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This report by the Pensions Commission discusses the declining role of the state in pension provision and proposes that private pension provision should fill the gap. It explores the savings gap, projected state spending per pensioner, and the barriers to a purely free market solution. The report also analyzes the impact of current indexation approaches and suggests several reforms to the state pension system. Additionally, it discusses the National Pension Savings Scheme and the role of the state in ensuring retirement security and encouraging low-cost saving.
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A New Pension Settlement for the Twenty-First Century:Second Report of the Pensions CommissionCass Business SchoolAdair Turner7 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: 2003-04, 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 2005-2050 Figure 1.16 p57
Percentage of 50-65 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: 1980-2004 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 CreditIf current indexation approaches continue indefinitely: 2005-2050 Figure 1.22 p64
IFA assessments of attractiveness of different earnings segments: survey resultsThe 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
Impact of the 1940s-1960s baby boom: ratio of 65+ year olds to 20-64 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 9 Figure 3.1 p 131
More generous state pension in the long-term at a later age: • Unified Citizen’s Pension? • Evolution of present system: BSP and S2P?
Preferred way forward • 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. • 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 2050. • 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). • Base future accruals to the BSP on an individual and universal (i.e. residency) basis, and improve carer credits within S2P. • 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). • Ideally introduce a universal BSP for pensioners aged over 75. Figure Ex.8 p 21
Percentage of pensioner benefit units on Pension CreditWith 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: 1899-2004 Figure 5.24 p197
Variability of real returns on equities over historical periods: 1899-2004 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 CommissionCass Business SchoolAdair Turner7 December 2005