Jeremy Warner's Outlook: Turner opts for auto-enrolment, but the debate on pensions has only just begun

Royal Mail sinks under pensions deficit; An unsatisfactory fudge on TV rights
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The Independent Online

In his interim report on the pensions challenge, Lord Turner said that either taxes would have to rise, or people would have to work longer, or they would have to save more to deal with the demographics of an ageing population. With publication of the Pension Commission's final report now just two weeks away, it looks as though he's about to recommend a combination of all three.

This always was the most likely outcome, but the prospect of having to pay more taxes, save more and work longer is not exactly an easy cocktail of policies to sell to the nation. The chances of achieving a political consensus around such an obviously unappetising collection of measures seem to me to be about zero.

Indeed, one of the reasons why Lord Turner was required to delay making any recommendations until after the general election is because ministers knew that whatever his suggested surgery was going to be, it was bound to be painful. Much better from the incumbent Government's point of view that these matters be discussed at the start of a new Parliament than at the end of it.

Yet with Tony Blair's majority much reduced, one humiliating Commons defeat already under his belt, and a whole raft of other controversial public policy reforms yet to be navigated through hostile backbenchers, from disability benefit to education, it's hard to see how it's even remotely possible to embark on pensions reform. The politics of it all dictate that this is something for a fourth term Labour government, if indeed there is one. With the pensions timebomb ticking away, that may already be too late.

The broad outline of Lord Turner's proposals look sensible enough. For basic poverty prevention, he's recommending that the state pension be raised from £80 a week to something closer to the minimum income guarantee of £109 and then indexed against earnings, allowing for means testing to be phased out.

To pay for this, he proposes that the age of entitlement be raised from 65 to 67. This would require parallel reforms in the law to allow people to carry on working to the age of 67 and possibly beyond with full employment rights.

However, even this wouldn't be sufficient to pay for the higher state pension. Taxes would eventually have to rise to make it affordable. Whether this new basic state pension would be the "citizen's pension" payable to all favoured by the Lib Dems and the National Association of Pension Funds, or as with the present basic state pension, be linked to national insurance contributions, is left open to debate. The citizen's pension would plainly cost a lot more.

The second leg of Lord Turner's proposals involve requiring people to save for retirement income beyond basic poverty prevention. A non means tested pension of £109 a week is obviously better than the present derisory level of basic state pension provision, but to most people it still wouldn't seem enough to support a reasonable standard of living in old age.

The idea, modelled on New Zealand's planned Kiwisaver, would be for all employees to be auto-enrolled into state-sponsored savings accounts unless they specifically decided to opt out. About 5 per cent of salary would be automatically invested in a limited range of relatively low-risk funds, the deductions to be administered through the PAYE system. The mass nature of the scheme ought to enable extremely low management charges, thus countering the criticism that it is not worth low earners saving at all because most of the savings get eaten up by fees.

Even so, the proposal is likely to prove controversial enough, especially if liability for the 5 per cent is split evenly between employee and employer.

Employers would regard it as an outright tax, while employees might see it as a tax in all but name. The whole idea would in any case hit the disposable income of low earners harder than higher income groups, who already largely make their own pension provision.

As ever, the devil will be in the detail, but even in outline, these are deep and uncharted waters Lord Turner is entering. Never mind the charge of inequality, what would such a huge implied increase in the savings pool do to consumption and investment returns? The debate is only just beginning.

Royal Mail sinks under pensions deficit

Royal Mail's pension deficit is just one of its many headaches but at £4bn and rising it is a king-sized one. The shortfall has already rendered the business technically insolvent under the new accounting rules. If, as expected, the actuaries add another £2bn to the deficit to take into account the fact that posties are living longer, then it could be enough to push the company into fully fledged bankruptcy. Annual contributions might have to rise from £500m a year now to almost £1bn.

With UK postal volumes in decline for the first time in 25 years, thanks to the rise of e-mail and the broadband revolution, and the market about to be opened up entirely to competition, it is inconceivable that Royal Mail could generate enough cash or profits to cover that sort of figure. For the same reason, the part-privatisation of Royal Mail through the issue of 20 per cent of its shares to the workforce, is a non-starter as things stand.

If the organisation hadn't taken a pension holiday for 13 years, it would not be in quite the pickle it now is, but that that wasn't entirely the company's fault, as the Inland Revenue required contribution holidays from companies whose pension funds were in surplus, and in any case it is all water under the bridge now.

Luckily for Allan Leighton, the Royal Mail chairman, he has one advantage that a private company in this position lacks. The sole shareholder in Royal Mail is the Government and ultimately it will be the Government which bails him out in the absence of a Road to Damascus conversion by the postal regulator that would allow Mr Leighton to get out of his fix by putting 50 per cent on the price of a stamp. Either way the consumer/taxpayer picks up the tab.

Not, however, before the workforce has been forced to make a contribution. Postcomm's assumption that Royal Mail can fund both its pension deficit and its ongoing investment needs with an increase in stamp prices of no more than 4p is based on the calculation that the company can cut its own costs at twice the rate Mr Leighton reckons possible.

Mr Leighton says that reality in regulation is an oxymoron. But if the regulator gets its way, then the reality for Royal Mail's workforce will be 30,000 more job losses. Having just received their first Share in Success payment, the posties are about to share in the pain. There is not much Mr Leighton can do to sugar the pill.

An unsatisfactory fudge on TV rights

The European Commission's bark seems to be a lot worse than its bite. It has been known since 2003 that the Premier League would be forced to split matches between rival broadcasters in its next auction of TV rights, thus undermining BSkyB's present monopoly. The question has always been how much of the monopoly Sky would be forced to cede. From a position where the Commission appeared to agree with rival broadcasters that it should be at least 50 per cent, it has finally settled for just a sixth.

Far from giving British football fans "greater choice and better value", as Neelie Kroes, the competition commissioner, claimed yesterday, this seems to be the worst of all possible worlds. Admittedly, the six packages are to be of equal quality, which means Sky cannot cherry pick the best matches.

But it is perfectly entitled to have five of the six. The effect is likely to be drive up the prices paid all round and force the viewer who wants to see all available Premiership games live to pay two separate subscriptions. Will ITV and NTL be as good as their word and refuse to bid now that demands for more radical reform have been turned down? We'll see.