14 July 2008

Rt Hon Mike O'Brien MP

Minister of State for Pensions Reform

Institute of Economic Affairs Inaugural Conference

Monday, 14th Julyl 2008

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Pensions Policy for the Future

I am delighted to join the IEA at your inaugural conference as we examine crucial questions.

On this morning we look to the prospects for pensions for the future…and I contend we have a revolution to talk about.

Some might consider that word revolution a little dramatic. But if you add up the array of policies over the last 5 years it is not.

What we are trying to achieve ranks up there with the challenges of managing climate change, defeating terrorism, adjusting for globalisation, tackling poverty.  

I believe that is true – the UK pensions landscape is transforming.

We’re mid-way through a journey to Adair Turner’s Promised Pensions Land.

So what will it look like? What must we do to get there? How do we ensure the promise doesn’t end up broken? These are big questions and big ambitions.

The Private Frazier’s of the pensions world will say “we’re all doomed, doomed.”

But I say, on this bright Monday morning, do not let the doomsayers ruin the chance for change.

Every change has it critiques, it challengers, and in a democracy there is no harm in that; but if we listened to them all nothing would happen.

So, today I want to talk to you about a quiet revolution in pensions and a commitment to the renewal of confidence in UK pensions – that’s the vision for the future.

Pensions are a long run investment so it is imperative that people have the confidence to save…it is incumbent on politicians to help generate security though consensual policy stability, whereby incentives are long-term.

In the 1980s and early 90s, this confidence was eroded by a series of scandals: the Maxwell affair, employers pension holidays, the collapse of schemes and the corrosive effects of mis-selling…And the bursting of the dot-com bubble and the long running FAS saga did not help much either.

In recent years, 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 (PPF). To ensure 90% of the benefits of Final Salary schemes are safeguarded if something went wrong.

The PPF currently protects nearly 11 million members and prospective members. It gives confidence, it guarantees retirement incomes. But it is not enough just to react. We must pre-empt. 

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

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 – a final and just settlement for 140,000 people, many of them already over pension age, who had cruelly lost their pensions.

And we have now begun paying out the first FAS benefits at 90% of core pension.

This is good news and testament to the consensus which facilitated the rapid passage of change through Parliament. 

Despite these successes, we must always be alive to new risks to the stability of the pensions sector.

Today in a fast changing world, people need to have confidence that their money is safe and nowhere is this change faster than in the pensions market.

In the last few years many new and innovative products have emerged, particularly in the buy-out market:

• many helping employers discharge their duty to pension members
• or ensuring schemes take account of increasing longevity
• and protecting employees pensions too.

This innovation and diversity is to be broadly welcomed. But it is important that while we foster innovative products, we are alive to emerging risks and ensure that they are properly managed. 

That’s why the Pensions Bill making its way through the House of Lords ensures our pensions protection regime has the flexibility to adapt to new risks in the fast evolving pensions buy-out market.

This has been prompted by concerns that some emerging alternatives to pension buyout could reduce the traditional security provided by an employer without putting adequate capital in place to replace that security.

We have consulted on a number of amendments to the Pensions Regulator’s powers to ensure that the regulatory regime, which stands behind the trust-based system remains effective and proportionate to risks.

But it is crucial that the powers are proportionate. And that they are effectively targeted so as not to inhibit legitimate business activity.

And I say to the BVCA whom I have met and to others in the private equity industry…

The Pensions Regulator has said that clearance statements will not be re-opened as a result of these changes; business can go-ahead.

There should be no good reason why legitimate business transactions should not proceed.

Most deals proceed without parties feeling the need to go to the Regulator; but if they feel they need to then the Regulator has undertaken to continue to provide a quick and responsive service.

And certainly there is nothing in these rules which need concern any legitimate foreign investor in the UK.

Too often in the past Government’s and others have spotted a freight train off in the distance; we can see the risk and avoid the smash so we and the industry need to work together to ensure we avoid it.

If we didn’t deal with this issue, then we might have real problems in the pensions market….so let’s protect all our futures.

This regulation will be tightly circumscribed and need not worry anyone who is currently carrying out legitimate business.

And all of this is part of a wider programme of encouraging greater confidence in pensions in the long-term. Renewing trust so that more people can save with confidence.

So I see a self-confident future for pensions, with stability matched by security, incentives coupled with more pension saving.

DC Pensions

And my message today is in private pensions we have an opportunity. The framework is in place – Regulator, PPF, FAS and now PADA.

And I welcome the CBI and Mercer Report, reinforcing our confidence that DC pensions have an important role in the workplace.

Employers and employees can see the financial commitment that is being made, whereby the employee is empowered to make their own decisions about pensions and balance their pension saving with other savings and benefits.

And for the employer, there is certainty about the financial commitment they are making and the ability to manage pension provision as part of a wider benefit offer.

Through good DC provision – like personal accounts – we can look forward to a future of more saving, as the recent Scottish Widows report tells us.

With demographic change comes an increasing imperative for long-term saving. The challenge can be put simply, we are, on average living longer… but we need to pay for that.

And we're revising our estimates of life expectancy upwards with each passing year. For example, today there are about 11,000 pensioners aged over 100, by 2050 there will be 250,000.

And let me say a brief word about the ASB proposals on longevity.

They are aimed at transparency and clarity but they may achieve this at a high price. I am concerned about the impact of the proposals and will be urging a more careful approach.

But let me also assure you that the Government recognises the challenges and the opportunities longevity poses.

So we are taking action.

The UK already has strong private pension provision to build upon. And not withstanding ups and downs in the market, we are determined to strengthen this provision.

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

Today, in the UK many millions of  workers, often on low incomes or with broken working patterns do not have access to a pension scheme. Only 40% of the working age population are making any retirement provision.

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

As Lord Adair Turner said, this is not a crisis now but we are presented with unavoidable long term challenges that require action… to avoid a future crisis. And if we fail to act now, we risk creating a generation of impoverished pensioners.

So the new Pensions Bill will ensure every worker has the opportunity to save in a pension scheme.

So I see a future of more security and more saving.

And for the vast majority it will be a future of more generous pensions. Our current legislation builds on the 2007 Pensions Act, completed last July 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% of women will receive the basic state pension, up from a third today.

And it will restore the earnings link so that by 2050, the state pension will be worth twice what it would be worth without reform.

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

So the Pensions Bill, which is currently in the Lords, will give many millions more 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.
• And it will transform the pensions market.

That’s radical pensions reform – do not underestimate the challenge of rising the State Pension Age, of agreeing to re-link the State Pension to earnings, of auto-enrolment. 

These are not easy. But they have the potential to really tackle under-saving and to affect behavioural change.

Through automatic enrolment, we will combat the inertia that inhibits many people from saving.

It will mean saving for a pension will become the default position.

And it has the potential to change the saving habits of the nation.

And – I am pleased to be able to say – automatic enrolment will also be possible for Workplace Personal Pensions.

WPPs are already a strong and growing sector of the pensions market and these reforms will benefit the sector even further.

Auto-enrolment will create a real opportunity for insurance-based pensions to capitalise on this reform of the pensions market, from 2012.

The Bill also provides for a duty on employers to contribute at least 3% of qualifying earnings to the pensions of their workers who choose to save.

This sends a clear signal to workers of the benefits of saving. 

Their money will be matched pound for pound into a pension pot by a combination of contributions from their employer and tax relief. 

And this extra money – we estimate up to an extra £10 billion a year – will create significant opportunities for the pensions industry and fund managers.

There is a tendency to talk about the Pensions Bill as if its about personal accounts – it’s not. Personal accounts is only a part of the change. The key is auto-enrolment and millions of people affected by that change will have nothing to do with personal accounts.

Many will enrol in pension schemes currently run by employers.

It is only where there is no current provision that people will be able to save in personal accounts, a Trust based savings scheme run independently of Government.

Those workers who do not have access to a good employer pension scheme can be enrolled into Personal Accounts. Targeted straightforward and simple, a Money Purchase scheme with low charges. No frills.

I see Carl Emmerson is to follow asking, “will personal accounts solve the pensions crisis?” The answer is no and it was never intended to and not what they are for.

Personal accounts is only another DC scheme – albeit a big one. Automatic enrolment is the key reform.

Some say it won’t pay to save because a number will still end up with Pension Credit; I think we should talk about this.

But we should also listen to the experts. Like Prof John Hills who warned that the problem was not so much seeing who ended up on Pension Credit as how you can predict at the start of saving whether its worth it for this individual.

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 your retirement income on Pension Credit benefit provision is unsound – none of us know what will be around in 50 years.

And this is not a new problem. There are thousands of people on Pension Credit today.

That’s why we have joined with a number of stakeholders to scope out the nature of the debate on savings, to look at the issue now, the nature of it in the future and the policy options around it.

We’ve listened to what people want and that’s a good pension that’s hassle free, putting them on course for a decent living in retirement.

Our Workplace Pension Reforms mean all workers automatically put into a pension will start saving when they start working.

And most people want a pot of savings for when they retire

And people want that pot to be as big as possible:

• to provide for that once in a lifetime retirement holiday
• to retain their independence as they get older
• to look after their loved ones
• to provide an income for the rest of their life
• to help their children and family

Everyone I speak to wants more than the State safety net.

Saving provides security, a better retirement income, independence and peace of mind.

To save now and to save early is the right thing for a comfortable later life – individuals need to take responsibility for their own future.

People have more expectations for their future life and lifestyle – these must be paid for and saving is the way to do it.

The average British couple will receive over £2 million during their lives – enough to buy a house, raise a family and save for a decent retirement.

We all have our part to play in making that our pensions future.

And the Government has responded positively to this challenge, again, let me re-cap:

• restoring the earnings link
• providing greater access to a full State Pension
• creating a platform for savings
• ensuring workers have access to a workplace pension
• tackling inertia through auto-enrolment
• ensuring employers encourage saving by making contributions
• and delivering a low cost pension for people who don’t currently have a workplace pension.

That is without doubt a radical revolution in pensions.

But to ensure this happens, I place great importance on working with the industry, and other stakeholders, so that we get the details right:

• to ensure Personal Accounts complement and do not compete with existing provision
• that we prohibit employers from offering “inducements” – such as higher salaries or one-off bonuses – to encourage workers to opt out
• that we get the qualifying tests right.

Let me touch on this.

It is very much our intention to ensure schemes offering generous contributions to members experience the least possible disruption when these reforms come into effect – this is in everyone's interest.

And I can say today that we have listened to stakeholders concerns and are grateful for the very constructive approach they have taken in finding the right solution.

We will be working over the summer to ensure the quality requirement can be applied on an annual basis where it makes sense to do so.

Our policy has always been that schemes rule changes would only be necessary if the value of contributions did not meet the new minimum level required by reform.

We will do all we can to ensure that this principle of equivalence is clear in law.

I am confident we will be able to establish arrangements that meet our collective needs to provide a new minimum level for workplace pension saving, and to minimise any disruption to existing good schemes.

Let me just say something about existing occupational pension provision.

We believe in enhancing and protecting existing good pension provision whether that be a well-funded money purchase scheme or a salary related scheme.

I am concerned about any trend away from good provision. In 1967 there were about 8 million people contributing to salary related pensions. But since then, there has been a steady fall in membership.

In 2007 the numbers saving in salary related private sector pensions stood at 2.7 million.

Many of these schemes are closed to new members.

So measures in the current Pensions Bill will provide savings for employers who operate salary related schemes.

But we recognise that there is no ‘magic bullet’ – decisions on occupational pension provision depend on a host of complex factors.

Reducing the revaluation cap on deferred pensions from 5% to 2.5% could provide total savings of around £4.4 billion by 2050. Savings which we hope employers will use to continue providing salary related schemes.

And as a sign of our continued commitment to support good UK pension provision, we are currently consulting on risk sharing.

We are certainly interested in the concept of risk sharing and we welcome innovation in the management of pensions.

There are important issues to discuss, we do not want to hasten the move away from salary related schemes…but we recognise that risk sharing could be a way of encouraging employers to continue with good workplace pension provision.

The issues are complex, so it is important that we consult widely on this issue. We do not want to rush to a particular decision only to regret it later down the line.

These changes and initiatives provide new challenges for the pensions industry.

We hope that deregulation will significantly strengthen good pension provision.

Of course, 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.

Our quiet revolution in pensions brings big prizes, and the prospect of a bright future, with:

• 9 million people saving more or for the first time
• up to £10 billion a year more being saved in pensions
• security and confidence renewed
• a step change in saving and a transformation of the pensions landscape…we all have our part to play.

Thank you.