15 November 2007

Mike O'Brien

Minister of State for Pensions Reform

ACA annual dinner

Thursday 15 November 2007

[Check against delivery]

ACA annual dinner

It’s a great pleasure to be joining you here this evening.

I bring some good news … on average we are all living longer.

And some bad news … we will have to pay for it.

Members of the ACA will know better than anyone that we live in an ageing society. In fact many of you will have been at the forefront of our understanding of longevity. Identifying the risks to our pensions. Identifying what this means for future generations.

Indeed without your work we would not have realised the challenges facing us. And we would not have been able to take early action.

Supporting our ageing population is one of the great challenges and indeed risks facing this country, and much of the world in the 21st Century.

I know many actuaries are risk adverse. And that sometimes you have to go to extremes to minimise risk.

In fact, I have heard recently of an actuary who tried to take a fake bomb onto a plane … he believed that it would decrease the chances of there being another bomb on the plane!

But increasing ageing is not just a risk. It is a blessing too.

In 1940s the average male lived to just 60. Most did not live to collect their pensions.

Yet today a man’s retirement will last 17 years. And by 2050, 23 years.

The trends are well known to you. But some of the statistics are striking…

During the last century life expectancy has increased by around 2 years a decade.

This is about 15 minutes every hour … on average.

So when I’m finished talking today your life may have extended by another 3 minutes or so…

…So I don’t mind people looking at their watches while I'm speaking…

…though I may object if you start shaking them to make sure they're still going!

So we must address the issue of longevity. But there are also other factors at play. Our expectations for retirement are increasing.

A recent YouGov poll showed two thirds of under 30s do not believe that the state pension will provide a reasonable standard of living for them in retirement.

Despite this, too few people are saving enough for their retirement.

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

Even though many of them realise that they ought to save. Many simply don’t make the time to consider investment decisions. In our busy working lives, long term issues are often neglected.

I am reminded of a classic cartoon that appeared in the Times some years ago. It shows a pair of dishevelled characters eyeing a lottery poster.

“Winning”, says one “is crucial to my retirement plans”.

There is perhaps a grain of truth in this. But sadly, I don’t think we will turn into a nation of lottery winners … although, that would make my job a lot easier,

We don’t want future pensioners to become known as the “lived fast, retired poor” generation. We have to bring about a cultural change. To embed a savings culture in the national psyche.

The Government’s first step has been to reform state pensions.

• To re-link it with earnings.
• Tackling gender inequality.
• Delivering a more generous, fairer and sustainable settlement.

Which means people will get more but retire later. The state pension age will rise gradually to 68 by 2046.

We also have a duty to protect the vulnerable. No pensioner should live in poverty. And our reforms will provide an important safety net for those that fall on hard times.

But the state pension is only half the solution. The state pension will not be sufficient by itself. People have rising expectations.

So we must empower them to take greater responsibility for their retirement. To take control of their income in retirement.

The second part of our reform will be in a Bill I will introduce in the Commons in December. It will enable people to realise some of their expectations. It will address the challenges of lack of saving, complexity, inertia and lack of provision.

There are three key measures in the Bill. Let me deal with each.

Firstly, automatic enrolment will encourage up to 9 million people to save more, or in many cases, save for the first time.

We know one of the biggest barriers to saving is inertia. People are simply too busy to focus on pensions. Many do not sign up to their company pension, even when told of the benefits.

Automatic enrolment changes the equation, instead of inertia preventing saving it will encourage it. All employees will have the chance to save. Having a pension will be the default position. People can opt out, but they will have to take steps to do so.

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.

An average earner, paying 4 per cent to their personal account over their lifetime could expect to receive a twofer – two pounds in their pension for every pound invested.

It’s a good deal. And a good reason to save.

Our reforms aim to extend the benefits of an occupational pension scheme to the whole working population. Bringing greater security for the pensioners of tomorrow.

One of the key aspects of our reform is our intention to strengthen existing pension schemes.

We have worked hard to ensure personal accounts compliment rather than compete with current schemes. Personal accounts are designed for a particular target market – the 7 million people not saving today.

We aim to discourage levelling down. There will be no transfers allowed in or out. Contributions will be capped at £3,600 per year.

And for employers with good occupational schemes we will have a simple self-certified scheme exemption test.

Combined, these measures will help protect existing provision.

And in addition, through our deregulatory review we are also looking to reducing the burdens on current pension schemes.

Sending a clear message to employers with good Defined Benefit schemes - we want them to continue.

Let me also just say a few words about the ACA’s ideas about risk sharing schemes.

I know that there has been some recent debate about the merits of these schemes. I have some sympathy with the idea of risk sharing schemes. But the pensions system is already quite complex.

Some fear this will create more complexity. I am not convinced of that, so I want to hear the wider views of stakeholders on this issue, and we are consulting on this issue as part of our Deregulatory Review.

The proposals on revaluation have produced controversy but ministers need to make a statement about the importance of good pension schemes.

We will be considering all responses very carefully. And I look forward to reporting back our findings shortly.

To make our reforms successful, it is essential we have broad consensus both politically and in the industry.

People need confidence, because pensions are long term investments. When people take out a pension today, they are putting that money away for sixty years or more.

You know I’d even have to admit we might even see several different Government’s in that time.

But consensus will ensure stability and protect against short-termism.

So the pension promises made by this Government today, will not be undone.

Not by this Government.

Not by the Opposition.

Not by short-term market fluctuations.

Consensus can ensure consumers are confident to make the right decision. Confident of the benefits of saving. Confident this will give them a better retirement.

Our reforms will create millions of new savers. Total pensions contributions will increase by billions.

Far from levelling down, these reforms should see levelling up. Because we know that 1 million employers currently make no pension contribution for their employees.

But with reform … 6–9 million will be saving more or saving for the first time.

With reform … The National Association of Pension Funds tells us that total pension saving will increase by over £10 billion a year, others expect it will be higher than that.

These are radical and far reaching measures…

They will help address one of the great challenges of the 21st Century.

Increasing longevity. Under saving. Rising aspirations.

We have proposed long term solutions for long term issues.

It will take time.

But we can do this.

We can re-invigorate the pensions market and embed a new savings culture.

Your business is primarily concerned with risk.

Of course, we can never entirely remove risk from pension saving. But in taking forward our reforms we can drive out some of the risks inherent in our current system.

• The risk that because of your gender, you’ll be left without proper state provision.
• The risk that because you are a low earner, you’ll be excluded from a workplace pension.
• The risk that you’ll retire poor.

We seek to manage and reduce these risks.

To ensure future pensioners can continue to share in our national prosperity.

That’s our aim.

That’s what I know you want to see happen to.

Together we can make it happen.

Thank you