13 May 2004

Rt Hon Andrew Smith MP
Secretary of State for Work and Pensions

National Association of Pension Funds (NAPF) Annual Conference

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Good afternoon. First, I would like to extend my deepest sympathy to the bereaved and injured, following the terrible incident on Tuesday at Stockline Plastics Factory. And also pay tribute to the emergency services who have worked so tirelessly.

But even in such sad circumstances, I am pleased to be here in Glasgow and have the chance to be with you at your conference:

Your input to the current debate is crucial. Together you provide pensions for over 10 million employees and 5 million people in retirement – accounting for more than £600 billion of pension fund assets.

The Association have always spoken up in favour of employer provision. Its value cannot be over-stated – it is central to the success of the pensions partnership and I am determined to continue to work with you and make it easier for your members to set up and run schemes.

A lot has happened since I last addressed your conference, nearly eighteen months ago. We've had the Green Paper and the consultation period. Then in June, last year, I announced the first phase of our plan of action to increase security and simplify scheme administration.

Since then we have come forward with proposals to simplify the tax system, to increase the rewards for people who defer taking their state pension, to drive forward the informed choice agenda on people's need to plan for retirement.

And, of course, most recently, the Pensions Bill has completed its initial committee stages in the Commons.

Today, I want to set out our wider strategy on pensions – and the key objectives that will drive pension reform as we move forward.

Our approach and the principles on which it is based are clear:

First, we have a responsibility to today's pensioners both those who have saved all their lives – and those who find themselves in poverty.

Second, because pensions in this country are based on a partnership between Government, employers, the financial services industry and individuals – we need to take a close look at what we can do to help our partners fulfil their responsibilities. That means embracing three key challenges:

I will deal with each of these. But first I want to reflect on the progress we have made over the last 7 years.

The system we inherited

We inherited a pension system in chaos that did nothing for the poorest pensioners and penalised – by pound for pound withdrawal– those with modest occupational pensions and savings.

Millions of pensioners were left in poverty – the poorest being expected to live on incomes of just £68 a week.

Complexity of regulation in the 1995 Pensions Act meant that companies were strangled by red tape and individuals were left struggling to pick their way through an impenetrable maze.

The state system did little to help the low paid, nothing to help those in part-time work, nothing for carers, nothing for disabled people.

Hundreds of thousands of people were affected by pensions mis-selling, inflicting serious damage on the pensions industry – but little had been done to clear up the mess.

All these problems made pensions a huge issue – especially because they came on top of the remorseless arithmetic that all western societies face as people live longer.

The progress we've made

Since 1997 we have made a lot of progress. Our first priority on coming into office was to address the immediate problem of pensioner poverty and ensure that pensioners share in the nation's rising prosperity.

Over the last 7 years we have strengthened the foundation of basic support – all pensioners now have a guaranteed annual increase in their state pension of at least £100.

The basic state pension has increased by 7 per cent more than inflation.

And 20 million people will benefit from reform of SERPS. Under S2P, low earners will get at least double what they would have got from the old system, while carers and disabled people with broken work records will be entitled to a second-tier pension for the first time.

Since its introduction in October already nearly 3 million individuals are receiving Pension Credit. And for households getting extra support, gains are on average £680 a year.

Our approach has been to raise the living standards of all pensioners, targeting extra resources on the poorest.

As a result, on average all pensioner households are £1,350 a year better off in real terms. With the poorest third of pensioner households gaining on average £1,750 a year – that's around £33 a week.

The reforms we have introduced have struck the right balance between fairness, affordability and sustainability.

The UK system is now fair to those on low incomes, fair to those who have saved and because it avoids big tax rises it is also fair between the generations – something that other countries across Europe are struggling with.

Our second stage of reform has focused on making still more of a difference for tomorrow's pensioners.

The need to take action was brought into even sharper focus as the stock market proved it could go down as well as up – creating anxiety for individuals and putting pressure on occupational schemes.

So, we are taking action to strengthen the pensions partnership that will give people the confidence and information they need to save for their retirement, while taking steps to make it easier for companies to run schemes.

I will now say a little more about each of these areas.

Increasing confidence in pensions

First – as we together build confidence in pensions, I believe the new Pension Protection Fund – a major social reform – will give invaluable reassurance to both members and scheme providers.

It will benefit at least 13 million members by giving them the peace of mind they need to go ahead and pay into their company scheme, safe in the knowledge they will still have a secure retirement even if their company goes bust.

And because members are more secure – increasing the value of pensions in remuneration packages – it should be all the more worthwhile for the 10,000 or so firms sponsoring defined-benefit schemes to provide their employees with invaluable pension provision.

The Protection Fund is structured so that when a sponsoring employer goes bust and the pension scheme is under-funded – pensions already in payment will continue to be paid in full, pensions for those yet to retire will be paid at 90%, subject to a prudential cap.

I am pleased to say that this big step to improve security and confidence in pensions has – quite rightly – received a very positive response and I would like to take the opportunity to thank those of you involved in the thorough consultation.

The PPF is a big job and we want the highest calibre people in its leading positions. I am very pleased to be able to tell you that today I have appointed Lawrence Churchill – current Chief Executive of Zurich Financial Services – as Chair of the PPF.

As you know Lawrence is a very respected figure in the financial services industry. His leadership and the experience he brings will help get the Protection Fund off to a good start.

I know there are those who have questioned the finer detail of how the Fund will work – and we have listened carefully.

It's clearly important to keep costs as low as possible, but at the same time to ensure that cover is good enough to provide members with a meaningful pension.

So, on top of the various moral hazard measures, we remain committed to introducing the risk-based element of the levy as soon as possible.

This will make sure that well-funded schemes pay a lower contribution as they are less likely to call upon the Fund for significant compensation.

We are all too aware of the plight of the workers whose companies have gone under before the PPF comes into being.

And again, for anyone who questions the need for protection – I would invite them to meet those who have already lost out. I've done so, and we can't let it happen again.

Their plight is an issue that rightly demands the close and careful attention the Government has been giving it.

I have been careful not to raise false hope. I have been conscious that I need to look the workers in the eye and for them to know that I have been straight with them all along.

And, whilst there is no legal liability; whilst we must avoid setting precedent; and whilst affordability is always important; I have no doubt that if we could provide some help it would be the right thing to do.

Increasing awareness and opening up choices

Alongside steps to rebuild confidence – the second key strand of our strategy is to make sure that people are better equipped to make informed choices about how much and when to save.

People will always be put off pension planning. If they do not understand it.

But I believe that given the right opportunities and information, people will plan for their retirement sensibly. I am determined that we must help put people in a better position to plan for retirement.

Now – there's something of a double edged sword here. The coverage pensions has been getting in the press, means that awareness levels of pensions are increasing – we need to harness this and channel it into encouraging people to take action.

We set out our plans for informed choice in February. We made it clear that if we are going to influence savings behaviour, individuals will need to receive clear information tailored to their own circumstances.

What this means is putting in front of people – in black and white – individually tailored information, so that they can see at a glance how decisions they're making now relate to their own retirement prospects.

So, we are committed to:

We will also be bringing forward the exciting new development of a web-based planner which for the first time will allow people to see all their state and private pensions together.

As individuals see what income they're going to get in retirement it will be clear to them that they need to take action to either:

This, in turn, will lead to pressure on employers to do more. We need to work together to make the most of these new opportunities. We are determined to:

We are also working with providers, Independent Financial Advisers and employers to test out the best ways of providing pensions advice in the workplace. Something that I know you are keen to do.

I want to get to a position where everyone has the opportunity to get a pension, or at the very least decent pension advice through the workplace.

There are a number of employers – some estimates put it at over 300,000 - who make little or no contribution to their employees pension scheme or have low levels of scheme membership.

Pilots will test out the different ways these employers can ensure their staff have the vital pensions information they need.

We are also keen to encourage new and different forms of pension provision – for example, the ongoing work your association is doing to encourage multi-employer schemes.

And of course, if we are to recognise properly the value of pensions we need to give them due prominence in the remuneration package.

On Tuesday the TUC launched a campaign calling for all job applicants to ask some hard questions about pensions available. This can only increase the importance of pensions in the workplace.

Giving people options to work for longer

But all this isn't just about what people save. Working a few years more can make a real difference to income in retirement.

I firmly believe working longer should be a matter of choice.

A choice that will become increasingly attractive to more people as the idea of a one size fits all retirement gives way, with people living longer healthier lives.

Amongst all of yesterday's good news about employment, there was one statistic that did not get much coverage. Since 1997 there are already an extra 1.3 million more people in work over the age of 50.

So, we are going with the grain of choices people are already making and taking action to get rid of outdated inflexible rules.

As you know we are legislating to give people the option to draw their pension whilst working part-time for the same employer.

It's a big step forward and will I think become increasingly attractive to workers and employers who will gain by eroding the cliff edge approach to retirement.

And that's also why in the current Pensions Bill we are legislating to bring forward incentives to encourage people to continue working by offering them a choice if they defer their state pension – to receive either an enhanced pension or a lump sum.

Making it easier for companies to run schemes

These changes – and increasing individuals' understanding of the range of options open to them – are crucial, but to get all elements of the pensions partnership pulling in the same direction I am also determined to support employers and the financial service industry in playing their role in the pensions partnership.

This is the third strand of our approach.

I do understand that the long-term challenges we face – people living longer and needing to fund longer retirements – leave you with significant funding pressures, which in turn have been exacerbated by fluctuations in the stockmarket and changes in accounting practices.

It is absolutely clear to me that, particularly in a largely voluntary system, we must always be mindful of the burdens and costs faced by providers.

Last time I spoke to you I said that we needed to take a hard-headed look at whether pension regulation was well targeted, proportionate and effective.

That's why we are taking radical action to ease these burdens on business – and we have done so.

A particular issue, for good employers with good pensions has been the way that the old Section 67 prevented them from making sensible rationalisations even where members were not losing out.

I listened to the arguments on this and decided that the difficult and complex issues needed to be confronted and action taken.

So, the old rules will go and firms will be free to recast benefits in a way that best suits them.

On indexation, too it was clear to me that regulation had got disproportionate – we were effectively forcing everyone providing a pension to buy a high level of inflation insurance and it was getting so expensive that some were choosing to pull out of pension provision altogether.

I have no doubt that the pensioner in the street would sooner have a bit less inflation protection and more confidence that they are going to get a pension in retirement.

So we've reduced the cap giving schemes the opportunity to reduce their ongoing liabilities, and increase choice for scheme members.

The Chancellor announced in the Budget this year that following the National Audit Office review we will go ahead with the simplification of the pensions tax regimes – removing over 350 pages of complex legislation, sweeping away nearly 1,000 pages of guidance and giving almost 15 million people more flexibility on how and when to save for retirement. Legislation is now going through Parliament.

We are also driving forward with simplification of administration. The Pensions Bill will streamline:

As you know, we are also replacing the one-size-fits-all approach of the MFR with funding arrangements that will allow schemes to adopt funding strategies suited to their particular circumstances.

But as well as simplifying the administration around pensions we also need to make sure that we have a proportionate regulatory framework.

The Pensions Bill sets out proposals for a new Pensions Regulator to give better protection to members of work-based pension schemes and to reduce the compliance burden on well-run schemes.

It will focus on protecting the benefits of pension scheme members, concentrating only on high risk schemes with issues of fraud, bad governance or poor administration.

The Regulator will also have important new powers to tackle under-funding.

It will not overburden employers who provide pension schemes, enabling well administered and funded schemes the freedom to continue supporting their schemes without being subject to constant, intrusive and burdensome regulation.

The whole thrust of these reforms, taken with other measures in the Bill, will be to cut down regulation and drive up standards.

The proposals around the requirement for trustees to have the right knowledge and understanding to act on of behalf of scheme beneficiaries, also aim to improve consumer trust and confidence in pensions.

In this context, I very much welcome today's announcement that the NAPF is already taking action to support their members discharge their important responsibilities.

Conclusion

So, to conclude my remarks today. Where does this leave us? I set out at the beginning of my speech the situation that we inherited in 1997.

We have come a long way since then. It has been a difficult time for pensions – but we are making progress.

So, we are making progress. As Terry Faulkner said of the Bill this morning "it's going to fundamentally change the pensions landscape", "and open up huge opportunities for the future".

It is progress we could not have made without your input – for which I thank you – but, there is, of course, still more to do.

Looking forward, we will all need to play our role to build on what has been achieved. The Pension Commission, which is completing its baseline report this year and move on to examine whether we need to introduce more compulsion into the system.

But what's clear – whatever the balance between voluntary and compulsory contributions people argue for – is that the agenda I've mapped out today will continue to be important.

I believe the framework is right. And I shall be looking to you and colleagues throughout British business, to continue to work with us, the workers and trade unions, to modernise, deepen and renew the pension partnership.

I thank you and wish you a successful conference.

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