Jeremy Warner's Outlook: Now for hard bit in Turner's pensions review

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The Independent Online

So now it's official: Britain has one of the worst and most complex pension systems in the developed world which left unaddressed would leave millions facing poverty in their old age. The state pension system is one of the least generous while private provision is in a state of precipitous decline.

So now it's official: Britain has one of the worst and most complex pension systems in the developed world which left unaddressed would leave millions facing poverty in their old age. The state pension system is one of the least generous while private provision is in a state of precipitous decline.

At least 9 million people are failing to make adequate provision for their old age, and although Adair Turner doesn't like to call £57bn the "savings gap", there it is in black and white on page 14 of his report; if pensioners want to be on average as well off by the middle of this century as they are today, while keeping the retirement age unchanged at 65, either the state will have to raise its spending on pensioners from 6.1 per cent of GDP to 11.3 per cent, with taxes rising by £57bn in current day terms, or privately funded pensions will have to rise from the 2.2 per cent of GDP they are today to 7.4 per cent.

So who's to blame for this calamitous state of ill preparedness? Er, well, according to Mr Turner, a former director general of the Confederation of British Industry, no one in particular. The problems we face today are, apparently, not the product of thoughtless policies, but rather multiple policy initiatives by successive governments, each of which appeared to make sense at the time, but which have often produced unintended consequences and which together have created a bewildering complexity which is in itself a barrier to effectiveness.

So does that include the Government's decision to abolish the tax credit on dividends at a cumulative cost to the private pensions industry so far of £40bn? According to Mr Turner, that too was just part of a pattern dating back to the 1980s of overestimating the resilience of final-salary pension schemes. The irrational exuberance of equity markets fooled everyone, in Mr Turner's view, into believing private pensions could be delivered at minimal cost.

I fear that Mr Turner is being polite to the point of ignoring the evidence in dismissing as no one's fault the series of short-sighted public policy blunders that has led us to our present predicament. The reality is that there has been a consistent lack of long-term thinking by successive governments on this, as on almost every other policy challenge that stretches beyond the date of the next general election. Driven by the short term needs of the ballot box, most policy initiatives on pensions have only conspired to make a bad situation even worse.

That a country which invented the welfare state can admit to having one of the least well prepared pensions systems in the developed world for dealing with the demographics of an ageing population is a terrible indictment, for which glib explanations about the misleading exuberance of equity markets make no excuse. Still, to use that awful New Labour cliche, we are where we are, and if this extraordinarily well researched and argued report serves to act as the wake-up call that's so desperately needed, then it will more than serve its purpose.

Analysing the nature of the problem, of course, is always bound to be a good sight less contentious than proposing solutions. So far, the Pensions Commission has dealt with only the easy bit. The unequivocal welcome which the private pensions industry gave yesterday to the Pension Commission's report would turn to howls of derision if, for instance, the solution settled upon was to pay for a worthwhile increase in the basic state pension by abolishing the National Insurance rebate and stripping out the higher rate tax relief for pensions saving.

Mr Turner wants his report to be seen as politically neutral (though implied criticism of the social inequalities of present arrangements run through it like a stick of Brighton rock), and he has been careful to enjoin politicians from all parties in its preparation. Yet as he himself admits, it will be much easier to produce a political consensus for reform in the aftermath of a general election than eight months before one.

The truth of the matter it that "Pensions: Challenges and Choices" plays directly into the Government's hands. Labour is alone among the main political parties in having no coherent policy to deal with the pensions crisis. The Tories have got one, and so have the Lib Dems. Labour, on the other hand, goes into the election only with the vague promise to do something once Mr Turner has delivered his recommendations.

Since all the suggested solutions would require varying degrees of pain - higher taxes, greater compulsion in saving, a later retirement age - this is politically the best possible place to be. 'Hey, we've got a problem here, so let's talk about how best to solve it' plays better to the electorate than 'let's jack up taxes to pay for a better basic state pension or let's abolish means tested pension benefits so as to give people more incentive to save'. Andrew Smith, the Pensions Secretary who ordered this report, may have been cleverer than people gave him credit for.

Mr Turner sets out the options plainly enough. Either pensioners will become poorer relative to the rest of society, or taxes will have to rise to pay for more state provision, or savings must rise, or the average retirement age must rise. Yet virtually all conceivable policy solutions contain some sort of a drawback. Raising the basic state pension to, say, the present means tested minimum income guarantee and then indexing it to earnings is the most obvious and simplest solution, enabling the Government to get rid of means testing and providing all pensioners with a bare minimum living wage.

Yet if the effect was to discourage private pension provision and savings, it wouldn't look too clever, and though the initial costs of such an initiative could in part be paid for by abolishing the National Insurance rebate, the pensions burden on the public purse would eventually rise exponentially with the ratio of elderly dependents to taxpaying workers. Never mind the risks alluded to in the Commission's report of pensioner unrest if nothing is done; what about the taxpayers' revolt that lies in wait if the costs of a pay as you go system rise too far?

Compulsory saving into funded pensions also strikes me as a bad idea both in principle and practice. It makes no sense for the low paid to save at all, as they only deprive themselves of already inadequate disposable income by so doing. The amounts involved would also be too small to cover the industry's fees. Yet to continue to make decent levels of state provision dependent on means tested benefit doesn't work either as the long-term effect is to disincentivise saving among those who can afford to. As for later retirement ages, understandably, no one wants to be forced into that.

In such circumstances, Mr Turner must be right to conclude that the way forward lies in a mix of all these solutions - better state provision, a revitalised voluntary system, flexible retirement ages, and perhaps a limited degree of increased compulsion beyond a certain income level. Of the four, the last is still the most contentious, particularly if it is into a funded private pension. I'm not convinced any government would want to sign up to the open ended liability to mishap it would involve.

Yet, in certain circumstances, it can be made to work. We already have a limited form of compulsion through the national insurance rebate, which either goes into a private pension or towards an earnings-related second state pension. Greater compulsion has achieved some success in Australia, though down under the enforced contribution comes from the employer as part of the pay bargaining process.

One of the report's macroeconomic findings is that savings rates tend to be lowest in countries with high levels of owner occupation and fast rising house prices. This is because the borrowing used to buy houses counts against savings and because more money spent on a mortgage means less money for saving. For many, their house is their pension. Yet as the report points out, house ownership doesn't provide a sufficient solution to the pensions crisis, the more so as those with the lowest level of housing wealth also tend to be the poorest in terms of pension provision.

One way or another, we are going to have to get used to the idea of saving more and working longer. The long-term economic consequences of these trends could be profound, for more money saved means less money spent, which in turn means less demand and slower growth - what John Maynard Keynes once referred to as the "paradox of thrift". The age of conspicuous consumption and soaraway house prices could be drawing to a close.