Lord Turner’s Report Shows Way out of UK Pension Mess

When the lead opinion articles in The Times [not the New York one], the Guardian and the Daily Telegraph agree, something unusual has happened in Britain. This week, that happens to be the report by Lord Turner on the UK pension system. Acting like a philosopher king (or at least like the vice-chairman at Merrill Lynch Europe that he is), he has come up with a solution that spreads what little pain is actually necessary. Pity the Chancellor doesn't seem to like it.

Like most European countries, the UK faces a demographic time bomb: not enough young people working to support old-age pensioners [OAP] the way the current system funds things. However, there are a few “facts” in the current debate that Lord Turner has debunked. For instance, even the bottom quarter of the OAP population is 20% better off than they were in 1979. No one wants to cut anyone’s pension, but cuts or increases require a baseline, and if 2005 is the baseline, the argument is much different than if the discussion takes a longer view.

The basic changes to the system include an increase in the retirement age. Currently, women in the UK can draw a pension at age 60, men at 65. Starting in 2010, everybody’s retirement age will be 65 (except says the UK Pension service “This will not affect women born on or before 5 April 1950”); then 66 in 2030, 67 in 2040, and 68 by 2050. So, the first factor is that Lord Turner’s proposal set an evolutionary pace for the changes. Those required to work until 68 are currently 23 years old – plenty of time to come up with a savings plan to supplement an earlier retirement, or indeed, to find a first real job.

Savings is the next key to Lord Turner’s proposals. A National Pension Savings Scheme (NPSS) is envisioned by 2010. Employees can contribute up to 4% of their salaries, employers 3% and government 1% for a total of 8% savings. Employers offering a more generous system can opt out, and money in the scheme can be inherited. The state pension will only exist to prevent poverty; OAPs who want to vacation in Brazil or Hawaii can manage their own money to do it.

This isn’t a perfect plan. Not much is done about people who, for medical reasons, have a shortened life-expectancy. Nor does it address the tax breaks in the current system that give 55% of the relief to the top 10% earners. And for people in regions where unemployment means a man at 55 isn’t likely to work ever again (there are such places still in the UK), it can be a long wait for funds to trickle in. However, for an addition 1.5% of GDP (which is the Turner cost for the schemes over the next 40 years), the UK pension system becomes affordable again. That much more spending on the elder isn’t a bad deal considering at age cohort is going to grow by much more than 1.5% in the next few years. Now, it is largely up to the Chancellor; will he be a statesman or a politician?


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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