26 November 2008

Rt Hon Rosie Winterton MP

Minister of State for Pensions and the Ageing Society

NAPF Trustee Conference

Wednesday, 26 November 2008

[Check against delivery]

Introduction

Good morning Ladies and Gentlemen.

Thank you for welcoming me this morning - the morning after the final day of the Pensions Bill.

The Pensions Bill

It is a Bill which marks an unprecedented development in the history of UK pensions.

It is now time to prepare for the implementation of radical reforms which have been years in the making.

Reforms which are three fold:

• Employees will be automatically enrolled into a pension
• Employers will be duty bound to contribute a minimum of 3%
• And personal accounts will enable those without access to a good quality workplace pension to save into a trust based savings scheme, many for the first time.

We can now look to turn hard work and intelligent ideas into a reality for millions, equipping people with the tools they will need to save for the future.

So they can be financially secure in what will in many cases be longer, healthier retirements.

From reform to implementation

Preparing for the delivery of reforms of this magnitude is a huge challenge.

So it is more important now than ever, that the broad consensus we have seen across the pensions industry - from companies, trade unions, consumer groups and political parties - continues as we prepare for implementation in 2012.

Firstly, I want to reassure you that we are determined to ensure that personal accounts do not compete with, or result in the closure of, existing schemes.

Through three measures:

• the ban on transfers between existing pension schemes and personal accounts,
• the £3,600 annual limit on contributions
• and a simple scheme qualifying test…

…Through these three measures we believe personal accounts will be focussed on the target market and minimise any risk to existing pension provision.

Providing a method of retirement provision for those on median to low incomes.

Risk of levelling down

I understand there is particular concern amongst trustees that as we move toward the introduction of personal accounts, they may inadvertently result in a ‘levelling down’ of pension provision.

But we have designed the reforms to minimise the risk of ‘levelling down’ to employers of existing schemes.

Reassuringly, a key finding of research which we will publish in mid December is that among employers already making contributions of 3% or more, a majority of 86% plan to maintain or even increase contributions for current members.

And it is worth bearing in mind that without this Pensions Bill, an employer would remain under no obligation to make any contributions whatsoever.

Nearly 9 million employees currently work for such an employer.

The Alexander Forbes 2008 Pensions Confidence Survey also shows that 70% of employers would not introduce personal accounts to replace existing schemes.

That figure is up over 20% from 2007.

So some encouraging results are in the pensions domain. 

And we still have several years to prepare for implementation.

In any event, should an employer wish to make a significant change to their pension scheme- such as reducing the contributions that they make - they are subject to the Employer Consultation Requirements, which from April this year, apply to all employers with 50 or more workers.

Fundamentally, this ensures that affected scheme members are made fully aware of substantial changes to their scheme and the implications this will have for their future pension provision.

And it ensures scheme members get to have their say.

However, and let me be very clear: none of this is to say that we are going to become complacent in our approach.

Quite the opposite, we will monitor it even more closely.

Overall, the minimum employer contribution, and automatic enrolment into both existing schemes and personal accounts, will mean that participation rates and total contributions into qualifying schemes will increase - significantly.

Resulting in between 6 and 9 million people newly saving or saving more in workplace pensions.

Current economic conditions

But of course whilst we prepare for the future we must deal with the present.

We are in the midst of challenging times in the global markets. 

This has placed strain on trustees and pensions providers. 

We will work alongside the NAPF and others, to ensure that trustees feel prepared not just for the implementation of these pension reforms, but also equipped to deal with the challenges of the economic downturn.

To do this, the Government is seeking to avoid placing additional cost pressures on the industry at this time. 

Over the past four weeks, we have taken a number of steps on qualifying earnings, section 75, and deregulatory measures in the Pensions Bill. In addition to freezing the levy on administration costs of the PPF and the Regulator among others…

…these are steps which I hope you’ve found helpful.

On section 75, for example, we have begun a four week informal consultation on employer debt provisions as set out in the 1995 Pensions Act.

We are seeking views on whether the rules should be modified so as not to hinder corporate restructuring – so long as the employer covenant was strong before the restructuring and remains so afterwards.

This is a difficult area, and it may not be easy to address the issues without creating loopholes.

But if we can, we will hold a full consultation in February, and introduce any changes in October 2009.

This is not about weakening protection for anyone, but about listening to concerns, and consulting on the options…

…All the while with the clear principle that we are not undermining the employer covenant and we are still protecting employees.

Defined Benefit Schemes

For defined benefit schemes we all know the long term trends and risks, compounding the need to strengthen confidence in their future.

A well designed scheme is still a good product.

The Pensions Regulator recently issued a statement to trustees on current market conditions.

I hope this provided reassurance that the Regulator’s current framework is sufficiently flexible and their guidance is still applicable in these market conditions.

Recovery plans typically seek to make deficits good within around 7 years, but given current financial pressures - some schemes may have to undertake longer plans.

The Regulator is working alongside scheme providers to ensure that recovery plans are both affordable and effective.

And there is also a robust protection framework in place for members of defined benefit schemes.

The Financial Assistance Scheme is now paying assistance to over 9,000 members, protecting 140,000 people.

And the Pension Protection Fund protects over 11 million people in around 7,800 eligible defined benefit occupational pension schemes. 

Defined Contribution Schemes

For defined contribution schemes, whilst many have lost value recently, asset values are expected to recover in the long term.

For those in DC schemes who are near to retirement, lifestyling arrangements, where their assets have been moved into safer, low risk investments will have helped shelter many from recent market turmoil.

The NAPF

For both defined benefit and defined contribution schemes, the Government, the Regulator, and organisations like the NAPF are on hand to provide support.

I want to re-emphasise that the NAPF plays a pivotal role in the pensions industry, providing great help and valuable feedback and challenge to the Government.

Our combined efforts must be geared towards an overarching objective…

…to strengthen and maintain confidence in a secure UK pensions sector.

The NAPF Quality Mark

I’d also like to thank the NAPF for the work underway on their quality mark. 

Which we hope, will contribute to increased confidence in the pension provision of those employers who meet the criteria for the quality mark.

As everyone here will know, establishing the criteria for the quality mark will be a complex process. 

So we will be interested to see how this develops.

But welcome moves like this, which aim to support good quality schemes.

The role of trustees

Aon’s 2008 trustee survey, reported that 60% of trustees felt that their workload had increased by 50% or more in the past 5 years.

But despite these demands, the survey also showed that 80% of trustees would advise a friend to accept a trustee role.

As these results show, being a trustee is increasingly challenging.

With all of our work together- yours, the NAPF’s, the Regulator’s- we can increase confidence in pensions.

The marked increase in the quality of trustee work has not gone unnoticed.

These efforts are much appreciated.

The NAPF’s 2007 report confirmed that the Myners’ principles are well supported, representing a clear approach to investment decision making.

This has led in part to the recent establishment of the Investment Governance Group, whose members include the DWP, HMT and NAPF. 

Strong trustee representation is a key part of the IGG’s composition…

…As its ultimate aims are to:

• Implement a new framework for the application of the Myners’ principles
• Improve the way pension schemes are governed
• And encourage best practice in investment.

So we can all see that the role of the trustee here, again is pivotal…

My colleague Lord Bill McKenzie and I met last week with the Trustees Panel.  This is a group of 10 active trustees nominated by the PMI, NAPF, TUC or Occupational Pensions Defence Union.  It is an important forum for us to speak directly to trustees and to explain our thinking on current issues.

Conclusion

…Pivotal. Important. Essential. 

Demanding.

All words I have used in association with the work of trustees.

We are in exceptional times.

The task at hand with the economy is a challenge.

The task to implement our reforms is a challenge.

And the task to strengthen confidence is a challenge.

But to ensure that we are able to provide millions of people with a secure and fair retirement…

…is well worth all of our efforts.

Through a collective approach, I am confident we can rise to the challenges ahead.

Thank you for all of your work.