11 March 2008

Rt Hon Mike O'Brien MP

Minister of State for Pensions Reform

PMI Spring Conference

Tuesday, 11th March 2008

[Check against delivery]

Solving the Pensions Crisis

Lord Adair Turner, who undertook the most thorough review of our pensions system ever, said that there “was no crisis for today’s pensioners”.

But he also concluded that unless radical action was taken, to deal with increasing longevity and chronic under-saving then we would have a future pensions crisis.

People are living longer on average but we have to pay for that.

If we don’t, millions could live long retirements in poverty, inequalities could increase dramatically and the State could have to call on vast resources to cover these costs.

So to avoid a future crisis, we need to take radical action now to reform State and private pensions systems. 

And that’s exactly what we are doing.

But did we have a crisis in the recent past?

It is undoubtedly the case that, over the last ten years we have been coping with the legacy of a crisis of faith in private pensions, rather than a crisis in pensions provision itself.

The Maxwell affair, pension holidays, the collapse of schemes and the corrosive effects of miss-selling scandals had worn down people’s faith in pensions.

Undermining the very idea of saving.

What was the point of saving for a private sector pension if it was all lost because of the latest corporate scandal?

So over the last decade, we have sought to rebuild faith in UK pensions. 

A key step has been to provide a safety net for those who save.

That’s why we created the Pension Protection Fund.

It ensures that 90% of Final Salary scheme benefits are safeguarded should something go wrong.

And it currently protects nearly 11 million members.

But it is not enough just to react when things go wrong.  We wanted to be able to identify emerging risks and reduce them before they took hold.

So the Pensions Regulator was created to provide greater protection for members and reduce risks to the PPF.

Government regulation which, by the way it was implemented, in a risked based way and not being overly burdensome has won plaudits from the City.

Having given greater security to those saving for a pension today, we sought to bring justice to those who through no fault of their own lost their pension prior to 2004. 

When I became Pensions Minister I firmly believed we needed to sort out this issue if we were to restore confidence.

Last December, Peter Hain and I were able to announce a final and just settlement for 140,000 people, many of them already over pension age, who had lost their pensions when their companies had gone bust.

It was a package of measures to better use the assets of the failed schemes and matched by Government money to provide greater security in retirement for the 140,000.

Today, I am pleased to announce that the first six pensions schemes backed by solvent employers who cannot fund them will to be admitted into the Financial Assistance Scheme

This will extend the number of people covered by the scheme by over 4,000 people.

I also extend my thanks to Ros Altmann, (who is speaking to you later) the Trade Unions and the Pensions Action Group, for working with us to secure justice for these people.

All of this is part of a wider programme of encouraging greater confidence in pensions.

We will never please the Private Fraser’s of the Pensions world who predict savers are all doomed.

But sorting out the wrongs of the past will help people to save in a pension with greater confidence.

It will encourage people to take formal responsibility, confident that saving in a pension is the best way to achieve security in retirement.

Encouraging greater confidence by dealing with legacy issues is just a start.

We are also taking forward historic social reforms that will enable everyone to save for a better retirement.

Taken as a whole, these reforms in State and private sector represent the most radical changes to pensions in a Century.

A hundred years ago the Government of the day took a bold step to introduce the first State Pension.

Today we are taking equally bold steps that will help millions of citizens.

They will see a dramatic transformation of both the State pension and private provision.

Creating an equal and more generous State pension.

And ensuring millions of people will for the first time have access to an employer pension scheme.

This is important because we know that there are millions who currently are not saving for their retirement.

Millions who will end up with retirement incomes well below their expectations.

As Lord Turner outlined, we need to enable these people to save for a better retirement.

Our first challenge has been to reform the State pension.

The Pensions Act 2007, which I passed into law last July, will usher in historic changes to the State Pension.

We have legislated to restore the earnings link, to give a more generous State Pension and provide a stronger platform for saving.

And we are keeping costs sustainable by gradually raising the state pension age to 68 by 2046.

Most importantly, after 2010 we will move to end the inequality that has prevented many women and carers from building up a full state pension. 

It will help to recognise their important contributions to our society.

Today a third of women get the full State pension.  In 2 years time this will more than double to 75% of women and rise to 90% by 2025.

This is an historic change: equality for women with in a generation. 

Our next challenge is to tackle under-saving in private pensions.

Currently only 40% of the workforce are saving in a private pension.

If we do not act now, millions will face a much lower income in retirement than they expected.

So the Pension Bill I am currently steering through the Commons will see saving in a pension scheme become normal.

It will achieve this through three key measures:

Firstly all employees will be automatically enrolled into a pension scheme.

Many people live busy lives and, many simply do not have time to understand pensions and take the active decisions needed to save for retirement.

This inertia contributes to under-saving.

Automatic enrolment will turn inertia on its head.

So that saving for a pension becomes the default position.

Secondly, there will a mandatory employer contribution of at least 3%.

We do not see this as a ceiling, we want many employers to pay more.

It is merely a minimum that we expect good employers to exceed, as many do already.

The survey PMI have published today warns that we will see levelling down as a result of our reform.

This is a concern we have heard before.

I understand it, but I say this:

9 million people currently do not save, receive no contribution of 3% and do not have a pension pot.

They will see levelling up.

We have conducted research among 2,500 employers that shows a majority with existing schemes, particularly the large employers, plan to maintain their schemes at current levels or to increase them.

The findings also show that employers have several ways of managing additional costs – most say they are likely to absorb them through overhead costs, prices or wages.

We have also included in the Pensions Bill a number of safeguards to reduce the risk of levelling down and focus personal accounts at their target market of low to moderate earners:

• Transfers in and out of the scheme will be prohibited (to discourage employers with existing schemes from moving to personal accounts)
• There will be an annual contribution limit of £3,600 (discouraging employers with higher earners from accessing personal accounts)
• And there is a simple qualification test to enable existing good schemes to continue to operate to make it easier to keep current schemes.

Thirdly, we will create personal accounts, a Trust based savings scheme run independently of Government.

Those employees who do not have access to a good employer pension scheme can be enrolled into Personal Accounts.

We do not want to over claim for Personal Accounts.

It will be a straightforward and simple scheme with low charges.

It will not provide the benefits of a Final Salary scheme.  It will be a Money purchase scheme.

But Personal Accounts will enable millions of people, especially those who work for small employers (the local chippy, the garage round the corner) to have access to a pension scheme, which will see the vast majority better off than they would be without saving.

Some say it won’t pay to save because some will still get Pension Credit.

Let me say a word on that:

The Pensions Commission was clear, people should save more.

And the majority of people will benefit from these reforms.

Employer contributions and tax relief will provide a pound for pound matching contribution for the first time.

In contrast, betting Pension Credit will still be around in 20 years is not a guarantee at all.

Instead, we are building on system which works to ensure it pays to save

• Savings Credit prevents £ for £ claw-back of benefits
• People can take 25% of pension pot as tax-free lump sum
• Trivial Commutation means if pension pot is less than £16,000 you can take 100%

We recognise the need for well-informed discussion and evaluation of savings incentives, and have therefore established a Government-led work programme to consider this issue.

As we steer this legislation through the Commons, I am pleased by the level of consensus our reforms have generated. 

We have broad support from:

• employers and business – CBI, FSB, EEF, NAPF
• The TUC, Help the Aged and Age Concern
• and across the political spectrum

Our aim is that by 2015, we will see 9 million people saving more or saving for the first time and £10 billion more being saved in pensions.

Our reforms will help millions of people, but we are not complacent. 

We recognise the challenges faced by current occupational provision.

The shift from Final Salary to Money Purchase is well catalogued. 

Recent research from NAPF suggests that the decline is slowing. 

But we remain concerned. 

We want employers with good schemes to keep them open.

So we have outlined a number of deregulatory measures that will help employers with good schemes make some serious savings.

For example, we will reduce the revaluation cap from 5% to 2.5% for future accruals. This has the potential to provide employers with savings of £250m a year.

But we want to go further.

Looking at serious measures that will help employers while balancing the needs of employees.

Your report highlighted one area where we could help pension provision in the UK: risk sharing

It outlined a number of approached including the model proposed by the ACA. 

I am interested in looking at all the different options for risk sharing schemes. 

I believe risk sharing schemes might have potential.

We already have them but need to look at legal changes in more detail.

So in June, we will set out our views and options.

I will be asking for views on whether, if and how we should take risk sharing forward.

When ever I talk about this issue, someone always raises public sector pensions.

You may be surprised to learn that  public service  pension schemes are already also moving towards risk sharing. 

It’s a myth that public sector pensions are not being reformed.

For example in the future the cost of any increase in the value of the Teachers' pension scheme will be shared between employers and scheme members. 

Another area we continue to look at are pension buy-outs and need to balance innovation with the safety of members.

In the House of Commons, I recently dealt with a debate that raised Pension Corporation’s take-over of Telent.

Concerns were raised of the potential risks to members.

The Regulator imposed independent Trustees and I have announced changes to legislation in the Pensions Bill.

I am concerned that this business model could place undue risk on the members and, potentially, the PPF could have to cope with new costs

This could mean a much higher PPF levy.

We want schemes to be run in the interests of members, not in the interests of their owners.

We must not return to the scandals of the 1980s.

I am keen to ensure that there is appropriate regulatory oversight to ensure people can save, in the knowledge that their money is safe.

I am considering what further legislation is necessary.

And I would be interested in your views on this important issue.

Our aim is to create a pensions landscape fit for the 21st century.

We have dealt decisively with legacy of scandals in the 1980s, and will continue to rebuild confidence in UK pensions.

Creating a safety net and protecting the interests of members so people can save with confidence.

We are eradicating inequality: 

• in the state system so that women and carers are not discriminated against.
• and in private provision so those on low incomes can have access to the same good quality pension provision as wealthier people.

And I want more people to save in a pension so they can enjoy a better retirement.

The historic social reforms we are undertaking will see millions more saving and billions more saved.