After months of speculation the Turner report is out, and for us, there is one paragraph that stands out, and any debate on the looming pension crisis must always start with this point. Lord Turner said there’s a trade off between the level of pensions we can expect to receive and the age at which we retire, and “Unless people are willing to discuss this, they are not serious participants in this debate. They are indulging in fairy-tale economics in which a fairy godmother makes all difficult choices disappear.”
Yet, bizarrely, the central plank of the Turner report seems to make an assumption which is equally based on fairy tale economics.
And if there is one thing the British public should have learnt about our Gordon by now, it’s that the chancellor will always tweak and add complexity. On this occasion, we suspect, once the recommendations of the Turner report and Gordon’s own ideas are mixed together, the resulting concoction will entail at least one new level of growth zapping bureaucracy.
Several key recommendations underline the Turner report. Firstly, Lord Turner wants us to scrap means testing and raise the state benefit up to the level which is currently only available to individuals who receive the basic rate plus the full tax credit. To fund this he suggests we must all work longer. By 2050, it would appear we would be retiring at 67, maybe older. For most of our readers of course, 2050 is way after their date for retiring, but not all. And Gordon’s twist? There’s no chance he will agree to remove the tax credit, means testing will stay in force. The debacle of working and family tax credit provides overwhelming evidence that from an administrative point of view this will create state funded chaos.
Secondly, Lord Turner has recommended a kind of Kiwi/Swedish approach, already nicknamed Britsaver. From 2010, all employees will automatically find themselves paying into the state pension. The payment won’t be compulsory, it will be possible to opt out, but the onus will be on workers having to proactively opt out - if they do nothing, and let’s face most of us our inclined to sit on our hands, we will join the scheme. This very much reflects the New Zealand approach to pensions.
But to administer all this, Lord Turner has recommended the creation of what will be a hugely powerful and all important body: the National Pension Savings Scheme (NPSS.) This recommendation mirrors the Swedish approach. The administration of the state pension will be handed over to NPSS who will cherry pick fund managers, no doubt from a beauty parade of just about the entire industry. Clearly there will be winners and losers, and one of the main criticisms of the Turner report is that the state is not the best qualified to choose the right service providers. In any case, argue others, what makes Lord Turner believe the state can administer pension better than the private sector? Trevor Matthews, Head of Life and Pensions at Standard Life, put it neatly, “There is no point in re-inventing the wheel. If we are going to introduce a new savings scheme, the UK savings industry is best placed to provide it. It already carries out these tasks on behalf of savers in the UK, and therefore has the infrastructure and capability to administer the NPSS more efficiently than the state.”
But then the controversy really sets in. The Turner report wants to limit the charges for managing a fund to 0.3%, from the typical 1.5% seen today. That sounds like a perfectly reasonable plan, except many argue it’s just not realistic. Once again Mr Matthews summed it all up, “The suggested charge of 0.3% a year would be seriously challenging. Sweden has had a state-run scheme in place for many years but charges are subsidised through the back door. Even on the cheapest Swedish fund, true charges are more than twice what Turner has suggested is possible for a UK scheme.”
Others argued that ultimately IFA’s would make up for the shortfall, by charging for advice. And here the danger really does set in: the obvious response to that would be to nationalise advice too.
Of course there are job implications too. Deloitte warned yesterday that there could be 50,000 jobs losses in the life and pensions industry. Although in practice we suspect, if these jobs are lost, they will be replaced by an equal number, and in time, no doubt, an even greater number, of civil servants.
Finally, Lord Tuner wants to see a big ramp up in the pension contribution as a percentage of income. Workers will contribute 4% of salary, employers will chip in with an extra 3%, and the state via tax relief will bring the total amount to 8%.
Here too, the critics leapt in. The FT said this could lead to job losses. Douglas McWilliams, Chief Executive of the Centre for Economics and Business Research said, “Turner’s proposed effective seven per cent hike in national insurance contributions could knock nearly £2 billion off GDP from the impact of reduced competitiveness over five years after it comes in.” CEBR might be right. On the other hand, the money being taken out will be spent, and therefore find its way back into the economy, so maybe the hit might not be as bad as the economic think tank says.
We understand the reservations about taking pension administration from the private sector to the state. We don’t like the idea of means testing, it just seems to add another layer of red tape, and our low productivity, which as things stand is something of a UK disease anyway, will suffer. A state system might work in Sweden, but then the Swedish mentality seems better suited to state over private sector.
But upping contributions, making employers pay more, that is unavoidable; sure there are costs, but then to think there won’t be is like waiting for the economic
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