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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

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A New Pension Settlement for the Twenty-First Century:Second Report of the Pensions CommissionCass Business SchoolAdair Turner7 December 2005

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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
Projected state spending per pensioner indexed in constant 2003/04 price terms: 2004 projections

Figure 1.5 p47

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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?
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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

percentage of 50 65 year olds in danger of having replacement rates below benchmarks of adequacy
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
Gross saving by sector as a percentage of gross national disposable income: 1980-2004

Figure 1.33 p83

barriers to a purely free market solution
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

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sources of costs for the median earner aged 40 in the present stakeholder pension system
Sources of costs for the median earner aged 40 in the present Stakeholder Pension system

Figure 1.52 p111

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Percentage of pensioner benefit units on Pension CreditIf current indexation approaches continue indefinitely: 2005-2050

Figure 1.22 p64

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IFA assessments of attractiveness of different earnings segments: survey resultsThe 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
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
public expenditure and pension age increases pensions commission proposed range for debate
Public expenditure and pension age increases: Pensions Commission proposed range for debate

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Figure 3.1 p 131

more generous state pension in the long term at a later age
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
Preferred way forward
  • 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.
  • 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.
  • 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).
  • Base future accruals to the BSP on an individual and universal (i.e. residency) basis, and improve carer credits within S2P.
  • 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).
  • Ideally introduce a universal BSP for pensioners aged over 75.

Figure Ex.8 p 21

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Percentage of pensioner benefit units on Pension CreditWith proposed state system reforms and introduction of the NPSS

Figure 6.42 p294

key features of npss
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
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
Pension income as a percentage of earnings for the median earner: retiring in 2053

Figure Ex.7 p19

longevity risk in uk pension provision billion of total liabilities broad estimates end 2003
Longevity risk in UK pension provision, £billion of total liabilities- broad estimates: end 2003

Figure 5.17 p181

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A New Pension Settlement for the Twenty-First Century:Second Report of the Pensions CommissionCass Business SchoolAdair Turner7 December 2005