A new report proposes raising the retirement age to 70 to head off a looming pensions crisis. Nick Morrison looks at the trouble lying in store for our ageing population.

AT five shillings, it quickly became known as the Lloyd George Crown, after the Liberal Chancellor of the Exchequer David Lloyd George. It was 1911, and the first plank of the welfare state, the old age pension, was in place.

Those first pensions were means-tested and paid only to those in need and over 70. It was not until after the Second World War that the universal state pension was introduced, with retirement ages set at 65 for men and 60 for women. No longer would workers have to toil until they dropped: now they would be able to retire confident that they would not starve, and at an age when they were hopefully still healthy enough to enjoy the fruits of their labours.

But maybe not for much longer. A report published yesterday, urging the retirement age to be raised to 70, is just the latest in a series casting doubt on the UK's ability to provide for its pensioners. An ageing population and greater life expectancy means the cost of preventing our senior citizens from falling into poverty is simply too great, the argument runs, and staying on at work longer is the only solution.

The CBI, authors of yesterday's report, says in return for deferring the state pension for five years, the sums on offer can be increased, but it is an argument which cuts little ice with trade unions.

Instead of an ageing population and greater life expectancy, the main problem is the way company pension schemes have altered over the last few years, according to Peter O'Brien, policy officer for the TUC in the North-East.

Many firms have closed their final salary schemes, which guarantee an income linked to an employee's final salary, and instead moved to money purchase schemes, where the size of the pension is dependant on the vagaries of the stock market.

"This is transferring the stock market risk to the employee away from the employer," says Mr O'Brien. But the TUC does agree with the CBI that urgent action needs to be taken, even if they differ over the means.

"We welcome the CBI's recognition that there is a pensions crisis, but we believe many employees will be angry that the CBI are saying they should work until they're 70.

"We believe what is needed to address this is a genuine partnership between employers, employees and the Government," Mr O'Brien adds.

Measures proposed by the TUC include restoring the link between pensions and earnings, which was scrapped by Margaret Thatcher in the 1980s, and requiring all employees, other than those on low pay, to contribute to a company pension scheme.

But the TUC recognises that some people may have to stay in work until they are 70 if they are to provide for their retirement.

"The emphasis is on people having to work longer or there is not going to be enough money in the pot when they retire," says Mr O'Brien. "We believe we're going to see more people in poverty when they reach retirement, and if they want to work until they're 70 then that is ok."

When universal state pensions were introduced, in the aftermath of the Second World War, the average life expectancy was 63. By the middle of this century it is forecast to be around 80, providing a powerful argument for delaying the state pension. But greater life expectancy has nothing to do with the hole in the nation's pension pocket, according to John Veit-Wilson, professor of social policy at Newcastle University. The bulk of the effect of an ageing population is already working its way through, he says, and, instead, it is the companies themselves which should take responsibility for deficiencies in their pension schemes.

"The employers have this great hole in their pension provision largely because when days were good in the 1990s, they took a holiday from putting in the contributions they said they would pay. They were allowed to do it, but the fact is they haven't made their contributions and now there is this great hole.

'They could take it out of their profits or treat it as an expense of employment, but instead they will make the employees pay for it," he says.

He says one of the major issues in pension provision is the system of tax allowances which gives billions of pounds to those with very high pensions, the top one or two per cent of pension recipients.

"Millions of pounds of taxpayers' money go towards their pension funds. It is extraordinarily unfair," he adds.

And he says the move away from final salary schemes has created a greater uncertainty over how large a pension an employee can expect.

"The final salary schemes are run on the basis that the current contributors are paying for the current pensioners. But with the money purchase ones, you haven't the faintest idea what you are going to get; it all depends on whether your money has been properly invested.

"If employers move towards that, what they're saying is they don't care what their employees are going to get. They will put some money in, and it is up to fate," he says.

But whatever the mistakes of the past, the CBI says it is concern for the future which has prompted its call for the raising of the state pension age.

"At one time we probably expected most people to have a couple of years of retirement, but we're now looking at several decades, so of course that means a much greater cost burden," says spokesman Richard Dodd.

"Individuals need to save more, companies need to save more into employees' pension schemes and the Government need to spend more. There is a huge problem emerging of paying for retirement: nobody is saving enough."

He says a "triple whammy" of people living longer, the decline of the Stock Market and the Government taking £5bn out of pension funds by changing the tax regime has forced many companies to close their final salary schemes.

"We have to be realistic about the situation we're in and work with that. People of every age group, including those in their 20s and just starting work, need to understand the importance of saving for retirement," he says.

And part of this realism is accepting that some people may have to work until they're 70.

"It would not affect anybody who is currently over 40, but for those people below about 40 we do recommend this phased-in change," he says. "The truth is many people will not need to, because they will be able to save enough to retire earlier.

"But the harsh reality is that we can't afford a retirement under the current set-up of what for many people will be two decades or more. That is what we need to address."