The pension hole we are in

Analysis
Julian Knight
BBC News personal finance reporter

We are living longer, who is going to pay?

In December 2002 the UK government called on its own "red", or if you like "grey", Adair to help it put a cap on the UK's pension problems.

Adair Turner, ex-CBI boss and head of the government's Pension Commission, will report on Tuesday on the scale of the nation's retirement savings shortfall.

Red Adair confronting a blazing oil well leaking billions of dollars of black gold had it easy by comparison.

Mr Turner is expected to say that the UK pensions system, once the envy of competitor nations, is withering away. The solutions are likely to be unpopular with politicians and public alike.

But under the Commission's remit, he need not make recommendations as to how the problem should be tackled until Autumn 2005.

Those recommendations could provide the bedrock for future pension legislation - after the next election.

Dirty word

Earlier this year, Mr Turner told the Investment Property Forum that he does not like to use the words crisis and pensions in the same sentence.

THE PENSIONS DILEMMA In 2003 the state pension was worth nearly 15% of average earnings This will fall to 5% by 2050 People aged 65 to 74 get 68% of average income from pensions 25% of company final salary pension schemes shut to new staff in 2003 More than 50% of Britons think people should be forced to save for retirement provided employers contribute Sources: Government Actuary's Department, National Association of Pension Funds and Association of British Insurers.

He told delegates: "There is a very big problem and we may need some significant responses."

His report will spell out out just how big the problem is.

Despite all the headlines screaming crisis, there has so far been no overarching review of where UK retirement provision is at. Mr Turner's job is to provide a sonar scan of the iceberg looming on the horizon.

Up until now, the public, employers and even pension policy planners have been given only brief glimpses of his findings.

"Mr Turner's team has been number crunching and pulling together lots of different strands from around the industry," said Helen McCarthy, head of pensions policy at the Association of British Insurers (ABI).

"This will help provide the first full overview of the state of retirement provision and should help spark debate."

That could be an understatement. Trade unions and Whitehall mandarins are gearing up for 'pensions in meltdown' headlines.

"Every sign is that this report will confirm that Britain is heading for a major pensions crisis, which may be even worse than previously thought," said Brendan Barber, TUC general secretary.

"The only conclusion can be is that there are millions in work today who have little, if any, proper provision for their retirement."

Savings gap

Like most industrialised nations, and even some industrialising ones, Britain's population is ageing.

Mr Turner's report will show in clear detail that the costs of carrying on with the status quo are likely to be enormous Tim Keogh, Mercer Human Resource Consulting

As a result, many analysts warn there will soon be too few taxpayers to support the over 65s, through the state pension.

Seeing the demographics stacking up against them, firms have been trimming back their pension promises to workers, closing lucrative final salary schemes and paying less money into their employees' retirement funds.

In the worst cases, an estimated 60,000 workers have seen all or part of their pension disappear after their workplace scheme has been wound up.

Stock markets have plunged and some major players in the pension and investment industry, most notably Equitable Life, have found themselves mired in scandal over their inability to meet commitments to policy holders.

The result? Britons are saving a smaller proportion of their income than nearly any other major economy. Instead people have chosen to invest in bricks and mortar or simply blow it in the shops.

"Mr Turner will highlight that the UK pension problem is two-fold," Malcolm McLean, chief executive of the Pensions Advisory Service (Opas), told BBC News Online.

"The immediate problem is one of confidence. People have little faith in pensions and are disillusioned with savings."

"The government is acting through its Pension Bill - currently going through parliament - to shore up confidence. But longer term solutions are needed."

Options not recommendations

He believes that Mr Turner may decide to stretch his remit to outline a series of "options" for what needs to be done.

WHAT IS THE PENSIONS COMMISSION? It was set up in 2002 to review the UK's private pension and long term savings regime Trends in occupational pensions Take-up of stakeholder and personal pensions Effectiveness of other savings vehicles

"He has a very broad remit and options for change could include what should happen next to the state pension, ways to encourage more saving, and compulsion may loom large."

Whether people should be compelled to pay into a private or occupational pension to supplement what the state offers is a growing topic of debate.

But pensions analysts warn that compulsion is full of dangers.

"Compulsory private pensions must be avoided as they will simply create an inefficient system for small amounts of money," said Tim Keogh, European partner at Mercer Human Resource Consulting.

Instead, Mr Keogh would like to see a beefed up state pension.

But there is a cost, as people may have to work longer.

"The state pension gives everyone a sensible planning base. If people want to retire at 65, or sooner, then they will know in advance that they have to save more, earlier in life."

"Ultimately, individuals are going to have to meet more of the bill for their own longevity."

Whether or not the first draft of a roadmap to tackling the pension crisis emerges from Mr Turner's initial report, Mr Keogh is certain the public will need to face harsh realities.

"Mr Turner's report will show in clear detail that the costs of carrying on with the status quo are likely to be enormous," he said.