The Interview: Pensions guru who believes people must be forced to save

Adair Turner Chairman, Pensions Commission
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The Independent Online

Adair Turner, the chairman of the Pensions Commission, is uncharacteristically flustered when I meet him for breakfast at the City offices of Merrill Lynch, the US investment bank which still acts as his day job. With all this pensions stuff going on, how on earth does this former director general of the CBI find time for anything else? They've been very understanding and accommodative, he concedes. "Maybe eventually I'll get my other life back." Not much chance of that right now.

There's just been another flurry of press speculation about what pension reforms he might recommend when he comes to report to the Government this autumn, and not for the first time, everyone seems to have got the wrong end of the stick. Headlines have been penned, table-thumping leaders have been written, positions taken, and all for a notion which not in a month of Sundays would he ever recommend.

This is the contention that graduates should automatically have a higher retirement age for state pension entitlement than those from lower socio-economic groups. The idea is not an entirely stupid one, which is how the canard first came to fly, for to some extent the present pension system already recognises it.

Mr Turner, who oozes pensions facts and figures, explains. As a low earner, you can already get £109 a week from the Government immediately on retirement at 65, since this is the Government's means-tested "minimum income guarantee".

A higher earner, on the other hand, would get just £82 and possibly less if they haven't worked the 44 years required for full entitlement to the state pension. Years spent at college means years unworked. However, under the pensions deferment option, you can get as much as £109 a week however well off if you agree to take your pension at the later age of 68. So to some extent the system already discriminates between graduates and non-graduates.

The confusion over Mr Turner's position arose because of reservations he has expressed about the pensions reform proposed by the National Association of Pension Funds, a version of which is also Liberal Democrat policy on pensions.

This is the so-called "citizen's pension", which envisages a flat-rate state pension paid to all on a non-contributory basis at a somewhat higher level than the present basic pension.

Flat-Rate Pensions

On the face of it, the idea has plenty to commend it. It's simple, it's understandable, people know what they are going to get, it gets rid of means testing, and it creates a more coherent basis for personal saving on top of what the state provides.

Yet Mr Turner points to a number of flaws. The most important of these is how to pay for it. If as suggested it is initially paid for by getting rid of the National Insurance rebate, this would immediately take some £9bn a year out of household saving, or about 20 per cent of the total as things stand. Is that scale of switch from private to state provision really desirable?

As the population ages, the costs become more punishing still. Proponents suggest these can be paid for by raising the age of entitlement to 70.

Yet that's going to be unfair on lower socio-economic groups, whose life expectancy is generally lower, and because they have never been to college are likely to have worked for more years than educated, higher-earning counterparts.

"All I am trying to do," Mr Turner says, "is point out that the present system does differentiate between socio-economic groups, some might say fairly, through means testing and the contributory principle, whereas a universal, flat-rate system would not."

So if not that, then what? This is of course the $64,000 question, and if Mr Turner knows the answer, he's not yet giving much away. Eventually, he must decide, but for the time being, the task is to articulate and mould the debate. Mr Turner is McKinsey man epitomised. Clever, polished, likeable and, despite the determination of the headline writers to misquote him, media friendly. There could scarcely be a more obviously qualified person to navigate his way through the pitfalls of the pensions debate.

He was almost impossibly young ­ just 39 ­ when he became director general of the CBI, and though chairman of the Conservative Association while up at Cambridge, he fast adapted to the third way, New Labour, politics of the centre that now reigns supreme ­ almost too much so for some old-guard members of the CBI, where he first gained the soubriquet "Red" Adair.

In truth, there is nothing overtly socialist about Mr Turner, other than a keen sense of basic, social decency, which runs through all he says and writes. Nor can there be given the political consensus he must mould to achieve a lasting solution to Britain's pensions crisis.

This is policy not just for the next few years; it has to address the world as it will be 30 or 40 years from now, with its army of long-living pensioners, all still demanding their aspirational lifestyles. As Mr Turner keeps pointing out, the present system is unsustainable. Indeed, it may be incapable even of basic poverty prevention. "We are going to have to change it in ways which are significant," he says.

The Pensions Commission is entirely independent of the Government, yet as Mr Turner acknowledges, there is no point in proposing something that doesn't command government support. Already, the practicality and desirability of the various policy options is being tested in government departments, as well as with the main opposition parties.

"What we want to end up with ­ and the necessary finessing and consensus may take some years to build ­ is a clear, understandable pensions system, which is state and private combined, based on intellectually clear analysis which can command a consensus."

Big Issues

Mr Turner insists that he is still genuinely undecided as to the big issues in the pensions debate ­ compulsory saving versus voluntary, pay-as-you-go against funded, as well as the balance between state and private provision. He likens his task to a game of Sudoku, in which the moment you think you've figured it out, the proposed solution creates all sorts of problems in other parts of the grid.

Yet one thing comes across loud and clear. Mr Turner sees little point in a pensions reform that doesn't include at least some element of earnings-related provision. Furthermore, he seems to be leaning ever closer to some sort of "auto-enrolment" system which would compel employees to save through a state-sponsored scheme unless they deliberately decide to opt out of it. This in any case is one of the ideas he wants to get out there for public debate and discussion.

Mr Turner says: "We are wary of a flat-rate solution which simply says the Government pays, prevention of poverty, end of story.

"If we go down that route, we will be unique across the world. Not even the Bush administration or its neo-con, extreme liberal right supporters have put on the table the idea that you should move away from any form of earnings-related provision. What the US in fact proposes is to move from a pay-as-you-go system to a funded one, but the framework is still effectively a compulsory, earnings-related one.

"So it does make you wonder why nearly all the governments in the world have ended up believing there is a role by some route or other for earnings-related provision. It's almost a type of paternalism ­ that people left to themselves won't be sensible enough to have saved. I think that's true."

One possible model which is plainly exercising Mr Turner right now is that of New Zealand, which up until last week was the only developed country in the world to have opted for the universal, flat-rate approach with nothing on top, even in the form of tax reliefs to encourage saving. Now the Kiwis are having second thoughts.

Just last week the New Zealand government announced a national auto-saving fund called the Kiwi saver, whereby everyone will be automatically enrolled in the national pension savings system, paying in 5 per cent of earnings, but with an opt out if that's what they want.

The other big argument cited by Mr Turner in favour of so called "national auto-enrolment" is that government-sponsored schemes, because of their size, are capable of achieving extraordinarily low administrative and fund management costs, neatly defusing one of the key arguments against saving by the low paid ­ that the amounts involved are so small that they get eaten up by fees.

So is this to be the Pensions Commission's conclusion? We'll just have to wait and see. In the meantime, Mr Turner admits to being somewhat pensioned-out. There is only so much you can know about any policy issue, and Mr Turner seems to know it all. What next? Perhaps he should turn his attentions to climate change, I suggest.

Well as it happens, he's already a member of the International Climate Change Taskforce, and eternal optimist that he is, Mr Turner believes it perfectly possible to achieve substantial reductions in emissions without having to abandon our cars or poleaxe our consumerist lifestyles. But let's just settle the pensions issue first, shall we.