[A-List] UK economy: pensions crisis

Michael Keaney michael.keaney at mbs.fi
Mon Oct 11 07:17:47 MDT 2004

Pensions black hole grows to £57bn
MICHAEL SETTLE, Chief UK Political Correspondent
The Herald, October 11 2004

BRITAIN'S pensions crisis is substantially worse than first thought with the
savings black hole now £57bn a year, more than double previous estimates.

The gloomy "wake-up call", which if not dealt with will condemn millions of
pensioners to poverty in the decades ahead, has come in leaked figures from
the interim report by the government's pensions commission headed by Adair
Turner, the former CBI chief.

The report, due out tomorrow, will posit three "unpalatable" solutions to
tackle Britain's burgeoning pensions crisis: higher taxes, people having to
save more, or raising the retirement age to, say, 70.

In Scotland, the timebomb is arguably ticking loudest as official figures
predict that by 2021 those Scots aged 60 to 74 will have increased by 29%
and those over 75 by 27%.

The Turner commission is not expected to recommend its own preferred option
to solving the crisis until its full report in mid-2005, but its findings
will push pensions up the political agenda ahead of an expected general
election in spring.

The issue is likely to exacerbate tensions between Tony Blair and Gordon
Brown as Blairites believe it is the chancellor's means-tested benefit - the
pension credit - that has created a disincentive to save for retirement. It
is believed Alan Johnson, the new pensions secretary, , wants to scrap the
benefit, the basic state pension and the second state pension and replace
them with a simpler increased "citizen's pension".

Mr Blair is today expected to promise major welfare reform, including
cutting spending on incapacity benefit, in his speech to the Institute for
Public Policy Research in London.

Rodney Bickerstaffe, president of the National Pensioners' Convention, last
night called on the prime minister to increase taxes to pay for better
Today, the Tories will set out their "eight-point action plan" for the
crisis. They have pledged to restore the link between pensions and earnings.

The leaked figures show that rather than the £86bn a year thought to have
been put into private pensions, the true amount is £40bn. The Turner report
will note Britain contributes about 6% of its wealth creation to pensions
compared with around 11% in Europe. Taken together, this equates to a
£57bn-a-year shortfall.


The crisis in pensions
Editorial Comment
The Herald, October 11 2004

IT was difficult to imagine the pensions crisis could get any worse. It has:
£30bn worse. The interim report of the Pensions Commission is expected to
deliver a damning verdict on Britain's provisions for its pensioners and to
warn an extra 5% of its gross domestic product must be invested if it is to
match the average contributions across the rest of Europe. If done through
income tax alone, an extra 17 pence in the pound would be needed to make up
the shortfall.

There are many reasons for this crisis: plunging stock markets, investment
scandals, the chancellor's tax on pension funds and the increasing numbers
of companies putting a cap on final-salary schemes. Even if these issues
were resolved, the future for British pensioners remains bleak because of
the inexorable increase in life expectancy and the tendency for workers to
retire younger. The government appears resigned to the need to take action,
yet it has merely tinkered at the edges. It must address the problem and
with a view to the long-term good, not short-term gain.Workers have already
paid for too much, risked too much, for pensions that will be far lower than
hoped and which, in many cases, will make retirement a struggle. Gordon
Brown has had a considerable part to play in this crisis. His first budget
introduced a tax on dividends on pension fund investment income, costing
pension funds around £5bn a year. Low interest rates are an incentive to
borrow rather than save, adding further disincentive to the high-profile
difficulties with both private and company pensions.

The government has made some concrete promises of help for Britain's
pensioners. The pensions bill, making a slow journey through parliament, is
expected to introduce an insurance scheme which would give future workers
90% compensation if their company pension plan is wound up. The department
of work and pensions has also announced a £400m scheme to help past victims.
Both measures are welcome but they will act as a sticking-plaster, not a

Tomorrow's interim report will set out the possible solutions in simplistic
yet realistic terms: higher taxes, a massive increase in workers' savings,
or later retirement. All would be highly unpopular. Labour has already ruled
out raising the retirement age through legislation, and is likely to rely
instead on incentives such as tax breaks for those who stay on. A huge rise
in income tax is likely to be political suicide. Instead, the government
favours compulsory contributions to pensions, forcing both businesses and
workers to pay what would effectively be an extra tax. The CBI warned
yesterday that it could cost businesses up to £22bn a year, while workers
are likely to resent being forced to pay into something they now
understandably see as risky.

Alan Johnson, the pensions secretary, is also thought to be keen on
replacing the current myriad of state pension schemes with a "universal
pension" that would be cheaper to administer and would raise the basic level
of support. The findings of the pensions report, however, demand more
drastic action. Labour is veering towards the easy options and must look
instead at the three solutions set out in the pensions report. They are
difficult and unpopular, but they will tackle the root causes of the
pensions crisis. If the government continues to concentrate merely on
tinkering, millions of workers face a miserable, poverty-stricken old age.

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