result is a disappointing
proposal for reform from the Pensions Commission.
(ii) It is impossible to forecast accurately
what society will look like in 30 to 40 years when ageing might
peak in Britain. This is because we are bound to experience much
change in many factors over this timetechnological, economic,
social, political, as well as demographic. It is therefore dangerous
to draw up a pensions regime now that supposedly anticipates how
society might look like that far ahead.
(iii) The nation's ability to support an
increasing proportion of elderly people needs to be looked at
in the context of the whole continuum of dependency from infancy
through the various measures of social protection for those of
working age as well as for those who are in retirement.
(iv) The key to providing adequate and sustainable
incomes in retirement is the pursuit of policies promoting high
economic growth. Policies therefore need to be focused not simply
on savings and pensions issues but should embrace taxation, government
spending, regulation, labour market arrangements, and the incentive
and reward structures facing individuals, business enterprises
and the public sector.
(v) The proposed National Pensions Savings
Scheme does not provide an adequate answer to the question of
post-retirement incomes. In particular:
The reduction of any benefit from the
NPSS due to means testing.
The unintended consequences of employee
enrolment such as the potential loss of other state benefits and
reduced freedom to apply their savings as they feet fit.
The unintended consequences of employer
compulsion such as potentially accelerating the closure of more
generous occupational schemes or a reduction in employer contribution
to 3%, the potential impact on overall compensation levels or,
in the worst case, the possible loss of jobs through redundancy
or closure of financially stretched businesses.
It will not help the many people who
cannot afford to save or many women in the UK who do not receive
the full entitlement under the existing Basic State Pension (BSP)
as they find it difficult to fulfil the contribution requirements.
It is wrong to pressurize people into
saving without ensuring access to financial advice, especially
in cases where there is existing debt and without adequate information
or advice all that people may have to rely on to justify being
in the NPSS is the unsubstantiated assurance from the Commission.
Should the resultant pensions fail to meet expectations the government
could be open to the charge of misselling.
(vi) We support proposals for a Citizen's
Pension, based on residence and set at the level of the BSP plus
the Pensions Credit. This was demonstrated in 2004 to be affordable
until 2010 within the government's then spending plans.
Allow the more rapid elimination of means-testing,
thereby removing current disincentives for lower earners to save
(especially for those people in and around the second quintile),
as well as the current encouragement for them to retire early.
Provide for many women in the UK who
do not receive the full entitlement under the existing BSP as
they find it difficult to fulfil the contribution requirements.
(vii) After 2010, affordability will be dependent
upon several factors, including:
The future levels of aggregate GDP and
GDP per capita.
Future patterns of employment.
The impact of immigration on the age
structure of the population and the proportion who are in work.
Changes to the age of entitlement to
Future government spending priorities.
Responses have been requested by the Committee
on the following:
1. Whether the proposal for a National Pension
Savings Scheme is the right way forward and, if so, how it should
2. The impact on saving behaviour of the
reforms and of existing incentives (such as tax relief).
3. The future rote of employers in pension
provision and the impact on this of proposals for reform.
4. Proposals for reform of the state pension
5. Whether, when and by how much the State
Pension Age should be increased.
6. Measures to facilitate later working and
7. The impact of reform proposals on the
pension incomes of different groups, including the self-employed
and those currently at particular risk of being "under-pensioned",
such as women, disabled people, ethnic minorities and people with
varied work patterns.
8. Whether proposals for reform adequately
address inequalities in pension provision.
Our submission covers the following:
There is no Pensions Crisis
In this section we challenge the use of the
dependency ratio This has implications for all 8 areas of the
Why the Proposed NPSS Will not Work
In this section we address some of the possible
unintended consequences of implementing the Pensions Commission
proposal for an auto-enrolment National Pension Savings System
(NPSS). In particular, that lower income people could find that
being in the scheme makes them little, if any, better off in retirement,
while making them worse off during their years of employment because
of having a lower disposable income. Overall their life-time disposable
income could be reduced.
This has implications for areas 1, 2, 5, 7 and
8 of the inquiry.
The case for a Citizen's Pension
In this section we argue for the establishment
of a Citizen's Pension, based on residence and set at the level
of the BSP plus the Pensions Credit. We highlight that in the
short-term, from now until 2010, this is affordable without raising
current levels of taxation.
In the longer term, affordability will depend
primarily on a number of factors but in particular the future
level of aggregate GDP and GDP per capita.
There is no pensions crisis
(i) Wherever in the world the phenomenon
of population ageing is discussed the common assumption is that
nothing can alter its negative economic impact.
(ii) This pessimism about the unaffordability
of an ageing population invariably relies for substantiation on
the "old age support ratio" or its inverse, the "dependency
ratio". This ratio measures the relationship between two
age sections of the population: the group of 65+ year olds, who
are designated as "dependent", and the "working
age" group, usually measured as the 16 to 64 year olds, who
(iii) In brief, the erroneous conclusion
is that each person of working age will have to support about
double the number of elderly dependents compared to today. On
the face of it, it seems indisputable that in financial terms
at least we face a substantially more challenging future.
(iv) However, this measure of dependency
ignores the fact that about one third of those of working agesome
9.5 million in the case of Great Britaindo not work. They
are among the supported, not the supporters.
(v) A more valid measure of dependency is
the economic support ratio, which is the ratio between the number
of people in work and all the various dependents they have to
support -including children below the age of 16, people of working
age who are not in work for a variety of reasons and people above
state pension age also not in work. The Economic Policy Committee
of the European Commission recognised this essential point back
"The key variable is not so much the
old-age dependency ratio, but rather the balance between economically
active and inactive persons . . . Whereas the old age dependency
ratio for the EU is projected to double in coming decades, the
economic dependency ratio will only increase by one-fifth".
(vi) Use of the economic dependency ratio
emphasises the fact that in the end pension promises, whether
funded or PAYG, have to be redeemed by the production of goods
and services which are then, by the mechanisms of taxation or
the liquidation of assets, shared between producers and non-producers.
(vii) In 2003, in round figures, Great Britain
had some 28 million people working. They produced the goods and
services for their own consumption as well as for 9.5 million
people aged 16-64 who were not in work, 10.5 million children
and some 10 million aged 65 or over who were not in work. This
gave a ratio of approximately one worker to every 2.1 consumers
(bearing in mind that each worker is also a consumer).
(viii) We do not know what the level of employment
will be in 2041, but the Government Actuary's projections give,
in round figures, 29 million working people, 10.5 million people
of working age who will not be in work, 10 million children and
15.5 million aged 65 or over who will not be in work. Thus 29
million will be producing the goods and services for a population
of 65 million, a ratio of one worker to every 2.2 consumers.
(ix) If by 2041 the number of people in work
should rise from 29 million to 31 million through a combination
of people working later, improved child care facilities and other
labour market factors, the ratio would then be the same as it
(x) There is no crisis at the present time
and the possibility of a small change in the dependency ratio
hardly justifies the view that there will be a crisis in the long
term. Such a change could be accommodated by a mixture of productivity
growth and an increase in the proportion of the population who
are in work.
SECTION 2.0 WHY
NPSS WILL NOT
(i) This section addresses some of the shortcomings
and possible unintended consequences of implementing the Pensions
Commission proposal for an auto-enrolment National Pension Savings
2.2 Lack of financial or economic case for
auto-enrolment and more saving
(i) Within the Pensions Commission's proposals
is the establishment of a NPSS which involves an additional layer
of state-organised private pensions. This mixes:
"soft compulsion" for workersautomatic
enrolment at a minimum of 4% of salary with an opt out provision
with full compulsion for employerswho
would have to contribute a minimum of 3% of salary for worker
(ii) No substantial financial or economic
case appears to have been established for the introduction of
auto-enrolment. On the contrary, in its Second Report the Commission
has in effect hardened its position by rejecting the existence
of any quantifiable "savings gap" that needed filling.
This is one of the more constructive messages in the report and
reflects Tomorrow's Company's own conclusions in this respect.
(iii) Nevertheless, the Commission still
maintains the value for "almost" everyone of saving
more when it is doubtful whether this is of benefit to either
pensioner income or public expenditure:
It is estimated that the NPSS would
contribute the equivalent of only 0.7% of GDP to pensioner income
This is less than the equivalent financial effect for pensioners
of a one-year rise in the effective age of retirement. ie 0.9%
From the perspective of public expenditure,
the Commission's model projects that total state expenditure on
pensioners would be reduced by only 0.1% of GDP due to the successful
implementation of the NPSS, as payments of Pension Credit are
However, the modelling assumptions underpinning this estimate
do not take account of the factors discussed overleaf which would
have the effect of reducing state spending on Pensions Credit
but at the expense of personal disadvantage during peoples' working
2.3 The unintended consequences for low earners
2.3.1 The extent of means testing
(i) The effect of means-testing lower income
people would be that any extra income from the NPSS would erode
their rights to means-tested benefits. The Commission's projection
of Pension Credit savings, already discussed, confirms the existence
of this offset. But to secure this change in the source of retirement
income (less means-tested income, more from the NPSS) they will
be worse off during their working lives because of contributing
4% of their existing low earnings into the scheme.
(ii) While not widely commented on in the
reactions to the Commission's proposals, means-testing is envisaged
to continue to affect about one third of pensioners by mid-century.
(iii) This is despite the fact that in principle
the Commission accepts many, though not all, of the common criticisms
of means-testing. For example:
It agrees that the spread of means-testing
is problematic for an effective and adequate pensions system through
the way it distorts and adds extra confusion to people's own arrangements
and preparations for their later years.
It also recognises that means-testing
"reduces rational incentives to save for many people."
(iv) Although the Commission aspires to
prevent the spread of means testing, this is unlikely to be the
Means-testing will continue to remain
widespread because of the modesty of the Commission's proposals
with respect to the Basic State Pension (BSP) ie a continued reduction
in the level of the BSP relative to average earnings until 2010,
followed thereafter by index-linking this level to earnings; with
the Guarantee Credit level continuing to be earnings linked and
with the maximum amount of Savings Credit payable frozen in real
If all the changes proposed by the
Commission were implemented in 2010, including assuming future
BSP accruals (not payments) are on a universal residency basis:
The percentage of pensioner households
affected by means-testing would peak in the middle of the next
decade at which time it could affect about 42% of pensioner households.
Thereafter the level would reduce gradually
to about 33% in 2050, only a few percentage points below today's
The NPSS itself is assumed to trim the percentage affected by
3% from 36%.
For the people affected the combined
tax and benefit withdrawal rates can range up to 100%, with 50%
withdrawal closer to the average.
(v) The limited impact of the Commission's
proposals on reducing mean-testing is emphasised when the Commission
estimates the effect of implementing its proposals five years
later in 2015. Under that scenario means-testing could still be
expected to remain above current levels over the whole period
from 2015 until at least 2050.
2.3.2 Almost all people
(i) Although it is envisaged that the charges
would be lower under the NPSS than under most existing private
pensions schemes this may be of little help to the many low earning
people who are still going to find their private pension income
effectively taxed at up to 100% as a result of means-testing.
(ii) Building up a bigger pension pot through
lower charges sounds attractive but is irrelevant if you are simply
going to lose out on the Pensions Credit later. The Commission's
Report illustrates the low net rate of return to some pension
saving caused by means-testing.
This illustration assumes 15% contributions from age 25; but lower
total contributions of 8% starting at a later age might turn this
into a much lower or even negative net pension.
(iii) The Commission's Report responds to
this by stating that:
"No simple across the board message can
therefore be given to people in mid-career. Instead, the challenge
is to communicate more clearly, through combined statements of
pensions rights, the value of pensions already accrued, and the
possible pension at retirement which can be obtained on the basis
of full contributions from now on.
For almost all employees, however, it will be
possible to provide assurance that saving via the NPSS on top
of the state PAYG provision would be beneficial: they will keep
the benefit of the savings that they make. This is because:
The spread and severity of means-testing
will tend to fall in future not increase.
The existence of a compulsory matching
employer contribution offsets the effect of the remaining small
element of means-testing, ensuring, along with tax relief, that
almost all people will be able to enjoy the full benefit of their
own individual contributions."
(iv) However, no illustrative scenarios
for such people have been prepared and in response to our request
for clarification on this matter the Commission confirmed that
it has not run any such calculations.
(v) We were referred to illustrations provided
in Chapter 6 of the First Report, which looked at the effective
returns on private pension savings for different stylised individuals.
However, these do not address the points raised:
None of the assumptions used in those
illustrations was close to the NPSS proposal.
They all assumed a single starting
age for pension contributions of 35.
The illustrations provided do however
show how much the impact of means-testing will eat into savings
returns for lower income people.
(vi) Without the relevant scenarios being
run all that people have to rely on to justify staying in the
NPSS is the unsubstantiated assurance from the Commission on page
350 of the Second Report, and with no guidance as to whether or
not an individual is part of the "almost all".
2.3.3 Reduction in spending power
(i) The element of compulsionwhich
will be both practical (through the inertia factor relied upon
by the very concept of auto-enrolment) and reinforced by social
pressuresmeans that many lower income people could well
be worse off during their entire adult lifecycle than they are
They could have similar, or even
the same, combined pension income in retirement as today, only
less of their income will come from public funds, more from the
But the forced savings will have
reduced their disposable income during their working lives, The
Commission reported that almost two-thirds of people who do not
contribute to private pensions today give the reason that they
cannot afford to.
The change to the NPSS as a source of income will be at the expense
of living standards and consumption levels in the period when
they are in work and paying into the NPSS out of wage or salary.
(ii) The assumed NPSS employee participation
rate of 65% for employees between the Primary Threshold (about
£5,000 pa) and the Lower Earnings Threshold (about £12,000
pa) could result in a lot of people losing out both through lowered
spending power during their working lives, as well as the loss
of at least some mean-tested benefits in retirement.
(iii) Steve Bee gives an illustration of
how the NPSS could fail low earners already into their working
"(This is) what the NPSS might mean to
a 57 year-old woman with no other private pension savings and
an incomplete record of National Insurance Contributions. If this
lady were working in a department store and had an annual income
of £12,000 a year for a 35-hour week (not unusual by any
means) then her earnings above the lower threshold that would
count for NPSS contributions would be around the £7,000 mark.
The NPSS would require a 4% contribution from
my hypothetical lady, 3% from her employer and 1% from the taxman;
a total of 8% in all. 8% of £7,000 is £560. £560
a year for 8 years up to age 65 would give a pension fund of £4,480
plus (hopefully) some returns on the investment. But if that's
all the pension saving that she has to her name by the time she
reaches age 65 then it would fall far below the limit that the
tax people count as being `trivial' and she would probably be
advised to surrender it and get a cash lump sum if she could get
anyone to advise her. The £5,000 or so pension pot would
provide a pension at age 65 of about £3.87 a week before
tax: hardly a fortune. And anyway, she will almost certainly lose
it all to the means-test if there isn't a radical overhaul of
the way the state pension system works by then." (Our emphasis)
"That's the problem with pension suitability,
we're not all aged 18 and we haven't all got a whole working lifetime
of saving ahead of us. The NPSS "one size fits all"
approach really only makes sense in academic reports; in real
life things aren't that straightforward and it's not `safe' to
assume that what's good for some of us is therefore good for all
2.4 Other consequences
2.4.1 Employee auto-enrolment and employer
There are other possible perverse effects of
both employee auto-enrolment and employer compulsion, some of
which have also been highlighted by others:
(i) Retirees receiving Housing Benefit could
find themselves even worse off as NPSS income and the Pension
Credit are likely to be treated differently in calculating the
level of entitlement.
(ii) The setting up of the NPSS could accelerate
the winding down of existing, more generous occupational schemes
where employers may be paying about 15% of salary into defined
benefit schemes and 6 to 7% into money purchase schemes. Some
of these may level down to the NPSS default employer contribution
of 3%. Far from boosting private pension provision the unintended
consequence could be to reduce it even faster than under current
(iii) As the NAPF warns, one possible consequence
of the proposal for auto-enrolment in existing occupational pension
schemes (which is another Commission suggestion) is that:
"many employers may cease offering an occupational
scheme and opt for a lower quality NPSS instead. There is a very
real danger that, in proposing new savings options to a wider
constituency, the Commission's proposals would throw the baby
out with the bathwater."
The Pensions Commission notes this possibility,
but while hoping it will not happen, fails to model it:
"there is also a risk that the NPSS adversely
affects existing provision. This is clearly undesirable and we
believe the effect can be minimised so we have not modelled it."
(iv) Compulsory employer contributions could
see future salary increases for these (and other workers) reduced
(v) It might also be the final straw for
some financially stretched businesses leading to redundancies
or even their closure with the loss of all jobs.
2.4.2 Lack of information and financial advice
(i) It is wrong to pressurize people into
saving without their having access to advice.
(ii) Financial advisers giving sound advice
to individuals should recommend that they reduce their expensive
short-term debt before they give thought to beginning a long-term
(iii) Should the resultant pension fail
to meet expectations the Government could be open to the charge
of misselling. A future Ombudsman might find that government information
about the NPSS was "sometimes inaccurate, often incomplete,
largely inconsistent and therefore potentially misleading".
2.4.3 The NPSS does not deal with the problem
of women's pensions
(i) Under the existing BSP arrangements,
many women in the UK do not receive the full entitlement as they
find it difficult to fulfil the contribution requirements:
Women currently need to have worked
and thus made National Insurance contributions (NICS) for 39 qualifying
years. They can help to protect their BSP during periods spent
bringing up children or caring for relatives by claiming Home
Responsibilities Protection (HRP) which acts to credit some missing
years and therefore prevent gaps in NICs for women claiming Child
Benefit or Income Support. However, this has only existed since
1978; so many women currently approaching retirement were unable
to take advantage of it and will find themselves only entitled
to reduced pensions, with those who have contributed for 10 years
or less getting nothing.
Indeed, only 16% of newly retired
women are entitled to a full BSP, compared to 78% of men.
(ii) This means that in addition to the
unfairness of the Pension Credit system, which taxes the pension
savings of some by 40%, many women will also face an even more
unfair penalty when they will have to "repair" their
inadequate BSP entitlement and suffer an effective tax of 100%
on their pension savings.
(iii) So, for people in general who are
in the frame for means-tested support in retirement through the
Pension Credit system things are bad enough, but for women in
that position things are generally much worse. The issue is that
the Pension Credit system assumes everyone applying for it is
already entitled to a full BSP, which many are not. Therefore,
for millions of people in the current UK workforce pensions are
simply not suitable investments when compared to other things
people can do with their money and that is even more true for
women than it is for men.
(iv) Obviously this state of affairs needs
attention. The Government has announced its intention to develop
a new contributory principle that would give women a fairer entitlement
to the BSP more quickly, ensuring that social contributions are
valued equally with cash contributions. This would be of particular
help to the key group of women aged 45 or over who tend to have
poor contribution records and do not now have time to put this
(v) However, the problem of women's pensions
would be most simply solved by the introduction of a Citizen's
2.4.4 The NPSS does not deal with the self-employed
(i) As the Pensions Commission points out,
there are major problems in applying the principles of auto-enrolment
to the self-employed: these derive from the way in which the self-employed
account for and pay taxes (with a greater role for end of year
settlement). The Commission argued, nevertheless, that the self-employed
should be able to gain the benefit of low cost saving via the
NPSS, and should therefore be free to make voluntary contributions
up to the same limits which would apply to employees. The self-employed
would, of course, not be disadvantaged in entitlement to a Citizen's
2.4.5 The NPSS does not deal with those who are
not in work
(i) The proposed NPSS does not offer anything
for the 9.5 million people aged 16 to 64 who for one reason or
another are not in work.
2.4.6 Freedom of spending choice
(i) It is also an intrusion into peoples'
lives to take away or reduce people's freedom to apply their savings
to such purposes as buying a house or putting money by for family
weddings, education expenses etc.
SECTION 3.0 THE
(i) The fundamental starting point for the
perverse effects of the NPSS on the low paid is the Commission's
underestimation of the immediate problem of inadequate retirement
income for the lowest paid 40% of the population.
(ii) The Second Report of the Pensions Commission
declared that there is:
". . .no general and immediate crisis."
This disguises the current inadequacy of retirement
income for many of below average income and wealth. The Commission
supported its "no crisis" claim with the statement that:
"On average, 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."
(iii) This is an example of the familiar
"tyranny of averages". Valid projections in the Second
Report about the future generosity of existing occupational pension
schemes do not provide much comfort for those who do not enjoy
this provision. In particular, the 40% of the pensioner population
with the lowest retirement incomes are more affected in the immediate
future by the relatively low level of state pension payments,
even when supplemented by Pensions Credit. The average gross annual
income of the poorest 20% of retired households, 2003-04 was £7,255.
This was made up of £5,874 in cash benefits and £1,380
other income, chiefly occupational pensions and investment income.
The average household in this group paid £2,414 in taxes,
direct and indirect, leaving a post tax disposable income of £4,840
Today one in five pensioners are still assessed as being in poverty
on the official UK/EU definition of living on below 60% of median
(iv) Our response to the Commission's proposal
with regard to the NPSS therefore rests on rejecting the modesty
of their suggestions with regard to the future of state pension
(v) Establishing a universal Citizen's Pension
at a minimum of today's Pension Guarantee level would:
Allow the more rapid elimination
of means-testing, thereby removing current disincentives for lower
earners to save (especially for those people in and around the
second quintile), as well as the current encouragement for them
to retire early.
Provide for many women in the
UK who do not receive the full entitlement under the existing
BSP as they find it difficult to fulfil the contribution requirements.
Provide for the self-employed.
Provide for the 9.5 million
people of working age who for one reason or another are not in
3.2 The affordability of the Citizen's Pension
(i) This section argues that the Second
Report of the Pensions Commission, due to its use of an inappropriate
measurethe old age support ratiopaints an unnecessarily
pessimistic picture of the affordability of an ageing population.
(ii) In 2005 the National Association of
Pensions Funds (NAPF), drawing on research by the Pensions Policy
Institute (PPI) argued convincingly that a Citizen's Pension,
based on a residency qualification, linked to earnings and set
initially at the level of the basic state pension plus pension
credit, could be afforded more or less immediately within the
then current government spending plans and could be phased in
The PPI findings are summarised in Appendix 4.
(iii) One thing that can reasonably be projected
beyond that date is the increase in the numbers of people who
will be over the age of 64.
(iv) However, forecasting what may or may
not be affordable becomes increasingly uncertain the longer ahead
one is looking. Forecasting what might or might not be affordable
in 30 or 40 years time is pure speculation.
(v) What is clear is that beyond 2010 the
nation's ability to afford a universal Citizen's Pension will
depend primarily on the future level of GDP per capita
This will determine the quantity of goods and services to be shared
between people in work and those who are dependent.
(vi) A secondary issue is the politically
sensitive question of how the available goods and services are
to be shared out and in particular the implications for the level
3.2.2 How we might afford a Citizen's Pension
184.108.40.206 Productivity growth
(i) Future productivity growth will depend
on the level and appropriateness of private and public sector
(ii) There has been much emphasis in the
debate on the need to encourage an increase in the level of personal
pensions savings. Yet the only savings that will make a real difference
to solving the macroeconomic problems of an ageing population
are those that are directed into productive investment and which
will therefore increase the size of the national cake.
(iii) The risk of an investment gap is of
more concern than that of a savings gap. One concern is the possibility
that money that otherwise might be used by companies to invest
in future growth is being diverted into purchasing bonds and gilts
as a means of meeting the requirements of the accounting standard
IAS19. The rule requires that pension fund deficits be measured
by reference to the yield on high quality corporate bonds, but
in many cases is leading also to the purchase of gilts. The resultant
boom in the price of such stock means that yields have sunk and
the IAS19 deficit calculations have risen sharply as a result.
This is creating a vicious circle. The result is a re-allocation
of resources to the potential detriment of long term growth prospects.
(iv) Our future ability to create enough
wealth to "go round" will depend on a number of factors,
among which the following are the most important:
To have a strong corporate sector
of companies of all sizes that are globally competitive.
To continue to be an attractive
choice for foreign direct investment for world-class companies
with world-class research facilities in such fields as bio-technology,
nanotechnology, new sources of energy and other "horizon"
A quality of education at every
level from pre-school to the universities which matches the highest
international standards and greater emphasis on skills training.
Hi-tech business start-ups and
more of these developing into major companies.
A much-improved national transport
infrastructure and the adoption of modern telecommunications technologies.
More and better long-term investment
220.127.116.11 Increasing the level of employment
(i) We believe there are three ways to increase
the percentage of the population working:
Continued incentives to encourage
people to remain in work beyond SPA and measures to encourage
employers to take on or retain older workers.
Increasing the percentage of
the population between 16 and 64 who are in work. (Reducing the
high numbers of people "stuck" on incapacity benefit
is one approach, improving child care facilities is another.)
Having immigration policies
that encourage young, skilled immigrants.
18.104.22.168 Future spending priorities
(i) Given that we can produce enough wealth
to go round and given that a sizeable proportion of the population
will not have been able to save enough to fund their retirement,
the greater part of retirement income will need to be financed
from taxation on a PAYG basis.
(ii) In the field of social protection government
spending is allocated between benefits for children, and benefits
for adults of working age as well as for those drawing the state
pension. There is scope for reviewing the whole area of benefit
provision to ensure that benefits are directed in such a way as
to combine economic objectives with social justice:
Both raising the state pension
age and reducing the numbers of people on incapacity benefit will
reduce social protection spending.
There is scope for reducing
pension tax relief for those on high incomes. High rate tax payers
currently account for 55% of all such relief.
The level of benefit fraudcurrently
some £2.5 billion a yearalso gives scope for saving.
(iii) In the broader context of government
expenditure there is of course considerable scope for savings
which would release funds that could be re-allocated to pensions.
A European Central Bank paper in 2003 argued that if Britain's
public spending were as efficient as that of the US or Japan the
British Government could spend 16% less than it currently does,
while still producing the same level of services. The resultant
savings would be in the region of £80 billion.
(iv) The main thing to emphasise, however,
is that meeting the cost of substantial growth in the numbers
of pensioners can be met out of wealth creation and does not necessarily
involve an increase in the level of taxation.
46 Pensions Policy Institute (PPI). Towards a Citizens'
Pension. Interim report. 6 December 2004. Towards a Citizen's
Pension-Final Report. Published by the National Association of
Pension Funds (NAPF). Analytical work was carried out for the
NAPF by the Pensions Policy Institute (PPI). September 2005. Back
IESR Discussion Paper by Martin Weale, Justin van de Ven and
James Sefton, "the Effects of Means-Testing Pensions on Savings
and Retirement". 15 December 2005. Back
European Commission Economic Policy Committee. Budgetary challenges
posed by ageing populations. P.19. 24 October 2001. www.efrp.org/downloads/eu_publications/Budgetary_challenges.
The Ageing Population, Pensions and Wealth Creation. Tomorrow's
Company October 2005. Back
P 296 [references are to the Second Report unless otherwise stated]). Back
P 298. Back
P 291. Back
Frank Field's Pensions Reform Group is one of the few to have
drawn attention to the perpetuation of means-testing as one of
the underlying structural weaknesses of the NPSS: "They do
not aim to eliminate future pensioners covered by its reforms
from being dependent on means-tested assistance
. The Pension
Commission proposals if totally successful will still leave over
30% of pensioners on means-test-ie to around the level it was
before pension credit was introduced. (Developing alternative
approaches to a National Pensions Saving Scheme: A submission
from the Pensions Reform Group. 31 January 2006). Back
P 64. Back
see figure 2, P.11 and reproduced in Appendix 1. Back
P 291. Back
Because of the complex interactions of means-testing, the impact
of tax credits, of SERPS/S2P and of the Commission's proposals
for the BSP and the NPSS, it is difficult to calculate the precise
withdrawal rates for different groups of people. Back
Figure 6.27, P.273 and reproduced in Appendix 2. Back
Figure 7.10, P.315 and reproduced in Appendix 3. Back
P 350. Back
First Report of the Independent Pensions Commission. Figures
6.22 and 6.23, P 235). Back
Appendices. P 117. Back
Steve Bee. "The problem is we're not all eighteen".
Beeline, 14 February 2006. www.scottishlife.co.uk/scotlife/web/site/BeeHive/BeeLines/BHBLFeb06Page7.asp. Back
Commission proposals threaten retirement plans of million. NAPF
statement. 30 November 2005. www.napf.co.uk/news/PR2005/PensionsCommissionResponse.pdf. Back
Appendix F. P 260. Back
P 371. Back
Trusting in the Pensions Promise Parliamentary and Health
Service Ombudsman. TSO. 2006. Back
P 31. Back
P 31. Back
Table 18a. Average incomes, taxes and benefits by quintile groups
of retired households, 2003-04. Office for National Statistics. Back
Some OECD countries also use absolute poverty measures (eg the
official US poverty line). Others have adopted a relative definition,
such as 60% of average income, the standard used by Eurostat and
some EU member states. Back
NIESR Discussion Paper by Martin Weale, Justin van de Ven and
James Sefton. "The Effects of Means-Testing Pensions on Savings
and Retirement" 15 December 2005. Back
Pensions Policy Institute (PPI). Towards a Citizens' Pension.
Interim report 6 December 2004. Towards a Citizen's Pension-Final
Report Published by the National Association of Pension Funds
(NAPF). Analytical work was carried out for the NAPF by the Pensions
Policy Institute (PPI). September 2005. Back
Professor Andrew Clare. The law of unintended consequences
Professional Pensions 16 March 2006. Back
Public Sector Efficiency: an International; Comparison
Antonio Afonso and Ludger Schuknecht. European Central Bank. July