Transcript Slide 1

A New Pension Settlement for the
Twenty-First Century:
Second Report of the Pensions Commission
Cass Business School
Adair Turner
7 December 2005
• State has been planning a reduced role in pension
provision for average earner
• Proposition: private pension provision should grow to fill
gap
• Reality: private pension provision in underlying decline
Projected state spending per pensioner indexed in
constant 2003/04 price terms: 2004 projections
Figure 1.5 p47
Participation in private pension schemes:
2003-04, millions
Figure 1.8 p50
• Is there a “crisis”?
• Is there a “savings gap”?
• If the problem is in the future, can we wait until then to
deal with it?
State pension at point of retirement assuming full
contribution record for a person who has been on
average full-time earnings throughout their working life:
percentage of average earnings
Figure 1.3 p45
Private pension income as a percentage of
GDP by source 2005-2050
Figure 1.16 p57
Percentage of 50-65 year olds in danger
of having replacement rates below
benchmarks of adequacy
Figure 1.30 p79
Gross saving by sector as a percentage
of gross national disposable income:
1980-2004
Figure 1.33 p83
Residential housing wealth as a
percentage of GDP
Figure 1.31 p81
Wealth holdings in a closed economy in
equilibrium
Figure 1.36 p85
Household non-pension financial assets
and non-mortgage debt as a percentage
of GDP
Figure 1.35 p85
Barriers to a purely free market solution
• Behavioural barriers to rationality e.g. inertia
• High selling costs
• Declining employer interest
• Complexity
• Expectations of spread of means-testing
3
Sources of costs for the median earner aged 40
in the present Stakeholder Pension system
Figure 1.52 p111
Typical Annual Management Charge in
alternative forms of pension provision
Figure 1.27 p71
Percentage of pensioner benefit units on Pension
Credit
If current indexation approaches continue indefinitely:
2005-2050
Figure 1.22 p64
IFA assessments of attractiveness of different earnings
segments: survey results
The design of the state system means that the returns to saving
for people in this group are good.
Figure 1.23 p65
Two major elements of policy
• National Pension Savings Scheme (NPSS)
• More generous less means-tested state pension provision
but at an age gradually rising with increased life
expectancy
Female cohort life expectancy at 65
30
Years
25
20
15
10
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
Historical
Principal 2003-based
Principal 1983-based
Principal 1992-based
Principal 2004-based
2050
Impact of the 1940s-1960s baby boom: ratio of
65+ year olds to 20-64 year olds
Figure 1.45 p 99
State pension provision: the unavoidable trade-off
Figure Ex.6 p 17
Public expenditure and pension age increases:
Pensions Commission proposed range for debate
9
Figure 3.1 p 131
Percentage of adult male life spent after State
Pension Age
State Pension Age
2005
65
Life expectancy at
SPA (years)
Percentage of adult
life (18+) after SPA
67
2050
68
69
19.4
21.8
20.9
20.1
29.2%
30.8%
29.5%
28.3%
More generous state pension in the long-term at
a later age:
• Unified Citizen’s Pension?
• Evolution of present system: BSP and S2P?
Preferred way forward
1.
Build on current two-tier system and recent reforms, accelerating the evolution of
S2P to a flat-rate pension by freezing the Upper Earnings Limit for S2P accruals in
nominal terms.
2.
Index the BSP to average earnings growth over the long-term ideally starting in
2010 or 2011 as the public expenditure benefit of the rise in women’s SPA begins
to flow through
……making this indexation affordable long-term by raising the SPA gradually,
broadly in proportion to the increase in life expectancy, for instance to 66 by 2030,
67 by 2040 and 68 by 2050.
3.
Maintain the reductions in pensioner poverty achieved by Pension Credit, but limit
the spread of means-testing by freezing the maximum level of Savings Credit
payments in real terms (which implies that the lower Savings Credit threshold
increases faster than in line with average earnings).
4.
Base future accruals to the BSP on an individual and universal (i.e. residency)
basis, and improve carer credits within S2P.
5.
Accept the consequence that the public expenditure on state pensions and
pensioner benefits must rise from 6.2% of GDP today to between 7.5% and 8% by
2045 (depending where SPA reaches in 2050).
6.
Ideally introduce a universal BSP for pensioners aged over 75.
Figure Ex.8 p 21
Percentage of pensioner benefit units on Pension
Credit
With proposed state system reforms and introduction
of the NPSS
Figure 6.42 p294
Key features of NPSS
• Automatic enrolment, but with right to opt-out
• Minimum default employee contributions of 5%, of which 1% paid by
tax relief
• Modest compulsory matching employer contribution (3%) if employee
stays enrolled
………impact on total labour cost 0.6%
• Payroll deduction, national account maintenance, bulk-buying: 0.3%
annual cost target
• Individual accounts invested at individual’s instructions: default fund
The role of the state
• Ensures that all people are out of poverty in
retirement, and creates a sound base on which
private savings can build
• Encourages and enables low cost saving, but leaves
ultimate decisions to individual choice
Pension income as a percentage of earnings for the
median earner: retiring in 2053
Figure Ex.7 p19
Typical Annual Management Charge in
alternative forms of pension provision
Figure 1.27 p71
Variability of real returns on equities over
historical periods: 1899-2004
Figure 5.24 p197
Variability of real returns on equities over
historical periods: 1899-2004
Figure 5.24 p197
Longevity risk in UK pension provision,
£billion of total liabilities- broad estimates:
end 2003
Figure 5.17 p181
Inflows and outflows from NPSS
Figure 6.36 p288
Aggregate NPSS funds at different rates
of return
Figure 6.37 p288
Stock of annuities arising from the NPSS
Figure 6.38 p289
Long-run effect of NPSS on private
pension savings as a percentage of GDP
Figure 6.39 p289
A New Pension Settlement for the
Twenty-First Century:
Second Report of the Pensions Commission
Cass Business School
Adair Turner
7 December 2005