PENSION practitioners and policymakers have been living in a fool’s paradise for the past two decades, according to the chairman of the Pensions Commission, Adair Turner.
Turner believes traditional defined benefit (DB) schemes suffered death by one thousand costs as administrators overestimated their resilience in the bull market of the 1980s and 1990s. Speaking ahead of a visit to Edinburgh this week, Turner said: “Almost everybody involved was living in a fool’s paradise. We believed that equity returns were making all this stuff costlessly affordable and in the late 1990s business woke up and realised it had made immensely generous pension promises.
“Essentially they loaded more and more cost onto pension schemes, by making spouse benefits and indexation mandatory. There was also a change in the tax law in the mid-1980s which made it less easy to run large surpluses and there was the dividend tax change in 1997.
“Bluntly, governments didn’t think it through, managements didn’t think it through, actuaries failed to say is this equity return sustainable. There were many people who did not see the problem coming. A lot of different people killed DB.”
In his final report Turner may propose mechanisms to reduce the inequalities between employees of the same firm who do and do not have access to a DB scheme.
“It’s a huge inequality — from a social point of view it leaves us with large numbers of people heading towards retirement with inadequate pensions.”
Turner believes we now need a more measured approach. It is likely that, when his commission makes its final recommendations in November — probably after the election — he will advocate that short- term political considerations are never again allowed to harm UK pensions policy.
He said his commission has received 250 valid submissions in response to its initial report last October. These were from industry bodies, think tanks, lobby groups and other interested parties but “not all have been absorbed yet”.
He insists he has an open mind on whether an apolitical body should take charge of pensions policy. But he said: “There’s a lot to be said for creating mechanisms in the pensions area whereby we get a policy clear for the next 25 to 40 years and stick to it, or stick to it with adjustments where the basis of those adjustments is not short-term politics but a set of pre- agreed principles.”
There have been calls recently from the Association of British Insurers that his commission should be converted into a permanent body to oversee pensions. There would be parallels with Chancellor Gordon Brown’s decision to hand responsibility for interest rate setting to the Bank of England in 1997. But Turner said: “The challenge whenever you set up such a quasi-independent body is you can only do it if you’ve agreed what the principles are. An independent Bank of England could only set the inflation rate within the context of an agreement that the inflation rate ought to be 2 per cent. That is the challenge.
“But it may be that the consensus which we hope will emerge can be wrapped around with some institutional distance between what the government does year by year and key features of the system.” Asked if Brown would support the proposal, Turner said: “It is not an issue we have debated with them yet.”
If such a body is to be formed, it seems unlikely the former CBI director-general will want to lead it. “After three years of pensions, I have just about had enough.”
But why is Turner not going to unveil his findings until after the election, now thought likely to be on May 5? He said: “The danger is it would become a political football and the different parties would leap into what look like sensible partial solutions but things that, once you link to everything else, would not make sense.”
It is impossible to fathom whether greater levels of compulsion are on Turner’s agenda. Yet the key problem can be summarised as follows: greater longevity has given us an ageing population, which means that the proportion of the UK population aged over 65 (“retirees”) against those aged 20-65 (“workers”) is going to rise from 28:72 to 48:52.
Turner said: “As a society we’re going to have to make clear decisions about the generosity of the state system and the state pension age. Individuals are going to have to make clear decisions about the age they wish to cease working, how rich they want to be in retirement, and how much they’re going to save.”
In reality, since individuals are not saving more and since state provision is not becoming more generous, citizens have only have two options, Turner said. “A lot of people are going to be faced with the choice of either working later or being poorer in retirement.
“We will come up with a set of proposals which will provide a more coherent way forward for British pension policy, and I’m an optimist by nature, and we have a good chance of constructing a debate out of which comes consensus.”
Adair Turner speaks at Dynamic Earth, Edinburgh, on Wednesday at 6pm.
This article was published in the Sunday Herald on 20 February 2005