2 November 2004

Alan Johnson MP, Secretary of State for Work and Pensions

ABI Saver Summit

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It’s a great pleasure to have this opportunity to talk to you this morning. Now in its third year, the ABI Saver Summit has established itself as an important forum in the Pensions Industry calendar and I’m pleased that a DWP Minister has been able to address all three.

A great deal has happened since that first Summit back in 2002. By working in Partnership with employers, the Pensions Industry and individual savers themselves we’ve taken some major strides forward:

The ABI has been a key partner for us throughout the last two years and I thank you for your continued support.

Pensions – and specifically the question of having secure and adequate savings for retirement - has probably never been higher on the political agenda. Your “State of the Nation’s Savings” report published today highlights many aspects of the current under-saving challenge that are gradually seeping into the public consciousness.

And the recent Pensions Commission report has, of course, played an important role in this, setting out in detail the nature of the challenges that we face today – and the evidence base on which together we can build tomorrow’s solutions.

I am very grateful to Adair and his fellow commissioners for all their work in producing such a valuable report. As I’ve said before, it’s probably the single most comprehensive piece of analysis and evidence on the British Pension system that we’ve seen.

But much of the discussion around the Commission’s report has focussed on how we achieve a balance of taxation, more saving and longer working lives to avoid the fourth option of poorer pensioners.

By contrast relatively little attention has been focussed on the three policy options at the end of the report. Namely that we might need:

These options present difficult decisions for us all. But if we are serious about re-vitalising voluntary pension provision then we need to respond to the challenge of partnership facing Government, employers, the Pensions Industry and individual savers themselves.

Building tomorrow’s solutions means that we all have to be bold enough to face up to our responsibilities today.

Employers and Government

As Richard said earlier, employers have a crucial role to play in facilitating and encouraging greater pension saving. Today’s ABI report finds that an employer contribution was the reason why over half of those in pension schemes were persuaded to save.

In difficult times, it would be easy to criticise employers for not contributing enough to pensions.

But in today’s voluntarist world many companies could have chosen to take the easier route and withdraw from pensions altogether.

The majority haven’t – the majority have persevered with their pension commitments – and deserve great credit for this.

They believe that a pension promise made should be a pension promise honoured. People have to have confidence that their employer provided pensions will be secure and worth contributing to. And we’re taking a number of measures in this regard.

We are working hard to build the Pension Protection Fund that will revolutionise the security of occupational pension saving for over 10 million scheme members. We’ve introduced Full Buy Out provisions and we are creating a new Regulator with tougher powers in line with the Pickering Report recommendations.

This new pro-active Pensions Regulator will work with employers and trustees to ensure that the Pension Protection Fund is not exploited – and that those in breach of pensions legislation will continue to be named and shamed.

We’ve also built the Financial Assistance Scheme to give some help to those who’ve lost the most in the past.

But employers can help to bolster confidence by honouring their own obligations. We have to ask whether an employer that is still solvent and paying dividends to its shareholders but failing to honour its past pensions obligations is acting morally.

I’m grateful for the support of industry who have worked with us to ensure that corporate engineering can’t be used to dump liabilities on the fund.

These are radical steps that will go a long way to boost confidence in employer pension provision. But it is only one part of the challenge.

Another is making it easier for employers to provide and contribute to pensions.

There’s a tough message for us in Government here. We need to think carefully and creatively about the costs that employers face in providing pensions.

We need to examine how our policies impact on hybrid schemes and other forms of risk-sharing. And we need to give more consideration to the role of pensions in small businesses – and I hope that the Employer Task Force which we set up will be able to offer us a useful perspective on this when it reports later this year.

We need to advance the cause of simplification – which is why the Finance Bill will untangle eight separate tax regimes which have been thrown on top of each other over the years and replace them with one coherent system.

It’s also why the Pensions Bill is freeing up the old Section 67, making it possible for businesses to rationalise pension rights into a single system retrospectively. And why I’m negotiating for an early Bill that will simplify the whole set of regulations associated with Guaranteed Minimum Pensions.

And we need to press on with the removal of the requirement to index Defined Contribution Schemes and the reduction for Defined Benefit Schemes.

We’re determined to make employer pension provision a key factor in the job recruitment market. We want to re-vitalise the rewards for employers, improving the business case and the recruitment and retention benefits from providing and contributing to pensions.

Together with our other informed choice measures – such as taking action to ensure that employers provide a decent standard of pensions information in the workplace and exploring options around auto-enrolement – we can activate workers to take advantage of pension provision that is already available.

Some 4.6 million workers up and down the country are not taking advantage of contributory schemes that their employer provides. Adair’s report shows that for the earnings bracket with the most people in it – namely those on £10,000 - £20,000 – there are more people with no pension working for employers that have a contributory scheme than there are workers who have no pension and no access to a scheme.

If employers want to avoid being compelled to contribute a set amount to a pension then we need to move towards a world where employer pension contributions are the norm. ABI research shows what a difference this could make – where there is no employer contribution, pension take up stands at just 13%, but with a contribution of at least 5% it rockets to 69%.

Having confidence that pensions promises will be honoured; getting individuals to understand and take up the benefits of their employer pension contributions; and moving ever closer to a world where employer pension contributions are the norm will help us go a long way towards addressing the UK’s under-saving problem.

Pensions Industry and Government

Of course the Pensions Industry has a key role to play in helping employees to recognise the value of employer pensions. And we are grateful to the ABI for their tremendous work in leading the consortium that produced the workplace Pensions Information Pack that we launched this Summer.

In partnership with industry and employers, we are committed to increasing awareness and educating people about the value of their pension savings.

Pension forecasting – seeing one’s retirement prospects in black and white on the page - provides a powerful message.

We are now committed to delivering Combined Pension Forecasts to 6.3 million people by the end of 2005/06. These give people the full picture, combining state provision with what their company is offering.

But there is a challenge for Government and the pensions industry here – and we are working with the Financial Services Authority to identify ways to build a national strategy for improving financial capability. This includes looking at the delivery of financial education in schools, the role of generic advice, ways of reaching people through the workplace and helping young adults face up to personal finance issues, often for the first time.

This education and awareness will not just help employees make the most of their company pension provision – it will also help those without company pensions to take informed decisions about their saving for retirement.

Of course, key to this is having a suite of simple, low-cost, risk-controlled savings and investment products that can be sold through a new basic advice process.

My colleague, the Pensions Minister, Malcolm Wicks is this morning making a written statement to the House, announcing consultation on new stakeholder pension regulations. Our changes make the stakeholder pension “Sandler compliant”, implement the new charge cap and take on board improvements prompted by practical experience of operating the current regime. These draft regulations, together with those for the short and medium-term products and the FSA’s new basic sales advice documentation, complete the material needed to support the new Sandler suite of stakeholder products from next April.

Most significantly, we are consulting on a requirement to “lifestyle” the savings of those people who do not want to make investment choices. This means that at least five years before retirement, the member’s pension savings will start to be moved into less volatile investments in order to reduce the risk of a sudden drop in value shortly before retirement.

We are also announcing that when the new stakeholder pension charge cap comes into effect next April, the cap for existing investors will be held at 1%.

I applaud the vast majority of providers who had agreed to maintain the charge at 1% for existing customers. Unfortunately, because this agreement was not universal, we have had to put this in the regulations.

Although it would have been preferable for us to have been able to adopt a non-regulatory approach – it will not trouble the vast majority of you. But we are keen that the details of the regulations should be right and we hope that you will work with us during the consultation period to ensure that they are.

The Individual Saver and Government

The third set of tough messages are for individual savers themselves.

Working longer and/or saving more are the options – in other words if not exactly pay now, live later; certainly pay now or retire later. With support from employers, the pensions industry and Government, citizens will need to face up to this stark reality.

It’s our job in Government to remove barriers that prevent people from working longer. State Pension Deferral means that someone deferring until 70 can get a Basic State Pension of around £120 a week or a lump sum of between £25,000 and £30,000. Combined with our age discrimination legislation, it means that people have greater opportunity and greater rewards from choosing to work for longer – without being forced to.

Part of the challenge is about helping people work up to State Pension retirement age, rather than beyond it. For example, statistics show that over 1/3 of men are outside the labour market by the age of 60.

A demand-led approach to Jobcentre Plus, combined with the Skills strategy and our Pathways to Work Pilots are making a real and tangible difference in helping people to realise their own aspirations of getting back to work – and giving people the skills they need to fill the 700,000 vacancies that exist in the labour market.

And part of the challenge is about ensuring that we have a welfare system that targets the poorest and helps to improve their quality of life.

Pension Credit has revolutionised the targeting of state support to poorer pensioners. Compared with the 1997 system, the poorest pensioners are £1800 a year better off in real terms – in other words, above increases in the cost of living - and 1.8 million have been helped out of abject poverty.

Over 3 million pensioners are getting extra money – an average £40 per household per week – which together with the Winter Fuel Allowance, the free TV license and a 7% real terms increase in the Basic State Pension this century is making a real difference to their lives.

And through the Second State Pension we are helping 20 million carers, disabled people and those on low incomes to build up a decent second pension for the future – with twice the financial benefit of the SERPS scheme it replaces.

There is a real gender issue here. For example, 1.3 million of the 1.8 million lifted out of absolute poverty are women – and a higher proportion of women than men are now accruing State Second Pension.

Poorer women are heavily dependent on state pensions – but just 14% of even recently retired women have a full Basic State Pension in their own right.

In building a 21st Century Welfare State we have to address this issue. I understand the importance that is still rightly attached to the contributory principle which was central to Beveridge’s vision.

But Beveridge designed a system for a world where men had 50 year jobs and a 40 year marriage to a woman who they expected to provide for. Divorce was probably even rarer than a part time job.

If we are to build a pensions system for our times, it means seeking the best balance of universal entitlement and progressive distribution by reacting to the changing world around us.

It doesn’t necessarily mean abandoning the contributory principle, but it does mean finding a way to target poverty and ensure that those in low paid or unpaid work are supported by the system – and that means it needs to offer a better deal for women.

Conclusion

We know the scale of the challenge that we face – but we should take heart from what we have already managed to achieve.

I’ve only been Secretary of State for 7 weeks (it sometimes feels like longer) – but I’ve become more and more convinced about the power of re-vitalised partnership between Government, employers, the pensions industry and individual savers themselves.

I believe that we can build a consensus if we recognise that none of us – be it politician or financial journalist, industrialist or analyst, insurer or employee, the CBI or the TUC (or even the ABI) – possess that pouch of fairy dust that would resolve the problems with a single sprinkle.

Government and the pensions industry must continue to work to make pensions products accessible and understandable - and to improve and increase the level of financial literacy. Individuals have to embrace the tough choices of working longer and/or saving more and all of us need to work diligently and adroitly to design a pensions system, affordable now and in the future, that prevents the current challenges becoming a crisis in 15 to 25 years time.

I’d like to finish by paying tribute again to the ABI. I’ve already seen numerous examples of the way that your support and expertise has helped us to make progress in meeting these challenges.

I am grateful for that support and I look forward to working with you and learning from you over the coming months.

 

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