27 November 2007

Mike O'Brien

Minister of State for Pensions Reform

Financial Times Leadership of pensions summit

Tuesday 27 November 2007

[Check against delivery]

Financial Times Leadership of pensions summit

I’m very pleased to be here today.

Pensions is big news. Because next week we start the next step of reform when I introduce the Pensions Bill.

From the broadsheets to the tabloids, hardly a day goes by without a major story devoted to them.

So I welcome that attention. And I welcome the debate that follows.

And to understand where we find ourselves today it is worth revisiting some of the changes that have occurred in the pensions market.

Since the late 1960s, there has been a steady decline in private sector occupational pensions.

From 8 million active members in 1967, to 5 million during the 1980s and 1990s and about 3.5m today.

But alongside this there has been a rapid rise in Defined Contribution (DC) schemes, from just 200,000 members in 1983 to over 1 million today.

There is a tendency by some to write off Defined Benefit (DB) schemes.

But we should also not lose sight of the fact that many large DB schemes remain open.

In 2006 this figure stood at 3,500 (which is about 27 per cent)

As we all know, these changes have been driven by long tem trends: inflation, stock market bubbles and most importantly, 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 still on the throne in 2050 he will be sending hundreds of telegrams a day!

In fact, during the last century average life expectancy increased by 2 years a decade on average.

This is about 15 minutes every hour … on average.

Which means that by the time I sit down, your life may have extended by around 4 minutes!

… so I don’t mind you looking at your watches
… but do mind if you shake them to see if they’ve stopped working.

So with people living ever longer lives, some employers have looked to transfer some of the risk to their employees.

But as you will know, these are complex issues.

Deregulatory review

This Government wants 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.

It is true, for example, that we must all adapt to the increases in longevity. 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.

It would return us to the original policy position when the cap was first introduced in 1986, of providing a degree, but not total, protection against inflation.

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

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

Our reforms

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 workforce are making no retirement provision at all.

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?

Some 7 million people, many 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.

This helps. For many, the state pension will form a solid foundation. But it will not be enough to fulfil their retirement aspirations.

So the second Bill, which I will be introducing next week, will give many people the tools 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.

As our own and recent PPI figures show, it will see up to 9 million people saving more or saving for the first time.

In fact PPI showed total pension contributions could increase by £10 billion. That is a dramatic change.

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. 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. 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.

There are details that we must address. And we must get these right.

• To ensure personal accounts compliment 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.

But we must not let these issues detract from the prize.

And that prize is up to 9 million people saving more or for the first time.

9 million people who will have a better retirement.

A transformation of the pensions market.

Ensuring everyone can save for their retirement.

And ensuring no one is left behind.