04 December 2007

Mike O'Brien

Minister of State for Pensions Reform

Eversheds: Is the pensions crisis over?

Tuesday, 4th December 2007

[Check against delivery]

Eversheds: Is the pensions crisis over?

I am delighted to be here today.

I am pleased to announce that this week sees the beginning of a big change in the pensions market.

Tomorrow I will introduce the Pensions Bill.

A reform that will see up to 9 million people saving more or saving for the first time.

A reform that will see up to £10 billion more being saved.

In short:

• Millions more saving
• Billions more saved.

Truly a transformation of the pensions landscape.

And reversing decades of decline in pension saving.

History - declining membership of private pensions

For too long, membership of final salary private pensions schemes has been falling.

In 1967 there about 8 million members.

Since then, there has been a steady fall in membership.

Today the numbers saving in DB private sector pensions stand at just 3.5 million.

And, although there is a tendency by some to write off final salary schemes, many large schemes remain open.

In 2006 about 3,500 final salary schemes were open (which is about 27 per cent).

And this audience will know well, these changes are driven by inescapable long term trends:

Changes in inflation and stock market bubbles have contributed.

But the most important factor is longevity.

Since the beginning of the twentieth century, we have been revising longevity figures ever upwards.

Some of the statistics are striking.

For example, this year, for the first time, there are more pensioners than children in Britain.

And these trends are set to continue.

Today there around 10,000 people aged over 100 but by 2050 it is predicted there will be 250,000 Centenarians.

That means that if an elderly King William V is on the throne in 2050 he will be sending 700 telegrams a day!

The challenge

This Government recognises the challenges longevity pose us.

So we are taking action.

The Bill I will introduce tomorrow, is taking radical steps to encourage saving and encourage good pension provision.

The UK already has strong private pension provision.

In 2005, value of pension funds in the UK was approaching £1 trillion, about two thirds of GDP.

And we are determined to strengthen this existing provision.

We also need to build on these strong foundations.

Today, in the UK 7 million are not saving enough for retirement and millions of employees do not have access to an occupational pension scheme.

We are determined to provide these people with a means to save for a pension.

Strengthening existing provision - deregulatory review

So we want to help strengthen existing provision to support employers and employees.

That is why we launched the de-regulatory review and appointed two external reviewers in December last year.

I want to reduce burdens on current pension schemes.

And send a clear message to employers with good DB schemes – we want you to continue.

I recognise there is no “magic bullet”.

Employers have to consider a host of complex factors around their pension provision, not all of which are within Governmental control.

But I believe that there are sensible measures we can take to reduce burdens on current pension schemes.

That’s why I welcome the balanced and thoughtful report we received from Chris Lewin and Ed Sweeney in July.

As you will know, we outlined our response in October and consulted further.

I’m grateful for the many responses we received.

Key amongst our proposals was to reduce the revaluation cap on deferred pensions to 2.5 per cent from 5 per cent.

This generated a fair degree of debate.

To which I can only reiterate that the decline in occupational pension provision is serious, and in the face of increasing costs, employers are abandoning their defined benefit schemes.

If we do nothing, that is likely to continue and even accelerate.

This proposal would save the industry an estimated £250 million a year.

Importantly, it would only apply to rights accrued after the change.

Anyone who has already deferred a pension would be unaffected.

Any rights built up by existing members until the point of any change would also be subject to revaluation under the current regime.

I don’t suggest that on its own this proposal will somehow turn the tide, but I do believe it is a reasonable step to take.

At the very least it sends a strong signal of the our intentions to reduce burdens on current schemes.

Encouraging employers to keep existing schemes open, while balancing the needs of the employee.

And, of course, the de-regulatory review will not end there.

We are also proposing a statutory over-ride to help those schemes with inflexible rules to take advantage of existing regulatory relaxations.

We will also work with the industry further on some of the more complex issues.

In particular, on section 75 (employer debt), on disclosure arrangements and on surplus arrangements.

My commitment to you is that we will continue to seek out and cut unnecessary burdens.

Providing all with a means to save – personal accounts

So we recognise our world is changing.

We have seen the good news … we are all living longer.

But there is bad news too … we need to pay for our longer lives.

Strengthening current schemes by reducing regulatory burdens will help.

But this is only half the story.

Lord Turner laid the stark facts before us.

Many millions of people are not saving enough for their retirements. In fact many are simply not saving at all.

60 per cent of the working age population are making no retirement provision at all.

As Adair Turner told us, this is not a crisis now but we are presented with unavoidable long term challenges that require action.

And if we do not act now, we risk creating a “live fast, retire poor” generation.

So why do so few people save?

Many millions of people, often on low incomes or with broken working patterns do not have access to an occupational pension scheme.

We all know the current system is complex.

So many do not understand what their state retirement benefits will be.

They cannot assess whether retiring on just the state pension will be enough to satisfy their aspirations.

And coupled to this lack of understanding, inertia allows many not to take the active decision to save.

Not saving for retirement has become the default position.

We want to challenge this. To turn it on its head.

So that saving for a pension does become the default position.

Two bills

We are responding to these challenges through two sets of reform.

Our first, the 2007 Pensions Act, simplified the state pension system. Giving people a clearer picture – making saving decisions easier. And delivering a more generous, fairer and sustainable settlement. Which means people will get more but retire later.

For many, the state pension will form a solid foundation.

But it will not be enough to fulfil their retirement aspirations.

Over 90 per cent of people questioned in a recent poll believed they needed more than just the state pension to live on in retirement.

So the Bill I will be introducing tomorrow, will give many people the means to take control of their retirement.

• It will address savings inertia and lack of provision.
• It will target the many millions who are not saving enough.
• And it will transform the pensions market.

And it will achieve this through three key measures.

Firstly, automatic enrolment.

This changes the equation, instead of inertia preventing saving, it will encourage it. All employees will have the chance to save. Having a pension will become the default position.

Secondly, employers will have a duty to contribute at least 3 per cent to their employees’ pensions.

This sends a clear message to employees of the benefits of saving.

Their money will be matched pound for pound by a combination of contributions from their employer and the State through tax relief.

And thirdly, personal accounts will be created. They will be targeted where the need is greatest.

Low to median earners with no access to good quality occupational pension schemes. Providing a simple, easy to understand product. A Trust based scheme run independently of Government. With low charges and better returns.

Our reforms aim to extend the benefits of an occupational pension scheme to the whole working population.

And today, in advance of the publication of the Bill, I can tell you that there is considerable support for our reforms from both employees and employers.

Our research shows that:

Amongst employees.

• 7 out of 10 eligible for automatic enrolment say that if enrolled into personal accounts they will remain in the scheme.
• And just under half of respondents said they were likely to contribute more than the minimum level on a regular basis.

And amongst employers:

• 6 in 10 think the reforms are a good idea.
• the majority (86 per cent), who are already making pension contributions of 3 per cent or more, intend to maintain or even increase their contributions.
• while about half intend to offer new employees their existing contribution levels (or higher).

These are very encouraging numbers.

They show that we are heading in the right direction.

Of course, there are details that we must address:

• to ensure personal accounts complement and don’t compete with existing provision
• to protect existing provision and prevent levelling down – in fact we want to see levelling up.
• and we must ensure there is a robust communications strategy that sets out clearly the benefits and the risks.

I am confident we can get these details right.

And in addressing these issues during the passage of the Bill, we must not lose sight of our goal.

We must keep our eyes on the prize.

Because this radical reform brings two big prizes:

• up to 9 million people saving more or for the first time
• up to £10 billion more saving.

9 million people who will have a better retirement.

A £10 Billion transformation of the pensions market.

Ensuring everyone can save for their retirement.

And ensuring no one is left behind.

So, I can tell you today that we are taking radical action to ensure there will be no pensions crisis for future generations.

And I am confident that we can bring about a transformation in pension saving.

Thank you.