18 November 2004
Malcolm Wicks MP
Minister of State for Pensions
The Pensions Show
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Demographics
One of the biggest challenges that the developed world face is the significant demographic change due to increasing life expectancy and below-replacement fertility.
When the State Pension was introduced in 1948 the ratio of working age people to pensioners was 5–1. Today, that ratio is 3–1 and by 2040 it will be 3–2. This is the pensions challenge we face.
On my recent visit to China I learnt of the challenge facing that country. Between 2000 and 2050 the number of people aged 60 or over is set to increase by 250%. In 2000 the ratio of workers to elders was 9–1, by 2050 that ratio is expected to be less than 3–1.
Hither to, people have looked at these challenges as being confined to Europe and North America, but clearly these are world wide issues.
Pensions Commission
Our approach to the challenges that face us has been that of reform. We also established the Pensions Commission to identify the effects of demographic change and to set out their views on the extent to which the voluntary approach can continue to deliver the required outcomes.
The Commission’s interim report is probably the single most comprehensive and authorative piece of analysis on the British pension system that has ever been produced.
Building on the analysis of our 2002 Green Paper, the report makes clear the scale of the issues facing us.
Turner estimates that “9 million people may be under-saving” and “75% of all DC scheme members have contribution rates below the level required to provide adequate pensions”.
But we need to bear in mind a key point stressed by Turner –- that that there is no crisis today, Turner states “the major challenge we face is more concerned with getting the pension system right for those people retiring from, say 2050 onwards, than fixing problems likely to be reflected in pensioner incomes over the next 10 years”.
In fact the report points out that “the position of pensioners on average today is at a higher level of average earnings relative to the rest of society than it’s ever been”.
Looking to the future, we all have an important role to play – Government, individuals, employers and the Pensions and Financial Services industry.
Provider
I do want to say a little more about each of these roles.
It is important that the State Pension continues to be viewed as a solid foundation on which to build, indeed the Prime Minister has made it clear that this should be so.
Our reform of SERPS into State Second Pension has made real improvements to pension provision for those with interrupted work histories and low earnings.
There has been criticism of our Pension Credit reform, but it is helping 3.1 million people out of poverty – two thirds of whom are women. It is a vital part of our overall policy to do away with Pensioner Poverty.
Enabling and incentives
Secondly, the Governments role as an enabler. A key element of enabling is ensuring we strike the balance between encouraging people to make their own provision and on the level of incentives we provide.
I’m sure I don’t need to tell you (but I will) that tax relief on pensions saving is running at around £19 billion a year. In addition, National Insurance relief on employer contributions is worth further billions.
People seem to take this as a given and fail to recognise what an incredible incentive tax relief on this scale represents.
While I’m on the subject of tax, the simplification of the pensions tax regime in the Finance Act which replaces the 8 previous regimes with one, has been widely welcomed. Measures enabling people to continue working for their employers and draw on their occupational pension sit well with our broader policies for extending working life and a more flexible approach to retirement.
Another element of this enabling role is ensuring that people have access to savings products that are simple, low cost and risk controlled. Stakeholder Pensions are one such product - over 2 million have been sold so far.
We are currently consulting on stakeholder regulations, and we think we have struck the right sort of balance – having listened to the concerns expressed by industry.
Issues like the charge cap and ‘lifestyling’ for those who do not make active investment choices are key points and I hope that people will respond to the consultation.
Enabling people to save is not the prerogative of government. We have established the Employer Task Force to work with employers to identify best practice and new initiatives to enable employers to encourage their employees to join schemes where they exist.
ABI research in this area is telling. It shows, for example, the difference that employer pension contributions make – where there is no employer contribution to a scheme take up stands at just 13%, but with an employer contribution of at least 5% this rockets to 69%.
We also look forward to hearing from the Employer Task Force about how our policies impact on hybrid schemes and other forms of risk-sharing. And we are looking to engage more actively with employers in small businesses.
But we cannot expect, under a voluntary system, employers to do it all. Individuals have responsibilities and our informed choice agenda focuses on the individual.
At the moment, not enough people are taking advantage of schemes that are already in place. Some 4.6 million workers who are eligible for membership of schemes with employer contributions don’t bother to join.
Therefore, we are looking at issues like automatic enrolment as a way of increasing participation. I would welcome other ideas on how we can encourage individuals to participate in existing schemes.
On the broader enabling and incentives front it has been said that the best pension policy is a job. Getting more people into work will provide them with the opportunity to save for their future.
Our achievements in creating economic stability and our active abour market policies, have already meant significant progress – employment is at record levels and unemployment at its lowest for nearly 30 years.
This is not simply an issue of people working beyond 65. The real challenge is helping people to work up to State Pension age. At the moment 1.4 million people in the age group 50–65 are receiving Incapacity Benefit. We know that many of this group do want to work and the trend is moving in the right direction but there is more to.
Since 1993 employment rates amongst those aged between 50 and SPA have been on a gradual upward path. For men, from around 65% in 1993 to around 72% in 2002.
But we need to break the outdated notion that people have to retire at 65. That is why we are establishing a framework enabling those who want to work longer to do so.
The decision on when to retire should not be based on rigid rules which mean that you have to leave employment when you reach a certain age, but should be based on individual choice. Assuming that they are competent, people should be able to judge when they want to retire for themselves.
Age discrimination legislation covering employment and training will be implemented by October 2006. I feel sure this will lead to increased employment and training opportunities for older workers. We know that older people, both in and out of the workforce, believe that discrimination on the grounds of age can be just as traumatic as other forms of discrimination.
The measures in the Pensions Bill that improve the reward for those who defer taking their State pension will both enable people and give them a real financial incentive to stay in work longer. And with the issues of falling fertility rates older workers will become an increasingly important element of the nation’s workforce.
Regulator
Thirdly I want to talk about Government’s role as a Regulator.
If people are to save for retirement in an occupational pension they need confidence that their pension savings are secure.
Government has a role to play in ensuring that this is so. We want to protect the interests of people in their endeavour to save, and boost confidence in the system.
That is why we are creating a new Pensions Regulator. We believe that we need a high profile, proactive and effective regulator.
Building on the foundations laid by Opra, the new Pensions Regulator will focus on tackling fraud, bad governance and poor administration. In addition to its power to sanction, it will encourage best practice through an increased education and guidance role.
Regulation will be proportionate, ensuring members are protected, while reducing the regulatory burden on well-administered pension schemes.
Protector
The creation of the Pension Protection Fund will help ensure that a pension promised is a pension honoured. It will protect over 10 million members of defined benefit pension’s schemes within the UK.
Whilst we are keen to ensure that peoples pensions are protected, we are also keen to keep the costs to employers as low as possible so are setting the initial levy at £150 million for the first year.
There has been a great deal of debate about how quickly we can move to the risk based levy and around the issue of the gap in coverage between the PPF and FAS. That’s understandable – we expect and welcome scrutiny of our proposals in what is after all a new area of pensions protection.
I announced recently that eligible schemes whose sponsoring employer has already entered insolvency proceedings may still be able to receive PPF compensation – as long as the scheme satisfies the relevant criteria.
One major area of criticism has been that the Pension Protection Fund is a burden on final salary schemes. However, if people are prepared to pay around £20 for a fortnight's holiday insurance, a similar amount a year to protect a pension for life would seem to represent extremely good value. The Pension Protection Fund is a significant policy development which will stand the test of time.
We believe that once the role of the PPF is understood it will strengthen people’s confidence in their pension schemes, increase security and encourage greater levels of participation.
Our proposals for the Financial Assistance Scheme are in development and will also offer help to people who have lost out before the Pension Protection Fund is introduced. We hope that these measures will put security back into pensions.
Which finally brings me to an important aspect of the trust structure of occupational pensions – that of the role of trustee. Trustees are at the very heart of the UK’s private pension provision and we want to strengthen their role.
The Pensions Bill prescribes that at least one third, moving to half, of all trustees on a board are member nominated. Broadly the trustee base is an important aspect of increasing confidence in the trustee system, allowing pension schemes to have access to a diverse range of experience. It makes sense to have a genuine partnership in an area as important as pensions.
Many of the measures set out in the Pensions Bill will impact on the responsibilities of trustees. As well as wanting to ensure that trustee boards benefit from the wide range of perspectives and skills of member-nominated trustees, we want to raise the level of trustees’ knowledge and understanding.
New measures in the Pensions Bill will require all trustees, member-nominated or otherwise, to be up to speed with what is in their trust deed and scheme rules, and with relevant pensions and trust law.
I believe that one of the great strengths of British occupational pensions is indeed the system whereby thousands of such trustees volunteer to manage pension schemes on behalf of their members (such trustees of course include trustees nominated by the company as well as member-nominated trustees.)
We want to strengthen and support this system, not knock it – that's why we have taken action in the Pensions Bill to strengthen trustee skills and expertise. We feel that we sometimes don't hear enough from the thousands of committed trustees who run the British occupational pension system, and perhaps more could be done to promote a greater understanding of the benefits good trusteeship can bring, particularly in smaller firms and schemes who find it harder to come to gatherings like this.
I am considering whether it would be useful to establish a Trustees Forum, which could be an important channel to the Government on trustee issues, and
promote the role and effectiveness of trustees, strengthen the voice of lay trustees in the debate about pensions (ensuring that we hear their voice as well as that of their professional advisers, or those who earn their living by running pension schemes), and provide support and encouragement to trustees of small schemes.
I would welcome suggestions from those here today as to whether such a forum would be useful, and how it might work. I am today inviting all of you and others with an interest in this area to write to me with your views.