29 October 2004
Malcolm Wicks MP, Minister of State for Pensions
Pensions World Annual Conference
(CHECK AGAINST DELIVERY)
Demographics
The challenges we face are not to be underestimated. Like the rest of the developed world the UK is facing significant demographic changes due to increasing life expectancy and below-replacement fertility. These are points you’ve heard made over and over again but what are we actually talking about?!
Well, forecasts suggest that over the next 50 years the number of people under 20 will fall slightly – by less than 10 percent. At the same time the number of those in the 20 to 65 age group will remain roughly constant. But, the number of over-65s will increase by three quarters.
Within this framework, healthy life expectancy is also increasing, albeit not as fast as overall life expectancy. This means that there is some scope to offset the increase by extending working lives – a suggestion made by many as a quick and easy response to the problems associated with an ageing population.
But life expectancy varies according to socio-economic group – male life expectancy at 65 is 13.4 years for the lowest socio-economic group, 17.5 for the highest – so moves to increase the state pension age would affect one group disproportionately.
Pensions Commission
There are no quick and easy solutions to the challenges we face. That is why we established the Pensions Commission.
We have asked Adair Turner and his colleagues to identify the full impact of the effects of demographic change and to set out his views on the extent to which our voluntary approach is delivering the required outcomes.
The Commission’s interim report is probably the single most comprehensive authorative piece of analysis and evidence 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.
The report takes a long view of the issues, examining the trends that led to the “fools’ paradise” of the past 20 years or so. As Turner points out “irrational equity markets and delayed appreciation of life expectancy increases enabled many DB schemes to avoid necessary adjustments until the late 1990s”.
Turner estimates that “9 million people may be under-saving” and “75 percent of all DC scheme members have contribution rates below the level required to provide adequate pensions”.
For example, the report says 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”.
That is not just good news, it bears out the validity of our policies of focussing help on those in most need.
The fact that we are living longer is also good news. With it, however, comes the challenge of how we balance work, saving and retirement.
The Commission Report has set out these challenges in detail and suggests that to meet them we may need a combination of working longer, saving more and raising taxes.
This is not simply an issue of people working beyond 65. Since 1993 employment rates amongst those aged between 50 and SPA have been on a gradual upward path. For men, from around 65 percent in 1993 to around 72 percent in 2002. Turner also says “that there are good reasons for believing that pre-SPA employment rates could continue to increase”.
Let me be clear, it is not our policy to raise the State Pension Age. It is our policy to establish a framework enabling those who want to work longer to do so.
Our recently announced changes to the rules on deferring state pension will provide solid financial incentives for people to work beyond the State Pension Age.
We want to create a framework that will provide ordinary working people with clear, understandable information on the choices available to them.
We shall, in the light of Turner, need to consider whether these policies alone deliver the savings rates the country needs.
The Prime Minister has made it clear the basic State Pension should remain as the core of pension provision. But in examining options we do need to take account of affordability, complexity, effects on the wider economy, and most importantly on how they would affect the inter-generational contract.
Progress so far
I touched earlier on our efforts of targeting help on those in most need. I know that many of you here today have concerns about the long-term effects on savings incentives of The Pension Credit. However without it and its predecessor, we could not have lifted 1.3 million women pensioners out of absolute poverty, nor the 600,000 out of relative poverty.
Both Alan Johnson and I have made it clear Pension Credit stays as long as it takes to deal with pensioner poverty.
Another significant reform, that of SERPS into State Second Pension, is often overlooked. For the first time it provides access to a second tier pension for millions of carers and disabled people who would be unlikely to ever be in a position to save for a private pension. Over time the State Second Pension could become a powerful tool against the means test.
Strengthening protection
Our reforms currently going through Parliament are intended to enable and encourage people to save, and we need to provide them with levels of assurance that will encourage them to do so. That is why we have acted to increase the security of occupational pensions.
The creation of the Pension Protection Fund will help ensure that a pension promised is a pension honoured. 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 will offer help to people who have lost out before the Pension Protection Fund is introduced.
Strengthening the voluntary approach
The reform of the pensions tax regime, replacing the 8 previous tax regimes with 1, establishing a lifetime limit and enabling people to continue working for their employers and draw on their occupational pension entitlement has been widely welcomed and will empower people to decide how and when they save for retirement.
In the area of personal pensions, over 2 million stakeholder pensions have been sold so far. I know there have been concerns about the target population for these products, and what I can tell you is that around two-thirds of stakeholder pensions with contributions sold in 2002/03 were to people earning less than £20,000 a year.
And we heard what the industry had to say about their problems with the 1 percent charging cap.
The new price structure, 1.5 percent for new customers from April 2005, will incentivise providers to market stakeholder pensions more actively and enable firms to provide advice to more people, whilst still offering a good deal to the customer.
We also want to achieve a shift in the attitudes and behaviours of employers – we want all employers to offer access to pensions through the workplace, to make a significant contribution to their employee’s pension as a key part of overall remuneration and to actively promote their schemes to all employees.
We are exploring the effectiveness of legislating for automatic enrolment. It is shocking to see from the latest NAPF research that in the year 02/03 only 51 percent of newly eligible employees opted to join their non-automatic entry scheme – whereas the figure in automatically enrolled schemes is 91 percent.
And it’s because the workplace can be such an important source of information about pensions that we introduced a challenge fund to generate more workplace advice by specially trained representatives. The Fund will start in 2005 and will be open to bids from trade unions and other organisations.
Trustee issues
The trust structure of occupational pensions places trustees at the very heart of the UK’s private pension provision.
Many of the measures set out in the Pensions Bill will impact on the responsibilities of trustees. We want to ensure that trustee boards benefit from the wide range of experience and skills of member-nominated trustees and to raise the level of trustees’ knowledge and understanding across the piece. Greater participation by a wider range of people can only help to promote confidence in schemes and increase participation.
The new measures will require all trustees, member-nominated or otherwise, to have a more appropriate and greater understanding of things such as the trust deed and scheme rules and relevant pensions and trust law.
We are particularly keen that trustees – across the board – have a greater understanding of risk, investment and funding strategies. But we do not expect them to become “experts”. Rather, working from a good knowledge base to set out overall strategy in these areas.
We believe it is crucial that ALL trustees are seen to be competent and confident in carrying out their duties. The role of trustees is central to our reforms in raising the confidence of scheme members.
Conclusion
I’ve said a lot about private pensions issues today but, in drawing my remarks to a close, I would like to say a few words about the role of the State.
In broad terms the State has three roles, Provider, Regulator and Enabler. On provision, I’ve touched on our reforms already. Pension Credit – lifting millions out of poverty. S2P laying a base for greater entitlement as a right in the future.
The State’s role as regulator is a familiar one – all too familiar some may say. The creation of the New Pensions Regulator focussed on risk and prevention rather than administration and technicalities will mean greater levels of assurance and credibility for occupational schemes. The role of the FSA in providing effective regulation across a wide range of financial services is also significant.
We are in the process of further developing the State’s role as an enabler. Providing people with information they can understand and use to make informed decisions about their financial future is a goal dear to both the government and industry.
We are working across a wide front, from Combined Pension forecasts to the launch of a web-based Pensions Planner and measures to improve financial literacy and capability.
Will all this be enough? How do you feel we can bolster confidence and security across the pensions industry? How confident are you that voluntarism will work?