Future pension income will be deficient in total and increasingly unequally distributed, unless some combination of

1. higher taxes/ National Insurance contributions;
2. higher savings; and/ or
3. later average retirement age

The Report adds that the way forward must involve some mix of

1. A major revitalisation of the voluntary system;
2. Changes to the state system; and
3. Increased compulsion beyond that already implied by the State Second Pension and contracting-out arrangements.

Lest the Government pin too much hope on the first option alone, four major barriers to the success of a voluntary pension saving system are spelled out:

• most people do not make ‘rational’ decisions about pension saving (a pointer to the important - even crucial - findings of behavioural finance research);
• the cost of advice significantly reduces the return on saving;
• the UK pensions system is extremely complex - leading to confusion and mistrust; and
• means testing increases this complexity and for some people reduces the incentives to save which the tax system provides.

These three options - outlined in Chapter 7 (p. 269) of the Report - will be the focus of the Pensions Commission between now and the publication of the Second Report, which will include policy recommendations, in Autumn 2005.

Meanwhile, the Commission wants written submissions from the industry (and others) on the following issues and hypotheses, by 31 January 2005:

1. What should be the balance of responses to the demographic challenge (described in Chapters 1 and 2)?
   • What mix of the 4 possible options: pensioners becoming poorer relative to the rest of society (“the least attractive” option); higher taxes/NI contributions devoted to pensions; higher savings; or higher average retirement ages, should be pursued?
   • How far should government or society in general have a point of view on this trade-off versus leaving it to individuals to make their own choice?

2. Is there broad agreement with the description of trends in the UK pension system set out in Chapter 3?
   • Is our assessment of the DB-DC shift and its implications for the future level of total contributions reasonable?
   • What is the appropriate risk-sharing balance between the state, employers, the financial services industry and individuals? Is the large shift of risk to individuals which is currently occurring acceptable, and if not is it avoidable?

3. Is Chapter 4’s assessment of the adequacy of existing and likely future pension provision reasonable?
   • Is our benchmark definition of “adequate” income replacement sensible?
   • Is our macro-model of likely future pension contributions and pension incomes too pessimistic or too optimistic?
   • Have we correctly defined the groups of people likely to be inadequately provided for and those likely to be well be provided for?

4. Are the conclusions of Chapter 5 (“Non-pension savings and housing”) reasonable?
   • Is it agreed that non-pension financial assets will play a non-trivial but modest role in pension provision? Could they play a bigger role in future?
   • Is it agreed that housing wealth, especially via inheritance, could play a significant role in pension provision, on average and overall, but that it does not provide a sufficient solution because of the pattern of distribution of pension rights and housing assets?

5. Is there agreement that the current voluntarist system, combined with the current state system, is unlikely to deliver an acceptable solution to the problems for the reasons set out in Chapter 6 (“Barriers to a voluntarist solution”)?
   • In principle, can a voluntary system work at lower income levels?
   • Is there a segment of the market comprising lower income, lower premium savers, which cannot be served profitably by the financial services industry on a voluntary basis except at Reduction In Yields which make saving unattractive to the saver?
   • How important an impediment to save, or to advise people to save, is the impact of means-testing?

6. Is our Chapter 8 analysis of the position of women pensioners and of how it is likely to evolve, reasonable? And what follows for pension policy?
   • Do people accept the principle that we need to aim for a system in which all individuals, men and women, accrue pensions in their own right?
   • Are there important private pension policy issues specifically affecting women or do the key issues affecting women relate primarily to the contributory nature of the state pension?

7. What solutions to present problems should be proposed?
   • Can the voluntarist system be made to work, and if so by what means? How effective can financial education and informed choice be? Is a significant reduction in the extent of means-testing within the state system required to make voluntarism possible? Can the cost of provision (RIY) be reduced to more acceptable levels within a voluntarist system?
   • Do organisations believe that changes to the state system are required in order for a voluntary system to work effectively, or as a necessary complement to an increase in compulsion? And if they propose higher and less means-tested state pensions, what mix of the two inevitable alternatives (higher taxes/NI contributions or a higher SPA) do they propose?
   • Is there a case for compulsory private savings and if so what form should it take? Should employers be compelled, or employees, or both?
   • If compulsion was introduced, what design features would be required to ensure an appropriate balance between individual choice, guidance on sensible investment approaches, and low costs of administration?