Why consensus is vital for pension reform
By Mike O’Brien, Minister for Pensions Reform
Over recent years, the Government has made a point of trying to achieve as broad a consensus as possible over pension reform.
We’ve involved members of the Parliamentary opposition, pension providers, industry experts and academics, to name but a few. And we’ve listened to them, as our recent decision to opt for a lower £3,600 annual cap on contributions shows.
But while we’ve been actively trying to achieve a political and professional consensus around pension reform, we’ve also been mindful of the fact that pension reform can only work if there is also a public consensus.
When it comes to pension provision, the general public is quite risk-averse and wary of wholesale, ‘radical’ changes, unless they are properly explained, properly planned and properly executed.
Ten years ago, I doubt very much that our plan to automatically enrol low to moderate earners in Personal Accounts would have enjoyed the same widespread approval and support we are seeing today.
That’s because 10 years ago, the overwhelming concern was what to do about the hundreds of thousands of pensioners who were struggling to make ends meet.
The Government is sometimes criticised for introducing Pension Credit. But if we hadn’t done so, as well as making other changes to the tax and benefits system, we wouldn’t have seen the number of pensioners living in poverty fall by more than one million.
Pension Credit was an immediate solution to a serious problem that had built up over many years. Pension reform, on the other hand, is about putting a series of long-term measures in place to help prevent serious problems in the future.
People retiring in 20, 30 or 40 years’ time will not face the same circumstances as people retiring today – precisely because we are taking the necessary steps to improve the situation.
For example, someone currently in their 20s who has a good working or caring history can expect to retire on a State pension equivalent of £145 a week in today’s money. Even if they have no other private savings, this amount will lift them clear of Pension Credit. And if they do have any private savings their income will be even higher.
The question for us in 2007 is ‘How can we help them to save more?’
We know from recent research by the National Centre for Social Research that 84 percent of people like the idea of introducing a national pensions saving scheme.
Yet despite the recognition that it’s important to put money aside, about seven million people still aren’t saving enough to have the sort of income in retirement they will need to enjoy the sort of lifestyle they want.
That’s why from 2012, we propose automatically enrolling millions of people into a system of personal accounts or a qualifying workplace pension scheme.
For the first time, employees will have a guaranteed contribution from their employer towards their pension. The employee will put in a minimum of four percent of their salary, the employer a minimum of three percent and around one percent comes from the Government in tax relief.
To ensure personal accounts complement, instead of compete with, good existing pension provision, we are putting a number of measures in place to ensure schemes mainly attract moderate and low earners who don’t already have access to good quality pension provision. These measures will include prohibiting transfers and proposing a simple and straightforward scheme qualifying test.
One of the concerns raised about personal accounts is that they will lead to widespread 'levelling down'. I disagree. Currently, around one million employers either make no contributions to their employees’ pension pot, or contribute less than three percent, so if anything, the introduction of personal accounts should lead to more employers ‘levelling up’.
Thanks to our reforms, we envisage as many as 10 million more people could be saving into a private pension.
Of course, no-one can say precisely how their working life will pan out, but most of the people who save into a personal account can expect to benefit from their saving.
As we begin the final phase of our package of pension reforms, we can look back over the past decade and appreciate just how far we’ve come.
We are changing public perceptions of saving for retirement and improving the practical arrangements required to make it easier to do so.
We’ve worked together across so many different areas, spheres and interests, from politicians to industry experts, to get agreement on what should be done.
Now it’s time to press ahead with our reforms and create a pensions system that will deliver a financially healthier future for all.