In the Green Paper Simplicity, security and choice (2002) it says:

"68. The terms of reference of the Commission will be:

To keep under review the regime for UK private pensions and long-term savings, taking into account the proposals in the Green Paper, assessing the information needed to monitor progress and looking in particular at current and projected trends in:

"the level of occupational pension provision:

- trends in employer and employee contributions;
- trends in coverage of occupational pensions;

the level of personal pension savings, including:

- take-up of personal and stakeholder pensions;
- contributions to personal and stakeholder pensions; and

the level of other saving:

- financial assets, for example Individual Savings Accounts; housing, businesses, savings and other assets of partners.

On the basis of this assessment of how the current volutarist approach is developing over time, to make recommendations to the Secretary of State for work and pensions on whether there is a case for moving beyond the current voluntarist approach." (page 31)

This refers to "private pensions" rather than BSP and S2P. The age of retirement of the BSP seems to be well outside the remit of the Pensions Commission.

These Four Options are part of the current consultation of the DWP about pensions, under the heading What do you think? ^x

1. An ageing population

The Optimum Population Trust discusses the "exaggerated fear of ageing.":

"Populations have been ageing for centuries without apparent ill effects... In the case of the UK the workforce is not shrinking and is not expected to shrink for about 20 years. The support ratio - the numbers of working age in relation to young and old dependants - is not expected to worsen before 2012." ^x

"The proportion of people over 65" is a dependency ratio. There is a heirachy of such ratios, as discussed on page 32 of the First Report of the Pensions Commission. People over 65 are not the only kind of people who are (mainly) not economically active. There are children, 25.1% of people of working age are not economically active. Employment (including self-employment): "Rate rises to 74.9% in 3 months to Sept 05" ^x Instead of "the proportion of people" comparing with GDP gives a better outlook since GDP is increasing. Various people such as the charity Tomorrow's World, are saying: "The reality: there is no pensions crisis". ^x If not a crisis then at least a spreading black cloud.

2. Retirement age

The DWP says under the heading People are retiring earlier:

"While people are living longer, the average retirement age has fallen over the years. This means that more people are leaving the workforce at an earlier age." ^x

But the DWP says that retirement age: "having reached a low of 61 for men in 1995, it has begun to rise again.". The Pensions Commission gives a diagram Percentage of male adult life spent in retirement which was 30.5% in 2000 and also 30.5% in 2004. ^x

The average retirement age is currently quite constant, and therefore does not seem an urgent topic in this area, in comparison for example to Equitable Life.

3. What about the GDP?

What can be afforded nationally such as pensions depends largely on the GDP. But the GDP is not mentioned in the discussion Where are we heading on the website of the DWP.^x

Retirement ages have been decreasing and the proportion of the population over 65 slowly increasing over a long time period. But because GDP has been increasing, this has not resulted in lower pensions. The DWP report Principles for Reform starts:

"The UK pension system today is delivering better average retirement incomes than any previous generation has ever enjoyed." ^x

Pensions become more affordable taking GDP into consideration. In Pension Facts of the PPI, ^x Table 3 estimates the Total spending on state pensions and other benefits for pensioners. This decreases from from 7.2% of GDP in 2004/5 to 7.1% in 20034/35. The BSP, S2P and Pension Credits combined decline from 5.1% of GDP in 2004/5 to 5.0% in 2024/25. This suggests that it is not necessary to choose between any of the Four Options. ^x

4. What about immigration from abroad?

Under Where are we heading ^x the DWP says: "people are also having fewer children". It does not mention immigration from abroad. According to National Statistics:

"In 2004 an estimated 223,000 more people migrated to the UK than migrated abroad. This estimated net inflow is 72,000 higher than the previous year and is the highest since the present method of estimation began in 1991." ^x

5. Alternatives to the Options

Reduce charges.

The pension system should be more efficient and less expensive. The government has instead increased the stakeholder cap on charges from 1% to 1.5% for the first 10 years.

Reduce the number of people claiming benefits.

If fewer people claimed the various benefits such as housing benefit, then more funds would be available for pensions.

Reduce unemployment.

The TUC is not in favour of increasing retirement ages (iv):

"There is an alternative to a 'work-till-you-drop' rise in the pension age, and that is to help those below the pension age get a job and make a full economic contribution so that there are more people in work under 65 paying taxes and creating wealth." ^x

"More people in work under 65" is an increase-the-size-of-the-cake approach to pensions, rather than how-to-divide-the-cake. The present website also has the former approach, that is how to increase benefits by reducing charges.

6. Difficult choices

Why is it necessary to "choose between" rather than choose all four Options?

(i)

The DWP consultation has the heading Where we are now starting:

"People over 65 today are better off on average than any previous generation of older people .." ^x

That is better off relative to the cost of living. But then there is a switch to "relative to the rest of society" in (i). In the consultation, when the DWP is referring to the past it is relative to the cost of living, and when to the future it is relative to the rest of society - which seems like spin.

I personally do not want to become poorer relative to the cost of living, but do not mind becoming poorer "relative to the rest of society". I am not trying to keep up with the Jones's. But I find the first option impossible to choose because "relative to the rest of society" is so near to relative to the cost of living.

(ii) and (iii)

Options (ii) and (iii) are inputs. But what is important in the first instance are outputs - actual pensions received. Considering inputs rather than outputs has in the case of (iii) the effect of hiding charges.

The choice between (ii) and (iii) surely depends on which option gives the best pension? Should this not be determined by the Pensions Commission?

The government is not being required to choose any of the options only "society and individuals". This lets the government off the hook. Requiring individuals to choose between (ii) and (iii) is what happens with the choice, whether or not to contract out of SERPS now the S2P, which has resulted in a fiasco - "a new billion pound pensions mis-selling scandal". ^x

(iii)

"The savings rate" is not defined in the Glossary of the First Report of the Pensions Commission. Sometimes, such as page 127, there are "savings rates" suggesting there is more than one "savings rate". Are company contributions to occupational pension schemes included in the "savings rate"? I expect so, but would like a formal definition to be certain.

(iv)

Following a headline: "Abject surrender over public sector pensions", a letter in the Financial Times noted:

"The government cannot have a credible policy of extending working life in response to demographic change and then exclude public sector workers, who already retire earlier than the rest of the workforce." (21st October 2005)

If retirement ages rise, there will need to be more work otherwise this will increase the number - millions - of people currently unemployed/economically inactive. Where is this work going to come from?

There has been a long-term trend towards earlier retirement. ^x Later retirement seems like putting the clock back.

7. Conclusion

In my opinion the Four Options are mainly outside the remit of the Pensions Commission. They were not preceded by an adequate discussion in its First Report, such as about GDP and immigration from abroad mentioned above. They are not the only options and are difficult or impossible to choose between.

I agree that "we need to think seriously about how best to fund our retirements", but this is not because of an ageing population, but for other reasons especially the decline in defined benefit pension schemes and various scandals.

September 2005

Stephen Wynn