25 June 2008

Rt Hon Mike O'Brien MP

Minister of State for Pensions Reform

Financial Times – Insurance Industry Summit

Wednesday, 25 June 2008

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FT - Insurance Industry Summit: 25 June 2008

I am delighted to be here today.

To speak to you about a quiet revolution in pensions, a step change in saving and a commitment to the renewal of confidence in UK pensions.

This revolution has been little reported in the media because they only report controversy and this has had broad based political and industry support.

Yet our package of reforms, the Pensions Reform Act 2007 and the current Pensions Bill are about radical social change.

They aim to create a new pensions settlement fit for the 21st Century – giving everyone the opportunity to save for a better retirement.

Our aim is to transform the pensions market giving millions more savers and billions of pounds more saved.

Building confidence

Pensions are a long run investment so it is imperative that people have the confidence to save.

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 miss-selling.

This undermined the very idea of saving.

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. To ensure 90 per cent of the benefits of Final Salary schemes are safeguarded if something went wrong.

The PPF currently protects nearly 11 million members. It generates 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.

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

Last weekend we began paying out the first FAS benefits at 90 per cent of core pension.

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

tPR announcement

Despite these successes, we must always be alive to risks. Because 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 scheme members, or
• ensuring schemes take account of increasing longevity

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

We must be careful not to inadvertently sacrifice hard won trust in pensions for the sake of a new market solution.

So today, I am able to announce, that we will table an amendment to the Pensions Bill to ensure our pensions protection regime has the flexibility to adapt to new risks in the fast evolving pensions market.

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

These emerging models could create a perverse situation whereby profits would be privatised but losses would threaten members’ benefits and the PPF. This would create an asymmetry of risk that could lead to broken pension promises.

Over the past 8-week period the Government has consulted on 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 new risks.

I welcome the positive engagement from stakeholders across the business community, including in the insurance and pensions field.

There is an emerging consensus that the Government is right to head off the risks highlighted by some new models before they materialise. But it is crucial that the powers are proportionate. And that they are effectively targeted and do not inhibit legitimate business activity.

So we intend to further consult on the detail and to look at some of the suggestions we have received during consultation.

For example, on the proposed alternative test for Contribution Notices and the removal of the Good Faith test, some have suggested different approaches – we need to work through the detail, with stakeholders, to ensure the law delivers our shared objectives, to protect members’ interests and the PPF without placing undue costs or red tape on business.

Given the consensus on the need for this change, it is important that any suggestions are consistent with our aim.

My commitment is that we will consult fully on the details before drafting the new regulations.

Most of you recognise these powers are important:

• They are not intended to hinder business as usual.
• They are not intended to be an unnecessary tangle of red tape.
• And we are certainly not giving a carte blanche to the Pensions Regulator

As Andrew Hill wrote in the FT, “Suggestions that the watchdog, which by all accounts has used its powers judiciously, will now have a sudden rush of blood to the head are unwarranted and ill-judged.”

They are intended to be proportionate measures that will target particular issue. And all of this is part of a wider programme of encouraging greater confidence in pensions. Renewing trust so that more people can save with confidence.

Longer lives

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.

A hundred years ago, Lloyd George’s first pension (worth only 5s a week) was paid to less than 1m pensioners over-70.

Yet today there are over 11m pensioners drawing a state pension. I’m pleased to say it is more generous.

And by 2050 the number of pensioners will have risen by about 50 per cent to almost 17m. Clearly this is a huge increase.

And we're revising our estimates of life expectancy upwards with each passing year. For example, today there are about 10,000 pensioners aged over-100, by 2050 there will be 250,000.

That means King William V, who will be approaching his 80th Birthday, would be kept very busy … sending about 700 telegrams a day to centenarians!

The challenge

The Government recognises the challenges and the opportunities longevity poses. So we are taking action.

We are confident the UK already has strong private pension provision to build upon.

In 2005, the value of pension funds in the UK was about two thirds of GDP. And we are determined to strengthen this existing provision. But we also need to address the injustices in our current system.

Today, in the UK many millions of employees, often on low incomes or with broken working patterns do not have access to an occupational pension scheme. Only 40 per cent 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 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 everyone has the opportunity to get the benefits of a workplace pension scheme. To ensure that saving for a pension becomes the default position.

Earnings link

And this legislation builds on the 2007 Pensions Act, completed last July. That Act 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 per cent of women will receive the basic State Pension, up from only 35 per cent 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.

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.

Providing all with a means to save

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.

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

It will mean having a pension will become the default position.

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

And – as many of you here today will no doubt be pleased to hear – automatic enrolment will also be possible for Workplace Personal Pensions (WPPs). 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.

The Bill also provides for a duty on all employers to contribute at least 3 per cent to their employees’ pensions. This sends a clear signal to employees 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.

Where there is no current provision, people will be able to save in 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.

I do not want to over claim for Personal Accounts. It will be a targeted straightforward and simple Money Purchase scheme with low charges.

But Personal Accounts will enable millions of people, especially those who work for small employers (the local chippy, the hairdresser or 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 a number 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 your retirement income on benefit provision is unsound – none of us know what will be around in 50 years.

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 your total pension is less than £16,500 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.

I believe these reforms could be a turning point for pensions saving in general and for your industry in particular…

… I agree with the words of Stephen Haddrill that these reforms have the potential to “energise pension saving in the country”.

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

It is important that Personal Accounts complement and do not compete with existing provision. So there will be an annual contribution limit of £3,600, at 2005 levels.

We have listened carefully to the industry on ways to reduce levelling down and decided that there should not be transfers in and out.

And as announced yesterday, we are introducing an amendment to prohibit employers from offering “inducements” – such as higher salaries or one-off bonuses – to encourage workers to opt out.

We want to prevent employers from trying to pressurise or tempt staff with “live for today” inducements into opting out of pension saving.

Strengthening existing provision

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 2006 the numbers saving in salary related private sector pensions stood at around 3.5 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 per cent to 2.5 per cent could provide total savings of around £4.4 billion by 2050. Savings which we hope employers will use to continue providing salary related schemes.

There are also measures in the Bill on pensions sharing on divorce which will make administration easier.

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 .

But it is important that we consult widely on a range of options so that we get the details right.

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.

Conclusion

Our quiet revolution in pensions brings big prizes.

• up to 9 million people saving more or for the first time
• and up to £10 billion more being saved in pensions

A step change in saving and a transformation of the pensions landscape.

These reforms present great opportunities to UK pensions and the insurance industry.

Opportunities I hope you will seize, so that together we can build on a renewal of confidence for an even more successful pensions industry.