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Last Updated: Wednesday, 30 November 2005, 18:23 GMT
Lord Turner and his very big idea
Analysis
By Ian Pollock
BBC News personal finance reporter

Everything about the Turner report is big - and not just the 460 pages that make the final report the size of a telephone directory.

Lord Turner
Lord Turner wants government to spend more on pensions

It is all about millions of pensioners - present and future - and the billions of pounds that will be given to them as pensions each year.

Even the proposed time scale for change is big too - stretching over the next 45 years or so.

In fact, by the year 2050 nearly half of the country's current population will have died.

Pension heaven?

If Lord Turner gets his way, then in the decades to come people should be working longer, retiring later, saving more and receiving higher pensions once they have retired.

Indeed, his plan is suggested as a way for people to achieve the "holy grail" of pension provision - an income in retirement that is close to two thirds of their salary.

He estimates that the revamped basic and second state pensions (indexed according to average earnings rather than lower rates of inflation, and made universal and not dependent on contributions) could replace 30% of an average worker's salary.

The National Pension Savings Scheme (NPSS), in its basic form, should add, it is hoped, a further 15% of former income.

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And if people become particularly assiduous at saving and put even more money away to be invested in the NPSS funds, then maybe they could get 15% more.

Add all that up and it comes to 60% of salary, not far short of the two thirds target that the best occupational schemes offer to staff who stay with their employers for 40 years.

New philosophy

Along the way, Lord Turner is proposing a sharp change in the current philosophy behind the state pension scheme.

In the future, the state will concentrate its economic firepower on ensuring that no pensioners live in poverty.

No longer will it aim to provide some pensioners with incomes related to their salaries, as it does through the current State Second Pension, formerly known as SERPS.

That extra level of pension will, according to Lord Turner, have to be funded in the future entirely by private savings - via the NPSS, occupational or personal pension schemes, or by any other means.

In addition, the funds put into the NPSS will be invested in things such as shares, bonds and property, while the ordinary state pension continues to be paid for directly out of tax and National Insurance.

Private savings

The key idea that Lord Turner puts forward to achieve this great leap forward in private pension saving - something that no other government policy has ever achieved - is something that others have called "soft compulsion".

The idea behind automatic enrolment is that savings rates will increase because people will think it is too much bother to opt out

Unless they are already in a good occupational scheme, workers will be automatically enrolled in the NPSS, triggering contributions from their employers too.

This will leave them to make a conscious choice to opt out, if they want to.

So instead of inertia preventing people from saving enough, Lord Turner is clearly hoping that once people have been corralled into the new scheme they will be too lazy to opt out.

In this case inertia will be good.

The report also highlights some good reasons to reject outright compulsion.

It points out, entirely accurately, that it won't be needed by some people, such as those who are wealthy, already saving or likely to inherit a house.

And at the other end of the scale, if people have big debts, such as on credit cards or student loans, they might be much better advised to pay them off first, before committing substantial chunks of their income to a pension policy.

No big bang

The changes that Lord Turner proposes are radical. But the pace of change will be evolutionary, which means slow.

He thinks it will take about five years just to set up the NPSS.

The current system of means testing pension credit - a favourite policy of the Chancellor Gordon Brown - should be allowed to decline in significance, he says.

And the first predicted increases in the state retirement age - to 66 - probably won't start until 2030.

The report explicitly considers the idea of a dramatic overnight change.

But it rejects the immediate introduction of a single unified state pension, rather than the gradual morphing of the current basic and second state pensions into two flat rate versions, one on top of the other.

Not only would sudden change be very complicated but it would also be more expensive than phasing in changes gradually.

But if Lord Turner gets his way then the state will indeed be channelling a greater proportion of the nation's wealth towards pensioners.

If the state retirement age increases in line with life expectancy, the government will still end up spending about 8% of the nation's wealth on state pensioners, rather than the current level of just over 6%.

And spending that extra money on pensioners is one of the main points of the exercise.


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