17 June 2008
Rt Hon Mike O'Brien MP
Minister of State for Pensions Reform
Fairer, affordable, sustainable pensions for all
Tuesday, 17 June 2008
[Check against delivery]
Fairer - Affordable - Sustainable Pensions for all
I am delighted to be here today.
To speak to you about a quiet revolution in pensions.
A revolution that will benefit millions of individuals in this country.
Because, to use a footballing analogy, pensions are a little like referees:
- not much loved by the press
- and rarely spoken about if everything is goes well
- but as soon as something goes wrong, there is an outcry!
So my job is to make sure nothing goes wrong – and to steer through these important reforms.
These pensions reforms, the Pensions Reform Act 2007 and the current Pensions Bill are about radical social change.
Creating a new pensioners settlement fit for the 21st Century.
Ensuring equality and social justice in State Pensions, particularly for women.
And giving everyone the chance to save for a better retirement.
Necessity for these reforms
The reasons why we are undertaking these reforms are well known, but it is worth running through them.
The key issue is longevity: because we are on average living longer.
There are a plethora of statistics to show this, but my favourite is that:
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 on the throne in 2050 he will be sending 700 telegrams a day!
Living longer means many of us will spend nearly a third of our lives in retirement.
So we need to pay for that.
But crucially few of us are saving enough for retirement or even saving at all.
In fact, only 40% of the working population are saving for retirement
And millions of employees, particularly those on low incomes, do not have access to an occupational pension scheme.
Keeping the status quo is not an option.
Lord Adair Turner, the architect of our reforms, concluded that unless radical action was taken to deal with the issues of increasing longevity and chronic under-saving then we would have a future pensions crisis.
Millions could retire on very little, inequalities would increase, and there was even potential for social unrest and dislocation.
We are taking forward his recommendations in our radical reforms.
Recognising that increasing longevity is a good thing and laying the foundations so that we can all adapt to these changes.
Exceptional consensus for change
In taking forward these reforms, we have built an exceptional consensus for change.
It is not often that the TUC and CBI will support the same measures so vigorously.
So I want to pay tribute to Lord Turner and his fellow Pensions Commissioners, Professor John Hills and Jeanie Drake for their seminal report.
They set out the challenges we face and mapped the way forward.
This has helped to galvanise support for our reforms.
Two bills
We are responding to these challenges through two sets of reform.
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 just 2 years time this will more than double to 75 per cent of women and rise to 90 per cent by 2025.
This is an historic change: equality for women within a generation.
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.
Yet despite this, many do not save in a pension.
Providing all with a means to save
So why do so few people save?
Many millions of people, often 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.
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 enough.
- And it will transform the pensions market.
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.
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.
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 a system which works to ensure it pays to save
- Savings Credit prevents pound for pound claw-back of benefits
- People can take 25 per cent of pension pot as tax-free lump sum
- Trivial Commutation means if pension pot is less than £16,000 you can take 100 per cent.
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.
There are other details that we must address:
- To ensure personal accounts complement 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.
I am confident we can get these details right.
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 quiet revolution in pensions brings big prizes:
- equality for women in State Pension provision
- the return of the earnings link
- 9 million people saving more or for the first time
- and a £10 billion transformation of the pensions market.
Ensuring everyone can save for their retirement.
And ensuring no one is left behind.
