Sixty-six and rising

It seems that you can't pick up a newspaper these days without reading about the state of pensions in the UK. But what has caused this proliferation of articles on what used to be regarded as a dry subject?

From an employer's point of view, the fact is that providing employees with a good income in retirement is not as straightforward as it once was. For employees, November's publication of the Turner Report offers a valuable signpost as to what they might now expect from their old age.

The demise of final salary

Final salary schemes are at the very least seriously ill - some would even say dead. The reasons for this have been well documented, and employers can do little to counter the problems of running such a scheme nowadays, in view of the magnitude of the problems.

The main alternative is to offer a money purchase scheme. These are not subject to the same demanding conditions required by their final salary brethren, especially as they do not have to offer the same guarantees. This reduces costs from the employer's point of view.

The savings that can be made in this area can be substantial, as the contributions have not traditionally been as generous as final salary schemes. Moreover, the risk passes from the employer to the employee, whose pension will be dependent more on investment performance and annuity rates at the time of retirement, than salary at or near retirement and length of service.

At B&CE, we would never encourage an employer to close a final salary scheme just because they provide enhanced benefits to employees. If employers do take the decision to close such a scheme, they continue to have a responsibility to help workers save for retirement.

The Turner Report

So pensions in the UK are in a state of flux, a fact that was made all the more clear in a comprehensive report by the Pensions Commission, chaired by Adair Turner, a former director general of the CBI.

In its interim report, published in the autumn of 2004, the commission presented four stark choices:

Many construction workers would have to rely on other state benefits until they can draw their pension. This seems to defy the point of relieving the state of current financial pressures

• Pensioners will become poorer relative to the rest of society
• Taxes/National Insurance contributions devoted to pensions must rise
• Savings must rise
• Average retirement ages must rise.

A second report, published last November, has made a number of concrete proposals. The Pensions Commission has recommended that, for the state to be able maintain a decent level of pension, the age at which pensions can be drawn should be increased to 66 by the year 2030, 67 by 2040 and 68 by 2050. Of course, the state pension age for women is already being raised from 60 to 65 by 2020.

There is a particular concern for the construction industry over the proposal for an increase in state pension age. Due to the manual nature of much of the work in this sector and the effect this has on health, retirement age is about 62, so many construction workers would have to rely on other state benefits until they can draw their pension. This seems to defy the point of relieving the state of current financial pressures.

On top of that, how can the government seriously consider this option when it is allowing existing public sector workers to continue retiring at 60?

The Turner Report also recommends that a new national pensions savings scheme is introduced in addition to the state pension. The thinking behind this is that such a scheme would go a long way towards addressing the shortfall of pension provision that many people are facing.

The features of the NPSS are:

• Automatic enrolment, but with the right to opt out
• A compulsory level of matching employee contributions to employers
• A default contribution of 8% of earnings to be paid into the NPSS - 4% from employees' post-tax pay, 1% from tax relief/tax credit and 3% from employer contributions
• An annual charge of up to 0.3%
• Investment in a range of low cost funds bulk bought from the investment industry
• Contributions to be collected through a national system similar to PAYE.

Where an employer's scheme already provides more generous contributions than these default levels, the employer would be able to opt out of the NPSS, and enrol employees into their own scheme.

We have long campaigned for auto-enrolment and are pleased to see that Turner has proposed this feature for the NPSS.

We are disappointed that Turner does not recommend changes to a more level system of tax relief on contributions (our proposal is 30%) to give a greater incentive to low and moderate earners.

We are sceptical, based on the experience of the Child Support Agency and child tax credits, that the government would be able to run a national contributions collection system. We believe that this should be operated through employers working in partnership with private sector providers.

Of course, it remains to be seen if the government will accept some or all of the Turner proposals - we await its reaction in the pensions white paper, due to be published in the spring.