A New Pension Settlement for the Twenty-First Century : Second Report of the Pensions Commission Cass Business School Adair Turner 7 December 2005

State has been planning a reduced role in pension provision for average earner Proposition: private pension provision should grow to fill gap Reality: private pension provision in underlying decline

Projected state spending per pensioner indexed in constant 2003/04 price terms: 2004 projections Figure 1.5 p47

Participation in private pension schemes: , millions Figure 1.8 p50

Is there a “crisis”? Is there a “savings gap”? If the problem is in the future, can we wait until then to deal with it?

State pension at point of retirement assuming full contribution record for a person who has been on average full-time earnings throughout their working life: percentage of average earnings Figure 1.3 p45

Private pension income as a percentage of GDP by source Figure 1.16 p57

Percentage of year olds in danger of having replacement rates below benchmarks of adequacy Figure 1.30 p79

Gross saving by sector as a percentage of gross national disposable income: Figure 1.33 p83

Residential housing wealth as a percentage of GDP Figure 1.31 p81

Wealth holdings in a closed economy in equilibrium Figure 1.36 p85

Household non-pension financial assets and non-mortgage debt as a percentage of GDP Figure 1.35 p85

Barriers to a purely free market solution Behavioural barriers to rationality e.g. inertia High selling costs Declining employer interest Complexity Expectations of spread of means-testing 3

Sources of costs for the median earner aged 40 in the present Stakeholder Pension system Figure 1.52 p111

Typical Annual Management Charge in alternative forms of pension provision Figure 1.27 p71

Percentage of pensioner benefit units on Pension Credit If current indexation approaches continue indefinitely: Figure 1.22 p64

IFA assessments of attractiveness of different earnings segments: survey results The design of the state system means that the returns to saving for people in this group are good. Figure 1.23 p65

Two major elements of policy National Pension Savings Scheme (NPSS) More generous less means-tested state pension provision but at an age gradually rising with increased life expectancy

Female cohort life expectancy at 65

Impact of the 1940s-1960s baby boom: ratio of 65+ year olds to year olds Figure 1.45 p 99

State pension provision: the unavoidable trade-off Figure Ex.6 p 17

Public expenditure and pension age increases: Pensions Commission proposed range for debate Figure 3.1 p 131 9

Percentage of adult male life spent after State Pension Age

More generous state pension in the long-term at a later age: Unified Citizen’s Pension? Evolution of present system: BSP and S2P?

Figure Ex.8 p 21 Preferred way forward 1.Build on current two-tier system and recent reforms, accelerating the evolution of S2P to a flat-rate pension by freezing the Upper Earnings Limit for S2P accruals in nominal terms. 2.Index the BSP to average earnings growth over the long-term ideally starting in 2010 or 2011 as the public expenditure benefit of the rise in women’s SPA begins to flow through ……making this indexation affordable long-term by raising the SPA gradually, broadly in proportion to the increase in life expectancy, for instance to 66 by 2030, 67 by 2040 and 68 by Maintain the reductions in pensioner poverty achieved by Pension Credit, but limit the spread of means-testing by freezing the maximum level of Savings Credit payments in real terms (which implies that the lower Savings Credit threshold increases faster than in line with average earnings). 4.Base future accruals to the BSP on an individual and universal (i.e. residency) basis, and improve carer credits within S2P. 5.Accept the consequence that the public expenditure on state pensions and pensioner benefits must rise from 6.2% of GDP today to between 7.5% and 8% by 2045 (depending where SPA reaches in 2050). 6.Ideally introduce a universal BSP for pensioners aged over 75.

Percentage of pensioner benefit units on Pension Credit With proposed state system reforms and introduction of the NPSS Figure 6.42 p294

Key features of NPSS Automatic enrolment, but with right to opt-out Minimum default employee contributions of 5%, of which 1% paid by tax relief Modest compulsory matching employer contribution (3%) if employee stays enrolled ………impact on total labour cost 0.6% Payroll deduction, national account maintenance, bulk-buying: 0.3% annual cost target Individual accounts invested at individual’s instructions: default fund

The role of the state Ensures that all people are out of poverty in retirement, and creates a sound base on which private savings can build Encourages and enables low cost saving, but leaves ultimate decisions to individual choice

Pension income as a percentage of earnings for the median earner: retiring in 2053 Figure Ex.7 p19

Typical Annual Management Charge in alternative forms of pension provision Figure 1.27 p71

Variability of real returns on equities over historical periods: Figure 5.24 p197

Variability of real returns on equities over historical periods: Figure 5.24 p197

Longevity risk in UK pension provision, £billion of total liabilities- broad estimates: end 2003 Figure 5.17 p181

Inflows and outflows from NPSS Figure 6.36 p288

Aggregate NPSS funds at different rates of return Figure 6.37 p288

Stock of annuities arising from the NPSS Figure 6.38 p289

Long-run effect of NPSS on private pension savings as a percentage of GDP Figure 6.39 p289

A New Pension Settlement for the Twenty-First Century : Second Report of the Pensions Commission Cass Business School Adair Turner 7 December 2005