Contact: David Wilson, ext 7407

1 Introduction

1.1 The Government set up the Pensions Commission as an independent body following its pensions Green Paper in December 2002. Its remit was:

`to keep under review the regime for UK private pensions and long-term savings, and 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'.

1.2 The Commission issued its First Report in October 2004. The report is largely descriptive, and makes no specific recommendations on pensions policy. A second report is planned in October 2005 which will include policy recommendations.

1 The background

1.1 Life expectancies are increasing rapidly and will continue to do so. However, the birth rate is low. This means that the percentage of the population over 65 is likely to double between now and 2050.

1.2 The Commission identifies four main options for the future:

· Pensioners will become relatively poorer.

· Taxes and/or national insurance will need to rise to enable state pensions to be increased.

· People will need to save more for their retirement.

· Retirement ages must rise.

1.3 To avoid the first scenario, there will need to be a mix of the other three.

2 Retirement ages

2.1 The Commission argues that a rise in the average age of retirement is essential. This is already occurring to a certain extent. However, a large increase in the retirement age would be needed to solve the problem. Inequalities in life expectancy and health later in life mean that this alone cannot be a sufficient solution.

3 The UK pension system - current position

3.1 The Commission believes that, until now, the UK system has seemed to work well, because a very basic state pensions system has been accompanied by a highly developed system of voluntary personal pensions.

3.2 However, the Commission expects the state to support older people less in the future as one means of controlling public expenditure. Unfortunately, at the same time the private system is in decline, exacerbated by poor market performance and the mis-selling of pension products. Defined benefit schemes in the private sector have been closing, and there has been a shift to defined contribution schemes, where the investment risk falls on contributors. The underlying level of saving for pensions is falling. The Government also directly increased the taxation of pension schemes, when Gordon Brown withdrew the right to reclaim tax deducted from dividends on UK shares in 1997.

3.3 The Commission estimates that 75% of defined contribution scheme members have contribution rates below those required to produce adequate pensions. Around nine million people may be under-saving. However, contributors to defined benefit schemes, like the Local Government Pension Scheme, should be relatively well provided for.

4 Non-pension savings and property

4.1 The Commission estimates that the personal sector owns around £1,150 billion of non-pension financial assets, some of which can provide retirement income. However, this cannot provide a solution as it is very unequally distributed.

4.2 Housing assets in the personal sector are valued in the report at around £2,250 billion, and are more evenly distributed. However, liquidity is limited, and there will always be uncertainty over house prices, as well as other claims on housing wealth such as long-term care.

5 Barriers to savings

5.1 The Commission says that the savings market has become increasingly complex over recent years. Many people need both encouragement and professional advice, which in itself can be expensive, sometimes eating up to 30% of yields on savings. Means testing, for example for the new pensions credit, also reduces the incentive to save.

6 Possible ways forward

6.1 The Commission suggests three possible ways forward:

· Revitalisation of the current voluntary system

· Significant measures to improve the state pensions system

· An increased level of compulsory private pension saving.

6.2 The Commission has deferred making any firm proposals until the autumn of 2005, but in the meantime asks for written submissions from organisations and individuals who wish to contribute to the national debate by the end of January 2005.

7 Relationship and relevance to the Local Government Pension Scheme (LGPS)

7.1 It is reassuring that the Commission's report specifically refers to public service defined benefit schemes as examples of a good standard of pension provision, although that in itself means that the LGPS is under attack from those in the private sector and the press. However, many of the issues identified in the Commission's report are analogous to the current difficulties with the LGPS. In particular, contributors are still paying a contribution rate of 6%, which was fixed in the 1920s, when life expectancies were much lower than now.

7.2 Indeed, the recent changes and planned changes to the LGPS (see items 9 and 10 of this Agenda) are a blend of the options for change listed above in paragraph 2.2.

7.3 The Panel may wish to respond to the Commission's request for written submissions. For example the Panel could suggest that funded defined benefit schemes are the way forward for all employers, and that they should be strongly encouraged, or obliged, to set up pension schemes and contribute their fair share as part of a balanced recruitment package.

Recommendation

1 That this report be noted.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

None.