some default text...
Select Committee on Work and Pensions Written Evidence


Memorandum submitted by Tomorrow's Company

PART A

BACKGROUND AND SUMMARY OF SUBMISSION

A.1.  BACKGROUND

About Tomorrow's Company

  Tomorrow's Company is a business-led think tank, working as a catalyst to help realise the Tomorrow's Company vision—a future for business which makes equal sense to staff, shareholders and society.

  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 Coates—Partner, Wragge a Co LLP

    Polly Dryden—Trustee of Tomorrow's Company

    Jeremy Goford—Former Principal with Tillinghast-Towers Perrin and President of the Institute of Actuaries from July 2002 until July 2004

    Chris Hirst—Former Executive Director Investment Management, CIS

    Phil Mullan—an economist and business adviser, and non-executive director of Easynet Group. supported by:

    Patricia Cleverly—Head of Research, Tomorrow's Company

    Mark Goyder—Director 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.

A.2.  SUMMARY AND CONCLUSIONS

  This submission argues that:

    (i)  The Second Report of the Pensions Commission, due to its use of an inappropriate measure—the old age support ratio—paints 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 time—technological, 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.[46] This 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.[47]

—  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 the BSP.

—  Future government spending priorities.

A.3.  SUMMARY OF THE SUBMISSION'S RELEVANCE TO THE INQUIRY INTO THE PROPOSALS CONTAINED IN THE PENSIONS COMMISSION'S SECOND REPORT

  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 work.

    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 system.

    5.  Whether, when and by how much the State Pension Age should be increased.

    6.  Measures to facilitate later working and flexible retirement.

    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:

SECTION 1.0

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 inquiry.

SECTION 2.0

 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.

SECTION 3.0

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.

PART B

DETAILED SUBMISSION

SECTION 1.0

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 support them.

    (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 age—some 9.5 million in the case of Great Britain—do 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 in 2001:

    "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".[48]

    (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 is today.

    (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 THE PROPOSED NPSS WILL NOT WORK

2.1  Introduction

  (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 System (NPSS).

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 workers—automatic enrolment at a minimum of 4% of salary with an opt out provision

    —  with full compulsion for employers—who would have to contribute a minimum of 3% of salary for worker participants.

  (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.[49]

  (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 by 2050.[50] This is less than the equivalent financial effect for pensioners of a one-year rise in the effective age of retirement. ie 0.9% of GDP.[51]

    —  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 reduced.[52] 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 lives.

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.[53]

  (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."[54]

  (iv)  Although the Commission aspires to prevent the spread of means testing, this is unlikely to be the case:

    —  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 terms

    —  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 level.[55] The NPSS itself is assumed to trim the percentage affected by 3% from 36%.[56]

    —  For the people affected the combined tax and benefit withdrawal rates can range up to 100%, with 50% withdrawal closer to the average.[57]

  (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.[58]

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.[59] 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."[60]

  (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.[61]

  (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 compulsion—which will be both practical (through the inertia factor relied upon by the very concept of auto-enrolment) and reinforced by social pressures—means that many lower income people could well be worse off during their entire adult lifecycle than they are at present.

    —  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 NPSS.

    —  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.[62] 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 lives:

  "(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)

  Bee concludes:

  "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 of us."[63]

2.4  Other consequences

2.4.1  Employee auto-enrolment and employer compulsion

  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 trends.

  (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."[64]

  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."[65]

  (iv)  Compulsory employer contributions could see future salary increases for these (and other workers) reduced in compensation.[66]

  (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 savings plan.

  (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".[67]

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 right.

  (v)  However, the problem of women's pensions would be most simply solved by the introduction of a Citizen's Pension.

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 Pension.

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 CASE FOR A CITIZEN'S PENSION

3.1  Introduction

  (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."[68]

  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."[69]

  (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 per household.[70] 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 earnings.[71]

  (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 provision.

  (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.[72]

    —    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 work.

3.2  The affordability of the Citizen's Pension

3.2.1  Introduction

  (i)  This section argues that the Second Report of the Pensions Commission, due to its use of an inappropriate measure—the old age support ratio—paints 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 by 2010.[73] 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 of taxation.

3.2.2  How we might afford a Citizen's Pension

3.2.2.1  Productivity growth

  (i)  Future productivity growth will depend on the level and appropriateness of private and public sector investment.

  (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.[74]

  (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" industries.

    —    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 projects.

3.2.2.2  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.

3.2.2.3  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 fraud—currently some £2.5 billion a year—also 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.[75]

  (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

47   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

48   European Commission Economic Policy Committee. Budgetary challenges posed by ageing populations. P.19. 24 October 2001. www.efrp.org/downloads/eu_publications/Budgetary_challenges. pdf. Back

49   The Ageing Population, Pensions and Wealth Creation. Tomorrow's Company October 2005. Back

50   P 296 [references are to the Second Report unless otherwise stated]). Back

51   P 298. Back

52   P 291. Back

53   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

54   P 64. Back

55   see figure 2, P.11 and reproduced in Appendix 1. Back

56   P 291. Back

57   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

58   Figure 6.27, P.273 and reproduced in Appendix 2. Back

59   Figure 7.10, P.315 and reproduced in Appendix 3. Back

60   P 350. Back

61   First Report of the Independent Pensions Commission. Figures 6.22 and 6.23, P 235). Back

62   Appendices. P 117. Back

63   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

64   Commission proposals threaten retirement plans of million. NAPF statement. 30 November 2005. www.napf.co.uk/news/PR2005/PensionsCommissionResponse.pdf. Back

65   Appendix F. P 260. Back

66   P 371. Back

67   Trusting in the Pensions Promise Parliamentary and Health Service Ombudsman. TSO. 2006. Back

68   P 31. Back

69   P 31. Back

70   Table 18a. Average incomes, taxes and benefits by quintile groups of retired households, 2003-04. Office for National Statistics. Back

71   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

72   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

73   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

74   Professor Andrew Clare. The law of unintended consequences Professional Pensions 16 March 2006. Back

75   Public Sector Efficiency: an International; Comparison Antonio Afonso and Ludger Schuknecht. European Central Bank. July 2003. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 22 July 2006