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Last Updated: Thursday, 17 November 2005, 12:02 GMT
Finding a cure for the UK's pension ills
By Julian Knight
BBC News personal finance reporter

A pensioner at a post office
Reform of the state pension is an option

Some details from the Pensions Commission's final report have been leaked.

Here are some of the likely options for tackling the issue of providing adequately for our retirement.

WORKING LONGER

In its interim report, published in October 2004, the government's Pensions Commission, led by Lord Turner, identified working longer as one of the options for solving the UK's pension problems.

Raising the state pension age to 67 from the year 2020 now seems the favoured option.

The idea has previously attracted some support.

The National Association of Pension Funds (NAPF), the body which represents occupational pension schemes, suggested that if the state pension age rose to 67 it would free up enough cash to pay a more lucrative state pension.

But, ultimately, politicians may decide that raising the state pension age may cost them at the ballot box.

USEFUL CONTACTS
Pension Advisory Service (Opas) 0845 6012923
Financial Services Authority 0845 6061234
The Pensions Scheme Registry 0191 2256316
The Pensions Service 0845 6060265
Pensions Ombudsman 0207 8349144
Pension Forecasting Service 0845 3000168

The government recently backed down over plans to force current public sector workers to retire at 65 rather than 60.

Overall, there is a growing consensus that people need to be helped to stay in work for longer, even if only part time.

The hope is to turn retirement from an event into a process, with more people supporting themselves in their mid to late sixties through work.

However, some firms are reluctant to hire older workers, fearing that they are more difficult to train and may take more time off ill.

In an attempt to combat this problem, from 2006 it will become a civil offence for employers to discriminate on the grounds of age.

COMPULSORY OR AUTOMATIC SAVINGS

Lord Turner is suspected to favour copying an idea being developed in New Zealand - that workers should be enrolled into an additional state savings plan with contributions being invested, rather like contributions to occupational schemes.

It would be collected through PAYE and be a cheaper way than a private pension for people to build up their pension savings.

The scheme wouldn't be compulsory but take-up would be expected to be high because taxpayers would be automatically enrolled unless they opted out.

Research from the US suggests that automatic enrolment (benefiting from people's inertia and aversion to form-filling) leads to a far higher percentage of participants than schemes where savers are required to opt in.

Another option from down-under that has been debated is the idea of compulsion, or forcing people to save.

Aussie rules?

Supporters of compulsion point to the experience of Australia.

Forced pension saving was introduced in Australia some years ago and has certainly transformed their pension market.

In the mid-1980s, about 40% of Australians had a private pension.

Now more than 90% do - compared with about 65% of full-time workers in the UK.

Although this is an improvement in many respects, compulsion in Australia has not proved a pensions solution.

This is because surveys suggest many people view the level of compulsory savings as enough in itself to provide for retirement, rather than a starting point.

Consequently, the ageing Australian population may still not be saving enough for retirement.

The problem with setting a higher compulsory level of saving is that it would be unpopular - many would see it as a tax - and inappropriate for certain categories of people. It would also raise questions about the degree to which government should intervene in our financial decision-making.

Britain's trade union body, the TUC, wants employers to be compelled to pay into their workers' pension funds.

At present, firms with five or more employees have to offer access to a workplace pension scheme but are not forced to make a financial contribution.

However, business leaders and representatives of the pension fund industry are not keen on this idea.

Another alternative, or addition, to some form of compulsion or automatic saving might be to automatically enrol workers in their own workplace pension schemes.

Like the state-run scheme, this would be expected to have a high take-up as it would require people to opt out rather than opt in.

INCREASE TAXES

The Pensions Commission said last year that if the state pension age or levels of savings did not increase, taxes would have to rise to finance the ever growing demands on the state pension scheme.

Over the next couple of decades, income tax or national insurance contributions (NICs) may conceivably have to rise by three or four pence in the pound just to retain current levels of state pension provision.

In addition, with the decline in workplace pension provision and lower levels of private savings, more people may find that they have to claim means-tested benefits such as Pension Credit.

But it is unlikely that raising taxes to pay for pensions would be a popular political move.

Ultimately, substantial tax rises could also stunt economic growth.

According to former government pensions adviser Dr Ros Altmann, raising taxes to keep pensions at their current level is "a recipe for long term economic decline".

REFORM THE STATE PENSION

BASIC STATE PENSION
Single pensioner 82.05
Pensioner couple 131.20
Source: Department for Work and Pensions (DWP)

The idea of a citizens' pension has also been floated, primarily by the National Association of Pension Funds and the Liberal Democrats.

This would try to ease the problem of women failing to make sufficient NICs to earn entitlement to a full basic state pension.

A citizens' pension would be a payment available to anyone resident in the UK who reaches a set pensionable age, regardless of national insurance contributions. It would replace the current basic state pension, entitlement to which is based on NICs.

The new system could be funded by pooling all the money that is currently put into the basic state pension, the state second pension, contracted out schemes and pension credits.

But to ensure that the value of the new pension rose in line with earnings - rather than just with inflation as at present - the state pension age would also have to rise, the NAPF says.

However, a citizens' pension could be an administrative nightmare because of the inevitable wrangling over residency qualifications.

Groups such as Age Concern have suggested that female pensioner poverty would be better helped by reducing the amount of time women are required to contribute for in order to qualify for a full state pension; from 39 years to 25.


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