In my last three blog posts I explained how the gold-standard of defined benefit pensions had turned from a useful recruiting tool into an expensive liability for private sector schemes by the start of the millennium.

The culmination of these changes was a slew of closures of private sector final salary schemes. This change was enough to spook the then Labour government in setting up the Pension Commission in 2002.

Battling the Treasury

Unsurprisingly there was tension between Tony Blair and Gordon Brown about the role of the Commission. According to this Institute for Government report, the prime minister felt this was an area where the government needed to act while the Chancellor was reluctant to open pensions up to wider examination.

By November 2002, Tony Blair had managed to convince the Treasury this issue needed consideration. Although the PM wanted to look at the entirety of pension provision, the Treasury would only agree to a Commission with restricted remit – one which excluded the state pension.

The purpose of the Commission was to review the level of occupational pension provision, the level of personal pension savings and other levels of savings. It was then effectively ‘kicked into the long grass’ with the final report not due until after 2005 election.

Battles with the Treasury did not end there – there were disputes about the composition of the Commission. Eventually they decided on three Commissioners – one nominated by the PM, one by the Chancellor and one by the DWP.

The PM’s nominee, Adair Turner, was the chairman of the Commission and he set its working style. His McKinsey heritage determined there should be an emphasis on going back to the original data, building models from scratch and drawing in international expertise.

Killer facts

The Commission published its first report in October 2004 which established Lord Turner’s three ‘killer facts’:

  • The proportion of UK private sector workers relying entirely on the state sector pension was 46% in 1995 and had risen to 54% by 2004.
  • Only 0.5% of people make pension savings decisions on a rational basis; compulsion is a much more effective tool.
  • It was impossible for small- and medium-sized enterprises to offer occupational pensions without high administrative fees ending up consuming a punitive proportion of the employee’s contributions.

Each of these powerfully illustrated under the current system people were not saving enough for their retirement and a significant proportion of the population was heading for a very low income once they were pensioners.

Eradicating the three killer facts required new policies. The first focused on the state pension. The Commission recommended a more generous and simple state pension which started at a later age, reflecting the improvements in longevity.

In addition, increases in the state pension age should be linked to average earnings to prices. This would prevent the real value of pensions relative to average earnings from continuing to fall.

These state pension recommendations fell somewhat outside of the agreed remit. But the Commission managed to persuade the Treasury it was impossible to address private pensions without looking at state pensions. It argued that a flat rate state pension makes retirement planning much easier because people then know what income they will receive from the state.

With a more coherent state pension in place, the Commission could turn its attention to workplace pensions. This was the ‘big idea’ – to use the insights of behavioural economics to frame proposals for auto-enrolment in employer schemes. The next post will delve into this in greater detail.

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