What's going to happen to your pension?

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The Independent Online

What is the Turner report?

The result of three years' work by the Pensions Commission, appointed by the Government in December 2002 to investigate whether Britons are saving enough for old age. The commission is chaired by Lord Turner of Ecchinswell, former director general of the Confederation of British Industry.

Why is it necessary?

The UK faces a pensions crisis. People now live much longer than in the past - as a result, there is a higher ratio of pensioners to working taxpayers. In 1950, there were four people of working age for every pensioner. Today, the figure is 2.7 and the number is expected to fall to 1.1 by 2050.

What does that mean for my pension?

Lord Turner's interim report warned that people have four options: to work longer, save more, pay more tax or accept a lower standard of living. If we ignore the first three, the value of state pensions will continue to shrink, as successive governments attempt to control public spending.

Won't private pensions make up the difference?

Unfortunately not. For one thing, too few people are saving in a private pension. The Association of British Insurers estimates Britons are saving £27bn a year too little for old age. However, even those who are saving are having a tough time.

Occupational pension schemes run by employers face the same challenge as the Government, with fewer workers to pay an increasing number of pensioners. In addition, stock market returns in recent years have been poor, substantially increasing the cost of maintaining pension promises made to staff.

People with individual private pensions have also been hit by stock market setbacks. And another effect of increasing life expectancy is that the same pot of savings now buys less pension income, because insurers expect to have to keep paying this income for longer than in the past.

What will the Turner report say?

Lord Turner's key recommendations have already been leaked. He is expected to call for the state pension age to be raised to 67 for both men and women. The savings generated would be used to pay for a restoration of the link between increases in the basic state pension and average earnings, which tend to rise faster than prices.

There has also been speculation that Lord Turner could even recommend the abolition of the pension credit, the means-tested benefit paid to low-income pensioners.

Finally, he is expected to call for a new type of pension scheme, modelled on the "Kiwisaver" fund introduced by the New Zealand government. Every worker starting at a new employer would be automatically enrolled in the scheme, though they would have the right to opt out. Employers would be required to contribute 3 per cent of salary for each member.

Why is it so controversial?

The Chancellor, Gordon Brown, is reportedly furious about the report's conclusions. He is particularly concerned about the cost of restoring the link between state pensions and earnings. Mr Brown also points out that Lord Turner was only asked to look at private pension savings, not to recommend changes to the state pension system.

What about the new pension scheme?

Lord Turner's "Britsaver" scheme is less politically sensitive, though businesses are concerned about being compelled to contribute on employees' behalf. Large insurance companies that sell private pension plans may also be critical of the scheme, which could make their funds less attractive.

What's all the fuss about public-sector pensions?

Last month, the Trade Secretary, Alan Johnson, agreed existing public-sector workers could retire at 60, though new employees will have to wait until 65. Business leaders say this will make it much harder for them to persuade their workforces to work until 67.

However, Lord Turner is only expected to call for a rise in the age at which people can start claiming the basic state pension. Employers, whether public or private sector, would not be required to introduce the same retirement age in their pension schemes.

What will happen next?

John Hutton, the Work and Pensions Secretary, has promised to deliver a government response to the Turner report next year. Mr Hutton, who has already said he will consult ministerial colleagues including Mr Brown, could choose to ignore the report or to cherry-pick certain recommendations.

Similarly controversial reports in the past, such as the 2002 Pickering report into pensions reform and the 1999 Royal Commission on long-term care, have simply been shelved.

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