06 December 2007

Mike O'Brien

Minister of State for Pensions Reform

ACA annual dinner

Thursday 6 December 2007

[Check against delivery]

ACA annual dinner

I am delighted to be here today.

Yesterday was big day for Pensions reform… I:

• introduced the Pensions Bill
• published the deregulatory consultation
• made the annual up-rating of benefits statement, and
• announced a package of State Pension simplification measures to help tackle poverty.

Most critically for the ABI is the next piece in our package of ambitious reforms on pension saving in the UK contained in the 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 pounds more being saved

In short – millions more saving and Billions more saved. This can be a transformation of the pensions landscape, reversing decades of decline in pension saving.

Longer lives

And you know better than most, that increasing saving matters.

The issue can be put simply, we are, on average living longer… but we need to pay for that.

In 1909, Lloyd George’s first pension (worth only 5 shillings a week) was paid to just under one million pensioners.

Yet today there are over 11 million pensioners drawing a state pension. I’m pleased to say it is an awful lot more generous than in 1909… And by 2050 this number will have risen by about 50 per cent to almost 17 million.

Clearly this is a huge increase.

And we're revising our estimates of life expectancy upwards with each passing year.

Since Lord Turner published his second pensions report in 2005, the average life expectancy of a man has risen by yet another year to 86 years.

Longevity certainly captures some of the newspaper headlines.

I read with amusement an article where Cambridge University geneticist claimed that the first person to live to 1,000 years old may now be aged about 60! …

… so potentially they would be receiving a pension for 935 years!

… imagine paying a pension for that long …

… it’s enough to give the whole pensions industry a heart attack!

Such fanciful claims clearly exaggerate the general story. But the general trend remains.

The challenge

The Government recognises the challenges and the opportunities longevity poses. So we are taking action.

But we are confident the UK already has strong private pension provision to build upon.

In 2005, the value of pension funds in the UK was approaching £1 trillion pounds, about two thirds of GDP… And we are determined to strengthen this existing provision.

But we also need to address the injustices in our current system.

Today, in the UK many millions of employees, often on low incomes or with broken working patterns do not have access to an occupational pension scheme.

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

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

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

And if we fail to act now, we risk creating a generation of impoverished pensioners.

Providing all with a means to save – personal accounts

So the new Pensions Bill, will ensure everyone has the opportunity to get the benefits of an occupational pension scheme. To ensure that saving for a pension becomes the default position.

Earnings link

And this Bill builds on the 2007 Pensions Act, completed in July. That Act focussed on the State Pension.

It tackled the inequalities around the State Pension. So that many more women and carers will be able to receive the full basic state pension.

Because of this reform, by 2025, 90 per cent of women will receive the basic state pension, up from only 35 per cent today.

And it is sustainable. We will be raising the state retirement age to 68 by 2046 to pay for this.

So people will get more but they will have to 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.

The Bill

So the Bill I introduced yesterday, will give 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.

It will achieve this through three key measures.

• firstly, the obligation for employers to contribute at least 3 per cent to their employees’ pensions
• secondly, personal accounts will be created, and
• thirdly, automatic enrolment.

In 2012 every employer will be obliged by law to pay at least 3 per cent of a salary for all employees into a pension scheme.

The employee can opt out, but we believe most will not.

That means thousands of employers from the local chippy or garage to larger companies who do not currently have pension schemes or have partial take up among employees will in future contribute at least 3 per cent to each employee’s pension scheme.

Secondly, Personal Accounts will be created to fill a gap in the market.

Millions of people do not have workplace pension schemes.

Some, because their employer does not have one. Others because of inertia – they never bothered – or had the time – to join a pension scheme.

They can become members of a trust-based default pension scheme called Personal Accounts. Or they can join a trust-based or insurance-based private scheme.

Personal Accounts will be expected to pay for itself.

The third change is auto-enrolment.

Let me spend some time on this because I know it concerns some members of the ABI.

Auto-enrolment means millions of people across the UK will sign up to a pension.

It will see a massive expansion of private schemes. And I want to see the insurance industry benefit from that.

Some thought it only applied to Personal Accounts.

It doesn’t.

Private sector schemes will see a massive expansion of membership.

They know that and have strongly supported the change.

But it will be up to individual employers to decide on a scheme.

Many employers will already have a contract-based scheme – others a trust-based scheme.

If the employer has only partial take-up of pensions, they will need to extend their pension offer to take in the vast majority of their workforce.

They are likely to expand current schemes if they can.

And this is an opportunity for the insurance industry wherever it is already established.

Other employers will have no scheme. In 2012 they will be subject to the reforms.

They will need to find a scheme.

It can be:

• a trust-based scheme, or
• Personal Accounts, or
• a contract-based scheme.

Anyone signed up between now and 2012 is not subject to auto-enrolment because they are already enrolled. It is important to bear this in mind.

Understandably the ABI is concerned by EU rules which prohibit auto-enrolment in a commercial scheme.

It is an issue.

Changing the EU rule before its review date in 2011 would be very difficult and time consuming.

Pursuing this objective would create business uncertainty about whether – and the extent to which – it would happen.

What is desirable is not always practical. And business deals in practicalities.

That means we need to work together to find a way to deal with this issue.

We are discussing with the ABI the practicalities of an exemption from automatic enrolment.

I hope to complete those discussions and have a view in the near future.

Some companies plan to sign up as many people as possible to pensions before auto-enrolment comes in.

They will not then be subject to auto-enrolment because they are members.

If there is an exemption agreed then we want it based on ensuring take up of pension schemes.

An exemption from auto-enrolment is a serious matter.

Some insurance companies have looked at Master Trusts as a way forward.

It may not suit everyone but it could enable insurance companies to reap the benefits of large scale take up of pensions through auto-enrolment.

The way it might be done is for the industry to maintain its current clients exactly as they are now – in contract based schemes.

They have a pension so are not liable to be automatically enrolled.

But then to create a Master Trust arrangement for new employees and run it in parallel.

It may not involve any significant change for employers.

But it may see some changes for the insurance industry. Some can make the changes, others would find it more difficult.

We are exploring with the ABI the extent and nature of this problem.

And I would be very interested in hearing your views either today or in writing.

I hope to take a view within weeks.

Another concern raised by the ABI has been a cap on contributions to Personal Accounts.

We want Personal Accounts to be complementary not in competition with current provision.

The ABI pressed the Pensions Commission and ourselves for a cap on the size of annual contributions to Personal Accounts to prevent Personal Accounts from siphoning off their more lucrative markets.

We have agreed that. It is £3,600.

There was also a desire to prevent transfers in and transfers out to prevent levelling down.

We have listened carefully to the ABI and others on this and decided there should not be transfers in and out.

Although I am considering a one off initial contribution of up to £10,000.

There is a provision in the Bill for that, but we will discuss it further before we do anything further.

Millions more savers and billions more saved. That is a big prize.

The Pensions Bill will become law. There is a strong level of support for it.

Auto-enrolment provides a massive opportunity for the pensions industry – which large parts of it are poised to take.

They want the new members and the savings payments.

I want the insurance industry to accept the challenge of expanding the market for pensions.

I want to work with you to enable more people to save in your pension schemes.

Impact assessment

The impact assessment for the Bill we published yesterday. It shows that there is considerable support for these reforms from both employees and employers.

Our research shows that:

Amongst employees:

• 7 in 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:

• About 60 per cent 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).

And over all, they are very encouraging.

They show that we are heading in the right direction.

Strengthening existing provision - deregulatory review

Let me just say something about Defined Benefit schemes.

I know it will be of concern to some of you because of its overall effect on the persons sector.

We believe in enhancing and protecting existing provision – including good quality Final Salary schemes.

I am concerned by the flight away from Final Salary schemes.

I announced yesterday changes to the regulatory landscape.

We will reduce the revaluation cap on deferred pensions to 2.5 per cent from 5 per cent.

We estimate this would save the industry £250 million a year.

There are also deregulatory measures in the Bill on stakeholder pensions and on pensions divorce.

I believe these changes send a strong signal of 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, de-regulation does not end there.

We will work with the industry on some of the more complex issues identified in the original review.

In particular, on principles based legislation around disclosure. You will all know the complexities of the disclosure requirements.

We have a working group, including I’m pleased to say representative from the ABI, looking at ways to develop clear principles and I expect to receive a first report by the summer of next year.

And in looking at these, we must always strike the right balance.

We seek to cut unnecessary burdens.

But we must also build confidence in the system.

And we can do this by ensuring that any changes we make balance the needs of employees and employers.

Conclusion

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.

So I hope you will agree with me that this Bill presents real opportunities for the insurance industry.

Opportunities I would encourage you to seize.

Thank you.