Government dilemma as pension age heads for 68

• Many Scots won't have to worry about pensions...

• because they'll probably die before retirement

• Everyone else may have to work until 67 or even 69

Key quote

"As a percentage of expected life in retirement, a one-year increase in the state pension age has a bigger impact on people in the lower socioeconomic groups than in the highest." - Lord Turner

Story in full

THOUSANDS of poorer Scots could escape controversial increases in the retirement age recommended yesterday - because they are likely to die earlier than the better-off.

Adair Turner's government-authorised Pensions Commission yesterday said the state retirement age must rise over the next half-century.

The age of entitlement to the state pension is likely to rise to 66 in 2020, then 67 in 2030 and finally 68 in 2050. If ministers decide the state's contributions should be smaller, Lord Turner said pensions could even be delayed until 69.

The plans sparked protests from Labour MPs and trade unions, who argued that the poorest workers will lose out the most from working longer.

The report, which has taken three years to compile and runs to 460 pages, also proposed state-run personal savings accounts for all workers, with rules to force employers to make matching payments.

Everyone over 75 should have automatic entitlement to a basic state pension, to address the scandal of millions of women missing out on retirement income, the report says.

Although he said there is no current crisis, Lord Turner insisted that without radical action now, inadequate savings and rising lifespans mean today's workers will face severe hardship in retirement.

Ministers say they will respond to the proposals next year, but the report already faces a major threat from the Treasury.

Gordon Brown, the Chancellor, has let it be known he will resist Lord Turner's call for the basic state pension to be linked to earnings instead of prices.

Lord Turner took direct aim at Mr Brown's record, calling for the Chancellor's flagship means-tested benefits to be all but scrapped.

Mr Brown believes micro-managing the distribution of retirement benefits allows him to help the poorest directly. Lord Turner said persisting with the Chancellor's scheme "would undermine private savings".

The Chancellor has hinted that he thinks Lord Turner's plans are not affordable, but the peer insisted that many of his proposals will be funded by aligning women's retirement age with that of men's by 2020.

Despite celebrating rising lifespans for Britons across the board, the pensions commission warned that poorer people will continue to die earlier than the better off.

The committee's experts estimate that for the foreseeable future, the poorest men will die on average five years before the richest; for women the gap is three years.

As a response, the commission suggested new rules that would allow workers with the shortest lives to start claiming some state retirement benefits earlier than the new higher pension age.

Those rules would be particularly relevant in Scotland, where the poorest areas are blighted by lower life expectancy.

A 65-year-old man in Glasgow, for instance, can expect to live another 13.25 years.

In Aberdeenshire, the figure is 16.54 years.

Lord Turner accepted that making workers wait longer for their state pension will disproportionately hurt the poorest people. "As a percentage of expected life in retirement, a one-year increase in the state pension age has a bigger impact on people in the lower socioeconomic groups than in the highest," he wrote.

His remedy is to allow the lowest-paid workers to have access to some retirement benefits before they can claim their full state pension, such as the means-tested Guarantee Credit and perhaps a reformed State Second Pension.

"This might be an acceptable price to pay to ensure that the lowest income groups with lower life expectancy would, if they wanted to, be able to access state pension benefits slightly earlier than others," the report says.

In the Commons, John Hutton, the Pensions Secretary, came under immediate pressure to spare the poorest workers.

Ian Davidson, the Labour MP for Glasgow South West, represents some of the poorest people in Scotland. "The average life expectancy in my constituency is 68," Mr Davidson said. "Enthusiasm for an increase in the pension age is less than total."

Brendan Barber, the leader of the TUC, also warned that special consideration must be given to the poorest if the unions are to support the Turner proposals. "We remain opposed to any proposal to increase the state pension age that would make manual workers and the poor worse off," Mr Barber said.

While increases in the state pension age are decades off, the most immediate measure, set to be implemented by 2010, is the National Pension Saving Scheme, likely to become known as the Britsaver.

The scheme will see workers automatically committed to paying 4 per cent of their salary into a personal fund that would be managed by commercial banks. The government would contribute 1 per cent. Unless a worker opts out of the scheme, employers would also be compelled to contribute 3 per cent.

"Make no mistake, compulsion would be a step too far for smaller firms, who simply cannot afford such a hike in the cost of employment," said Sir Digby Jones, the head of the CBI.

The pensions report set the scene for Michael Howard's last Prime Minister's Questions as Conservative leader.

"The only retirement he is planning for is the Prime Minister's," Mr Howard said of the Chancellor.

Mr Blair gave little away about the government's eventual response to Lord Turner's report, promising only "a long-term pension framework", but many MPs noted that the Prime Minister did little to defend Mr Brown's means-testing agenda.

Masters of fairytale economics aim to make difficult decisions disappear

FRASER NELSON

THE report had been riddled with bullets before it was even published. Lord Turner knew his Pensions Commission had already been savaged by the Treasury - and as he stood behind the podium yesterday, he hit back as hard as he could.

"Different people will take different judgments," he said in the Royal Overseas League office. "But unless people are willing to discuss it, they are not serious participants in this debate. They are indulging in fairytale economics, in which a fairy godmother makes all difficult choice disappear."

No-one was in any doubt about whom he was talking. The Chancellor, Gordon Brown, he believes, is the only person standing outside a pensions consensus where a higher state pension must replace the pension credits and means-tested benefits issued at present.

The Chancellor sees finance as his domain - and thinks that anything to be implemented will be done so on his watch. He has never welcomed the Blair- inspired commission into pensions. The Prime Minister knows he stands no chance of forcing through pensions reform that Mr Brown opposes. So both will bury the Turner proposals.

Neither would be so brash as to say this in explicit terms. The Turner report is buried by being welcomed as an introductory note to a debate to be concluded by the likes of Mr Brown.

The Chancellor is touchy about being denounced as a "roadblock" to reform - as has become the taunt of David Cameron, soon-to-be Tory leader.

So he will look for an opportunity to present his own radical reform - but on his terms. He does not see a timebomb, and does not see why he should be rushed into making a decision.

The briefing wars were starting again last night. The Treasury was briefing that Lord Turner's report has a 20 billion black hole - and that his plans for a second pension are not funded.

So the Turner Report may serve to air the pensions debate, but it is unlikely to twist anyone's arm - Mr Blair is, on this issue, agreed with the Chancellor on keeping means testing.

Mr Brown likes to decide big issues by raising the questions himself, then providing the answers. It will be no different this time around.

Doing things the Swedish way with a pick-your-own fund

WHY trust the government to manage your pension? This question is at the heart of a main proposal in the Turner Report, for a scheme set to be dubbed the BritSaver.

Based on a system popular in Sweden, it would be a second state pension that workers could control - they would also be able to see every year how their investment was faring.

Under such a scheme, the government would nominate a wide array of funds, allowing workers to choose one and switch, as they feel appropriate. For example, those who thought the economic future lay in South-east Asia could choose the appropriate fund. A default fund would be used for those who made no choice.

Workers would pay 4 per cent of their salary into a BritSaver, with the employer putting in 3 per cent and the government 1 per cent. It is estimated this would allow a 25-year-old earning 25,000 to retire aged 67 on a pension worth 46 per cent of their salary.

When first tried in Sweden, critics warned it might work for the middle class but that ordinary workers had little understanding of the stock market and would be unable to navigate their way through a bewildering array of international funds. To the surprise of the authorities, however, two-thirds of Swedes exercised their right to choose, as it became a talking point across the country.

The thorny question facing the UK government is what to do with the default fund - and whether ministers could be sued if it performed badly. There are no details about this at present.

The BritSaver would be a small part of the overall pension. In Sweden, the fund takes up only 2.5 per cent of salary, and workers must set aside 18.5 per cent for their retirement.

The Turner report referred to this as the National Pension Savings Scheme and said it should be established by 2010.

A version of this, named the KiwiSaver, is being adopted in New Zealand in 2007.