Turner report: an old story

The central message coming out of the Turner report on pensions, prepared by the Pensions Commission and published in the UK on 12 October 2004, is stark.

With current state pension policy, the report argues, unless we are prepared to be poorer than today’s generation of retired people, or accept being forced to work until we are almost 70, then we had better start saving much harder. The report claims that about five million people over the age of 35 are not saving anything in a private pension and almost as many are not saving enough.

Although this is only part one of the Pensions Commission findings, with its policy recommendations to follow in a year’s time, the report clearly favours a bigger role for government in pushing us to take individual action to save more.

It concludes that the way forward for government involves some mix of revitalising the voluntary pensions system, changing the state system, and/or increasing compulsion. Regardless of such specific suggestions, the report has largely been welcomed as a scary ‘wake-up call’ that we need to save more and work longer. It adds to the growing consensus that something must be done about ageing.

But scaring people is not conducive to rational debate about pensions or savings – or anything else to do with ageing. Although the Pensions Commission can justify its savings focus as merely following its official remit from government back in 2002 – to review and make recommendations about the regime for private pensions and long-term savings – this is no excuse for adding to today’s doom and gloom. A sense of intensifying demographic crisis, and the message that we are remiss in not doing enough saving, doesn’t produce positive social change or even good policy.

We can all agree that ‘something must be done’ about pensions because they are failing us. The basic state pension is going to become even more derisory than it is at present, while the occupational pensions, which many of the current retired rely on, will also be less generous than today. But to situate the problem, as the Turner report does, as primarily demographic risks making things a lot worse.

Historically it has been the dismal fatalism of a narrowly demographic determinist perspective, and not the underlying demographic trends, which has helped bring about today’s pensions predicament. The real problems with public and private pensions have been due, not to people living longer, but to decisions that we, society and especially its political leaders, have taken. And many of these have been predicated by the unfounded belief that population ageing demands that we should control expenditures at the expense of what pensioners can receive in the future (2).

For example, in 1980 Thatcher’s Conservative government de-indexed public pensions from average earnings, resulting in the amount received on full pensions falling steadily as a percentage of average earnings from 23 per cent to about 15 per cent today. Before this, during the 1970s, government documents had drawn attention to the financial burden of ageing populations, paving the way for such a cut (see, for example, A Happier Old Age, DHSS, 1978). These warnings became increasingly shrill during the 1980s, preparing the scene for whittling down the state’s additional earnings-related pension.

It is the exacerbation of such demographic fears today that has stiffened the present government’s resistance to reversing pension de-indexing , despite the broad consensus behind such a move from financial, research, workers’ and employers’ organisations.

On the continuation of present policy, the pension’s percentage of average earnings would probably fall to single figures during the next 30 years. This is what allows chancellor Gordon Brown to boast that unlike most other developed countries, Britain’s public pensions will stay at about the same level as today between now and 2050 despite the 50 per cent increase in the number of people over state pension age by then. (While the cost of the basic state pension is expected to fall from 3.8 per cent of GDP today to less than 3 per cent, the total state expenditure cost is forecast to stick at about 6 per cent, when you include the state second pension, means-tested pension credits, NI rebates for those contracting out of the second pension, and other state benefits to pensioners for disability, housing and Council Tax.)

Yet the extra cost if pre-1980s state pension levels relative to national earnings were to be restored would be between 1 and 2 per cent of GDP, which would still leave Britain’s spending far below today’s average of public spending on pensioners across the old members of the European Union of more than 10 per cent of GDP. It is actions taken on the basis of exaggerated demographic concerns, rather than ‘unaffordable’ spending rises, which are at the core of today’s pension problems.

Similarly on the private pensions front, it is anxieties about greater longevity that have played a big role in justifying the recent winding down of employer-backed occupational pensions. The Commission estimates that 60 to 70 per cent of defined benefit schemes, weighted by the number of employees, have closed to new members over the past few years, while perhaps 10 per cent have already closed to further contributions from existing members. Although many observers are critical of the way both governments and employers have taken financial advantage of these schemes – and especially of the paper surpluses that built up in them as a result of over-valued stock markets during the1990s – the fact that people are living longer is always the final clincher that speedy and austere action is needed to reduce potential liabilities. Without the scare mongering, less precipitate and damaging changes might have been pursued.

It is long overdue to turn the ageing paradigm on its head. But instalment one of the Turner report does not help. We need more level-headed discussions about the welcome opportunities and gratifying choices brought about by living longer, healthier lives in more prosperous times. We should trust people to manage their own finances and not impose a pensions savings imperative that can be inappropriate, even harmful, to many people.

Throughout the modern era, at least until the past two decades, society has had a pretty good record of adjusting to changing circumstances, not least to the steady ageing of the population over the past century. If we can transcend today’s conventional demographic pessimism we could continue to adjust fittingly to future ageing too, and without inviting the government to meddle even more in our personal lives.

Such an enlightened perspective could allow us to leave behind distorted moralising about the need to save more in pensions, provide a higher decent state pension, and even refashion the rigid twentieth century-approach to work, leisure and retirement.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA))

(1) Pensions: Challenges and Choices: The First Report of the Pensions Commission

(2) Ageing: the future is affordable, by Phil Mullan