Britain facing pensions crisis - report

British workers will suffer a 30% cut in their retirement income unless urgent action is taken to tackle the pensions crisis, an official report warned today.

More than 12 million people over the age of 25 are not saving enough for their retirement, according to the research which starkly highlights the scale of the problem.

Spending on pensioners would have to rise by £57bn (€82.9bn) a year to keep pensions at the current level unless drastic action is taken.

The Pensions Commission, set up two years ago to consider the crisis, said the retirement age would have to rise to almost 70 if taxes or savings rates do not increase.

The 528-page report disclosed that 11.3 million workers were not making any contributions to a private pension scheme, including 1.7 million self-employed.

The eagerly-awaited report said the UK faced major challenges over pensions and the British government was left in no doubt that “unavoidable choices” would have to be made.

Tom McPhail, a pensions research manager, said people in the UK had been living in an unrealistic economy - a fool's paradise - in recent years.

“We live in this cosy little comfort zone,” he said. “We love our low mortgages, low consumer spending and cheap flights to eastern Europe.

“The current generation are probably the first pensioners that have enjoyed that luxury.”

He went on: “Peoples expectations are informed by what they see around them.

“A lot of people are not going to enjoy the same level of living as they do today – we are going to be worse off.”

He added: “It is a reality check for the nation as a whole, a lower standard of living as a whole.”

A combination of four ``unavoidable choices'' was put forward in today's report:

:: Future pensioners will be poorer than they are today.

:: Taxes and national insurance contributions will have to rise or public spending will need to be cut.

:: Each generation will have to save more and will be reliant on the next generation also saving more.

:: Retirement ages will have to rise.

The report said: “There are no alternatives to these four choices. If we do not raise tax rates, savings rates or average retirement ages, pensioners will on average suffer about a 30% decline in their incomes relative to average incomes between now and 2035.

“If we want pensioners to be on average as well off as today, but keep retirement ages totally unchanged, the percentage of GDP transferred to normal retirement age pensioners would have to rise from 9.9% today to 17.5% in 2050.”

Achieving the increase in the percentage of GDP would require either state spending on pensions rising by £57bn (€82.9bn) or private funded pensions more than trebling.

“If we want to keep pensioners as well off relative to average incomes as today but we do not increase taxes or savings rates, the average age of retirement would have to rise from the current male average of 63.8 to 69.8, in addition to the current female average of 61.6 rising to equal the male level.”

The Commission's chairman Adair Turner, a former leader of the CBI, said the UK's State pensions system was one of the least generous in the developed world.

“We used to say that was okay because of extensive private provision.

“That rosy picture always hid multiple inadequacies for specific groups of people even while the system worked well for many others.

“But the State system is now planning to become less generous in order to constrain public spending in the face of a rising number of pensioners, and the private system is in significant underlying decline.

“The long-term shift away from defined benefit to defined contribution schemes has become a flood as the fools’ paradise of overvalue equity markets has come to an end.”

The Commission reworked official figures which showed that the level of pension savings in the UK had been “seriously overestimated”.

Mr Turner went on: “A major shift of risk is occurring – from the State, employers and the financial services industry, to individuals who are often ill equipped to deal with it.”

He said millions of people were failing to make adequate provision for their retirement and warned that the number will grow because of the changing nature of private sector pension schemes.