19 October 2004

Alan Johnson MP, Secretary of State for Work and Pensions

CBI Pensions Conference

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It’s a great pleasure to have this opportunity to talk to you – at a time when – thanks in no small part to the work of the Pensions Commission – the challenges facing the future of UK pensions are higher in the public consciousness than ever before.

I know that Adair Turner is addressing the conference later today – and as I said in the House last week – I am very grateful to Adair and his fellow commissioners for all their work in producing such a valuable report: Probably the single most comprehensive piece of analysis of the British Pension system that we’ve seen.

I took some stick from the Opposition in a Parliamentary debate last week for saying that there is no magic bullet or pouch of fairy dust – so it’s very reassuring that the other day John Cridland spoke of the report “shattering the illusion that there is a single magic solution.”

All of us here know that meeting the challenges of longer and healthier lives will mean being prepared to take tough choices, as we pursue a range of policies across private and state pensions that will enable people to work longer and/or save more if they want a reasonably prosperous retirement.

We did not commission this independent report because we wanted an easy life. We said in our 2002 Green Paper that between 8 and 13 million people weren’t saving enough for their retirement. We appointed Adair and his colleagues at that stage because we needed a reliable, independent analysis that could convey messages to employers, employees and Government that we may not have wanted to hear.

This was a necessary first step in devising the long-term solutions to ensure that the words “pensions” and “crisis” do not intertwine in 15 to 25 years time when I am no longer the Pensions Minister and, who knows, Digby Jones may not be the Director-General of the CBI.

With private pension reform – those first steps will mean building on one of the greatest strengths that we have internationally. And that’s our system of private and occupational pensions. As the report points out, it leaves us with a more fiscally sustainable system in the post baby-boomer environment than many other countries.

In building on this strength, it would be naïve to imagine that we could rely on employers contributing more out of the kindness of their corporate hearts – it wouldn’t make good business sense and it’s unrealistic to expect progress through philanthropy.

And so, before we get to the Commission’s Second Report that will focus attention on compulsion – and ahead of the great national debate that the first report will provoke – there are things that we can and should be doing for the short and medium term.

If we are to make a success of a revitalised voluntary approach to pension saving we have to re-invigorate the business case for employers providing and contributing to their employees’ pensions.

This means:

I’d like to say something about each of these, before going on to talk a little about state pensions and finally talk about what I see as a crucial relationship between Government and the CBI.

Protection

Firstly pension protection – which is vital in providing people with the confidence to save and strengthening the recruitment and retention benefits for employers.

There’s been a considerable amount of media coverage of the protection agenda over recent months – and rightly so for our Pension Protection Fund is a ground-breaking policy that revolutionises the security of occupational pension saving for some 10 million members of defined benefit pension schemes. And the Financial Assistance Scheme provides help for those who have lost the most and who will not benefit from the Pension Protection Fund.

We have always said that we are committed to introducing a risk-based levy as soon as possible.

Let me re-emphasise my personal commitment to this objective. The Pension Protection Fund can not be about penalising good employers regardless of the relative risk that they might incur to enter the PPF. I can assure you that Lawrence Churchill shares this commitment to a risk-related levy. It will happen – and it will happen as quickly as possible.

On moral hazard – we must be vigilant against corporate engineering aimed at dumping liabilities.

But we’ve consulted industry over the moral hazard clauses – and there will be a number of amendments to clarify the moral hazard provisions in Part 1 of the Bill. These will relate to, for example, the issue of who is “associated” with the employer for the purposes of Financial Support Directions; the introduction of a clearance procedure and a “backstop” period for the time the Regulator can look at acts or failures to act before any decision to issue a contribution notice.

We will be providing a report on the consultation exercise to the Lords Committee within the next week, with an analysis of the findings and details of the proposed amendments to these moral hazard clauses.

So in building our protection agenda, we are committed to continue listening to employers and crucially restoring confidence in saving - increasing the value that employees will place on their employer provided pensions.

A final word on the Financial Assistance Scheme – we’ve made it clear that there will be no compulsory levy but I do urge CBI members to make a financial contribution to the scheme.

Simplification

It’s no use just promising greater protection for those lucky enough to work for companies that do offer pensions, if we don’t take action to encourage employers to run good schemes.

We need to confine regulation to the most serious issues and focus on simplicity as our guiding star.

In April 2006 we’ll sweep away today’s 8 separate tax systems for pensions, and replace them with a single regime based on a lifetime limit, which will start at £1.5 million, and will rise in stages, faster than the rate of inflation over the next few years.

This is radical stuff that will save businesses millions of pounds.

Our new Pensions Regulator will operate more smartly - building up information in order to determine which schemes are running genuine risks, so it can safely adopt a light touch approach wherever possible.

The layer-cake of regulation – baked in a very slow oven - creates real disincentives. Rights built up over the years need to be recorded and processed separately to reflect the regime in place at the time they were accrued.

This can be a nightmare for firms trying to do the right thing by their employees. That’s why the Pension Bill is freeing up the old Section 67, making it possible for businesses to rationalise pension rights into a single system retrospectively.

And – at the earliest possible opportunity – we will also simplify the whole set of regulations associated with Guaranteed Minimum Pensions. I’m negotiating for an early Bill on this.

This may not be glamorous stuff, but because it helps firms that do provide pensions, it is absolutely critical to restoring confidence in saving through the workplace.

Information

A simpler pension system will also help individuals understand the value of what is on offer more clearly. And of course, that makes pensions more valuable to firms who are seeking to use them to recruit and retain the best staff.

But we all need to aim much more directly at individuals as well. The agenda we are embarked on here has been supported by the CBI’s own Raising the Bar report.

Pension forecasting is absolutely crucial. If individuals can see clear information about their retirement prospects in black and white, they will understand the value of a pension promise more clearly.

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 pensions picture, combining state provision with what their company is offering.

Evidence suggests that this can lead employees to focus on pensions and to save significantly more as a consequence.

We have a Combined Pension Forecasts stand here at the Conference, which I encourage you all to visit.

Another crucial step is activating workers to ensure that they 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. So if we could put that right, we would go a long way towards addressing the UK’s under-saving problem.

The CBI have suggested that one very important step to deliver this is changing the way we run pension schemes, so that people have to opt out rather than opt in. Evidence suggests that this can double participation rates.

That’s why I signalled my willingness to take action to ensure that employers will provide a decent standard of pensions information in the workplace - or take action to get more people into their scheme through methods like auto-enrolement.

Welfare to Work/equal opportunities agenda

While it deliberately does not draw conclusions at this stage, the Turner report emphasises that more people choosing to work for longer must be a crucial part of the response to longer lives.

In the Pensions Bill, we are increasing the rewards of working longer through State Pension Deferral. By increasing the increments - someone deferring until 70 can get a Basic State Pension of around £120 a week. So they can choose to work longer and get a higher state pension – but are not forced to.

And through our Age Discrimination Legislation we are already committed to giving people greater opportunity to work for longer if they wish to.

Employers are also central to our whole welfare to work strategy. Breaking down the barriers that prevent employers benefiting from the skills and talents of disadvantaged groups such as disabled people, lone parents and older workers.

Our 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.

A job is often the best pensions policy – and by making this possible for more people for longer, we reduce the dependency ratio and the burden on the state – while increasing the quality of life for individuals and the diversity of the workforce for employers.

State Pensions

I know that the CBI has firm views about reforms to the state system.

A basic state pension must remain at the core of our pensions system and our approach to this central element will evolve just as it has in the past.

We will continue our drive to eradicate pensioner poverty – and once it’s eradicated we’ll have measures in place to ensure that the very poorest in our society never slip back into the abject poverty that blighted the lives of millions of pensioners as we entered the 21st Century.

Pension Credit has revolutionised targeting. It moves away from forty-page forms and the perversity of pound-for-pound withdrawal, and establishes a simple over-the-phone claim and a savings credit that ensures that thrift is rewarded. There is no weekly re-assessment; the next review will be five years later.

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

When I read articles from comfortably-off journalists about the need to end means-testing I wonder if they understand that it is this targeting that has ensured the poorest pensioners are £1,800 a year better off compared with the 1997 system - and that it has helped to lift 1.8 million pensioners out of acute poverty.

Our policies have addressed the pensions crisis of our time – poverty and collapsing schemes - and we shouldn’t forget that the State Second Pension is helping 20 million carers, disabled people and those on low incomes build up a decent second pension for the future.

Going forward we need to make sure any changes are fair and affordable – many of our European competitors are finding that their pension systems are far from sustainable. And it is in no-one’s interest to have a system that becomes unaffordable after 2030, requiring unfair tax rises for everyone and broken promises for pensioners.

We may need to spend more on state support – just as we are spending £10 billion more in this year alone compared with 1997 - but as the Chancellor and the Prime Minister have made clear tax increases are not the answer.

We already spend £5bn less a year on unemployment benefits compared to 1997 and as we help more people off benefit and into work this saving will increase and will help us fund extra pension spending.

So, since 1997 we’ve reformed the state system to strike a fair balance between the poorest pensioners, those who have saved, and tomorrow’s taxpayers. And we’re already making changes to encourage people to work longer if they want to.

We need to maintain that balance so we ensure that we have a system that helps the poorest while providing incentives to save for everyone.

And I am keen to build a consensus where we can. I’d like to thank the CBI for their continuing contribution to the pensions debate – the recent Strategy Group report was a particularly important contribution. We won’t always agree on every aspect of policy but we need to build on areas where there is this consensus and engage in proper grown up debate with the aim of establishing such a consensus where none exists.

The value of employer pension provision is one of the great international strengths of this country’s pensions system – and it’s one of our most powerful routes to making a success of revitalised voluntarism.

I salute the majority of you who have continued your pension commitments in difficult times and I urge the minority who have turned away from decent pension provision to think again.

Employers in partnership with Government, employees, unions, the financial services and voluntary sector can help us make real progress towards what I think is our shared vision – by continuing their commitment to pension provision and by sharing best practice, as identified in the CBI’s Raising the Bar report and the work of our Employer Task Force.

For Government’s part, we will continue our drive to develop the best possible framework for occupational pensions thus strengthening the business case that makes it worthwhile for employers to provide and contribute to their employees’ pensions.

The Pensions Commission report has provided the catalyst; we all need to be bold enough and courageous enough to grasp the opportunities it presents.

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