State pension age 'to rise to 68'

Lord Turner's briefing

A gradual rise in the state pension age to 68 has been put forward as part of a major proposed shake-up of UK pensions.

In return, the basic state pension would be increased and rise in line with earnings rather than inflation.

In its report the Pensions Commission also proposes a National Pension Savings Scheme, which many workers would be automatically enrolled into.

The report has triggered a political row over who caused the pensions crisis and whether the reforms are affordable.

Pensions Secretary John Hutton said the government's response would be based on five tests: "Do the proposals promote personal responsibility; are they fair; are they affordable; do they simplify the system; are they sustainable."

Opposition parties doubted the government's commitment to reform. Outgoing Conservative leader Michael Howard said under Mr Blair's government, "over 10,000 occupational pension schemes have collapsed and the amount of money people save has almost halved."

The Liberal Democrat spokesman on pensions, David Laws, said that he welcomed the report, but added there was a fear that the government might "kick it into the long grass".

However, pensions minister Stephen Timms told the BBC's Ten O'clock News that the report had presented an attractive model for reform that could be "affordable".

More generous

The head of the Pensions Commission, Lord Adair Turner, said the UK's pension system currently faced "significant problems".

PENSIONS COMMISSION REPORT Increases in the state pension age will be essential to keep the increase in public expenditure within limits Executive summary [225 kb] The Turner Report in Full: Documents and Appendices Some computers do not open PDF documents automatically Download the reader here The report in quotes

The commission spent three years looking at ways to revamp the UK's pension system.

In its interim report last year, the commission said more than 12 million people over the age of 25 were not saving enough towards their retirement.

The commission has now called for the state pension to become more generous, but become payable at a later age over the coming decades as life expectancy increases.

It suggests that the state pension age should rise gradually, to 66 by 2030, 67 by 2040 and 68 by 2050.

It also proposes:

• future entitlement to the basic state pension should become universal and be based on residency and not on contributions
• the basic state pension should become indexed to earnings
• the current state second pension should evolve into a flat-rate payment
• the state system should be "as non means-tested as possible"
• the savings element of the pension credit should rise by less than average earnings

"The problems in the UK's pension system will grow increasingly worse unless a new pensions settlement for the 21st century is now debated, agreed and put in place," Lord Turner said.

The proposal to link increases in the basic state pension to earnings has already caused a political row. Chancellor Gordon Brown was reported to have said it was unaffordable.

The idea behind automatic enrolment is that savings rates will increase because people will think it is too much bother to opt out Read what the pensions report means for you

Alison O'Connell from the Pensions Policy Institute told the BBC that people who had studied pensions recognised that it "would be much better to have a better state pension and less means testing".

"As we're all living longer, that will require some change in state pension age in future to pay for it," she added.

"The big question is how much we spend on state pensions and how much we can reduce that cost by raising the state pension age."

Small firms 'badly hit'

Explaining the national pensions saving scheme (NPSS), Lord Turner said the scheme should automatically enrol all workers if they are not already in a sufficiently-backed company scheme, although they would have the right to opt out.

Under the proposed NPSS, individuals would contribute the equivalent to 4% of their post-tax earnings, their company an additional 3% and the government 1% through tax relief or credit.

Lord Turner said this would add only 0.6% to the labour costs of the private sector.

But some business groups questioned whether such a scheme, modelled on one being developed in New Zealand, would be affordable.

More than 12 million workers are not saving enough for retirement

David Frost, director general of the British Chambers of Commerce, said he was "disappointed" to see that employers would be expected to pay into the scheme.

"Small firms would be particularly badly hit, and businesses have told us that they would have no option but to lay off staff, [and] freeze salaries and much-needed investment."

However, the EEF business group applauded the commission's proposals.

"We support the idea of soft compulsion for employers and employees but recognise that some smaller companies will find this problematic," said the EEF director general, Martin Temple.

The EEF called for government to assist smaller firms with the transition to the new scheme.

'No pain-free solutions'

TUC general secretary Brendan Barber described the commission's report as "bold and hard-headed".

HAVE YOUR SAY Perhaps if pensions were safe from greedy politicians it would encourage more of us to save Kyle R, Cardiff Your views on Lord Turner's report

"We remain opposed to any proposal to increase the state pension age that would make manual workers and the poor worse off," Mr Barber said.

But he added the majority of the conclusions were "undoubtedly progressive".

"There are no pain-free solutions to pensions. Employers, employees and the state, through tax revenues, must all play their part."