25 May 2006 - Historic settlement for pensions challenge
A bold new pensions settlement designed to enable people to plan ahead and save more for their retirement was set out today in the Government’s White Paper on pensions reform.
The proposals are for the future and will provide the infrastructure for the system for the next forty years.
Speaking in Parliament today, John Hutton, Secretary of State for Work and Pensions said:
“Today’s White Paper seeks to entrench a new pensions savings culture where future generations can take increasing personal responsibility for building their retirement savings.
“The reforms represent a comprehensive, integrated package of reform. I believe it can lay the foundation for a new and lasting consensus on a long-term resolution of the pensions challenge we face as a country.”
Key elements of the White Paper include:
- New low cost savings scheme in which employees will be automatically enrolled. Employers will make matching contributions while the employee chooses to remain in the scheme. This will create a new savings culture in Britain; up to 10 million people will be saving in these personal accounts and most of the money paid in will be new pension saving. By retirement, their pension funds could be worth up to around 25 per cent more because of lower charges;
- These measures to make it easier to save will be supported by a higher fairer state pension re-linked to earnings. This will mean that by around 2050 anyone who has been in employment or caring throughout their working life will get around £135 a week or more in retirement in state pension. This is over £20 a week above the guaranteed income level.
- Measures to help smooth the introduction of this reform for business. Employer contributions will be phased in over at least 3 years and the contribution rate will be fixed in primary legislation. In order to minimise the burden on the smallest businesses, we will consult on additional transitional support.
- We will ensure the new settlement is sustainable over coming decades by gradually raising the state pension age in line with life expectancy. The state pension age will rise to 66 over two years between 2024 and 2026 and then from 66 to 67 between 2034 and 2036 and then to 68 in 2044 to 2046.
- The package of reforms continues to protect the poorest pensioners from poverty. It will ensure that the least well off continue to share in the growing wealth of society by increasing the guarantee credit in line with earnings in the years ahead.
- Unfairness in system – which affects women in particular will be addressed by modernising the contributory principle for the basic state pension and the state second pension so it rewards social contributions equally with paid contributions. This will be done by: cutting to 30 the number of qualifying years needed to receive a full basic state pension and improving the system of credits. This will improve the pension provision for those who care for children as well as severely disabled people. In 2010, 70 per cent of women reaching State Pension age will be entitled to a full basic State Pension, compared to 30 per cent now.
- Abolishing the contracting out for defined contribution schemes will reduce administrative complexity and remove a key source of confusion for individuals.
Alongside this today, the Government also announced the outcome of the review of the Financial Assistance Scheme (FAS).
James Purnell, Minister for Pensions Reform said:
“It was this Government which brought forward the Financial Assistance Scheme as we recognised the real hardship many people faced in retirement through no fault of their own.
“Having reviewed the scheme we are pleased to increase the cover from 3 to 15 years. We are now able to extend assistance to an additional 22-30,000 people on top of those helped by the current scheme. This represents a substantial additional investment into the scheme, taking the total cash funding of the FAS from £400 million to over £2 billion.”
The proposals for reforms set out in the White Paper are informed by an extensive programme of government consultation with key stakeholders and the National Pensions Debate. The Government will now begin the formal consultation process, continuing to engage with stakeholders and members of the public.
We are confident that it meets the five key tests we have set for reform – of promoting personal responsibility, affordability, simplicity, sustainability and fairness.
Notes to Editors
- The White Paper "Security in retirement: towards a new pensions system" is published today.
- A media fact sheet is available from the DWP Press Office.
- Further information is available at: www.dwp.gov.uk/lifeevent/penret/
- The summary version of the WP is available free of charge from the Pensions Information Orderline -- call 0845 7 31 32 33 to order a copy (textphone number is 0845 604 0210). Also you can download full version, summary and RIA from www.dwp.gov.uk/pensionsreform
Press office media enquiries: Angela Merron, Liz Forster or Fiona Ludlow
Press office: 020 7238 0643
Textphone: 020 7238 0788
Out of hours: 07659 108 883
Public enquiries: 020 7712 2171