Pensions for all - but you'll have to wait

The age at which people can collect their state pension could rise as high as 69 if recommendations put forward by the Pensions Commission today are adopted.

In its long-awaited report on pensions reform, the Commission called for the retirement age to be increased to fund a more generous state pension which would rise in line with earnings, rather than prices as is currently the case.

It said the age at which people could collect their state pension should be increased gradually, broadly in line with increases in life expectancy, for instance to 66 by 2030 and 68 by 2050.

But it added that the state pension age could be increased at a greater rate than rises in longevity to 69 by 2050 to limit the future cost to taxpayers.

The Commission stopped short of recommending what the future retirement age should be, saying it was an issue for public debate.

Head of the Commission Lord Turner, the former director general of the employers' organisation the Confederation of British Industry, said there had to be a trade-off between how much the state pension age would have to increase and how much spending on pensions would have to rise.

He said: "Different people will make different judgments on that trade-off, that is a political trade-off.

"But unless people are willing to discuss it, they are not serious participants in this debate. They are indulging in fairytale economics in which a fairy godmother makes all difficult choices disappear."

He justified the increase in retirement age, saying that the average man aged 65 today could expect to receive the basic state pension for 19 years.

If the retirement age was increased to 69 by 2050, increases in life expectancy would mean they could still expect to collect it for 20 years.

The Commission said the state pension could begin to rise in line with earnings from 2010 or 2011 when the impact of raising the retirement age for women would begin to flow through.

But it said people must accept that public expenditure on pensions would have to rise, from around 6.2% of GDP today to between 7.5% and 8% by 2045, depending on whether the retirement age was increased to 67 or 69 by 2050.

Lord Turner said the current state pension system should also be reformed to make it simpler to understand and less means-tested, to provide an incentive for people to save.

He suggested the introduction of a universal basic state pension, with entitlement based on residency rather than National Insurance contributions as it is now, to make the system fairer for women who tend to take career breaks to bring up children.

At the same time, he said the State Second Pension should evolve to a flat rate system delivering a pension of around £53 a week in current earnings for someone with a fairly full contribution record.

He said the scheme would continue to be based on contributions, but with improved credits for people who had taken time off work to care for relatives.

The Pensions Credit should also be retained as a tool for targeting pensioner poverty, but its future spread could be limited by freezing the maximum real value of the Savings Credit.

In an attempt to address the current inequality of pension income, the Commission also suggested introducing a universal basic state pension for people aged over 75.

The 460-page report also included measures to encourage people to save more towards their own retirement.

Central to this would be the introduction of a National Pensions Saving scheme into which workers would automatically be enrolled when they start a job, although they would have the chance to opt out.

Workers would contribute 5% of pre-tax earnings above £5,000 and below £33,000 to the scheme, of which 1% would be paid for by tax relief, while employers would pay in a "modest" 3%, although there would be scope for both parties to pay in more.

Contributions would be collected through the Pay As You Earn system and paid into a national account, with a choice of different investment funds.

Annual charges on the scheme would be just 0.3%, which the Commission said would mean workers retiring with a pension 30% larger than if they had paid charges of 1.3%, which is typical today.

Workers whose employers already offer a "high quality pension scheme" would be automatically enrolled into that instead.

Lord Turner told a packed news conference in London he was confident that a "feasible and sustainable" way forward to tackling the pensions problems does exist.

He said: "There are significant problems in our pension system and there is a major demographic challenge.

"But the problems can be overcome with an appropriate and integrated set of policy responses."

Asked what he thought the chance was of the Government adopting his proposals, Lord Turner said: "High."

He added: "I am, by nature, an optimist."

The report was given a broad welcome from both sides of industry, but companies voiced concerns about being compelled to make contributions, and unions said they were against an increased retirement age.

The Pensions Commission was set up in 2002 to look at the future of UK pensions.

In its first report, published in October last year, it warned that spending on pensions would have to rise by £57 billion a year to keep them at their current level unless drastic action is taken.

It said 12 million people over the age of 25 are not saving enough, and workers would face a 30 per cent cut in their retirement income if steps are not taken to tackle the pensions crisis.

The Government will publish a detailed response to the report in the spring.