Generic Advice and the National Pension Savings Scheme
From the number of e-mails we’ve received in the BeeHive inbox this last month or so while the ‘battle of the blogs’ has been raging I guess many of you are as horrified as I am about the prospect of a National Pension Savings Scheme being introduced with automatic enrolment as its engine.
I don’t know whether we’ll ever get to the position where pensions will be suitable investments for all of the people at work in this country of ours, but I rather doubt it. It’s a shame, as it doesn’t seem much to ask, but there we are.
I’m not happy having to say it, but while pensions are not only not suitable for all, but downright dangerous investments for many, we really do have to be careful when encouraging people to save these days; particularly if we don’t, or can’t, know their individual circumstances and financial histories. There have been some good examples of how bad an investment a pension can turn out to be for some people in the blogging exchanges I have had with James Purnell, the minister for pension reform at the DWP. The hypothetical lady we were discussing earlier this week, you’ll remember, was in the unfortunate position of having saved over £25,000 in a pension only to find she didn’t get one penny’s worth of value out of it! The minister and I don’t see eye to eye on that as you know, but at the very least I think that people should go into such dangerous investments with their eyes open and I hope we don’t disagree on that.
But that does raise the question of just how we’re going to get people to decide whether or not pension savings will work for them or against them if everyone is going to be auto-enrolled into saving with the advent of this new national scheme the ministers are putting together in this week’s Pensions Bill. Just how is it envisaged that some people will be warned about the dangers of saving in a pension while at the same time being sold the undoubted benefits that pension savings will bring to others? How will people know whether pension saving will be suitable for them as individuals? That’s a real dilemma, and one that those of us with years of experience in the tricky business of distributing pensions in such a ridiculous environment as our political masters have created for us know only too well.
We’re used to these difficulties, unfortunately, and I guess we’ve also given up on anyone in a position of power over that environment of ever fixing it so that pension saving is a no-brainer for everyone.
But what’s about to happen with this latest Pensions Bill is a bit different. Following this the Government ministers themselves will be looking to see how they can do what we’ve been unable to do in this difficult environment; they are themselves going to try to distribute pensions to the millions of people who are currently not saving for a pension. What I’m interested to see is how they will tackle this central and important issue where pensions are highly suitable for some people while at the same time being highly unsuitable for others.
We’re going to find out I suppose when we read and digest the words of wisdom contained in the detailed Pensions Bill, but in the meantime we have some other sources to give us an idea of the way ministers’ thinking is going.
I’ve printed in full at the end of this BeeLine the text of a speech that John Hutton, the secretary of state for work and pensions and therefore the senior minister on the pension tree, gave at a recent ABI summit. I wasn’t at the summit myself, I was too busy that day doing other things, but I found the speech on the internet anyway. While I was reading through it I was getting more and more confused about just what it is these guys are going to be unleashing on us with this new Pensions Bill. In fact I found it all rather unsettling. But see what you think; you can read the whole text here if you like.
But in case you don’t really want to read the whole thing I’ll give you a flavour of it by highlighting just a few sentences. These were the bits that really jumped out of the text at me:
“We will take the first steps towards a new system of personal accounts to make it easier for people to save.”
“At least 7 million people are not saving enough for their retirement. Many are from low income households and the majority are likely to be women. It’s an area where existing pension products have not served this potential market well.
Personal accounts will rectify this. It’s expected that between 6 and 10 million people could save into personal accounts – particularly low to moderate earners who do not currently save in a private pension.”
“While there will always be specific individual circumstances which will affect people’s savings – fundamentally our package of reforms will mean that people should be better off in retirement by having saved.
And that is the crucial point. Personal Accounts and auto-enrolment will help to facilitate personal responsibility. The goal of our policy is to give people a good expectation that if they contribute to the state system for most of their career, they will be better off for having saved. Whether they save – will remain the individual’s decision. And it will be crucial that we have clear, generic information to enable people to judge whether or not it will be in their interests to remain in personal accounts.”
“Personal accounts will be different. They will help people to save rather than compel them; the accounts will be transparent – it will be their money, not Government’s.
We will give people choices over which funds to invest and auto-enrolment will secure economies of scale so that individuals will benefit from lower charges. Collective means to realise individual ends.”
Well, that’s the flavour of it. You’ll probably appreciate that I think some of that’s got “Ooh-Err!” written all over it, but perhaps I’m being a bit harsh in my judgment. So please read the whole speech yourself and make your own minds up. It follows here in full:
I’m grateful for the opportunity to join you today.
These annual Saver Summits - now in their fifth year – together with the State of the Nation’s Savings reports - have played a crucial role in driving the debate over how to tackle the challenge of under saving and helping to bring it to the forefront of public consciousness.
A year ago today, on the eve of the publication of the Pension Commission’s 2nd report, I set out in a speech what I believed to be five key tests for a successful future pensions system. I said it needed to promote personal responsibility; to be fair – especially to women and carers; to be simple to understand; affordable and sustainable for the long term.
Next week the Government will introduce a Pensions Bill to meet those five tests – and in doing so, change fundamentally the landscape of this nation’s Pensions system.
Our goal is to promote personal responsibility for dignity and security in old age. And the Pensions Bill will help to do this by creating a simpler and more generous state pension system.
We will restore the earnings link so that the Basic State Pension will retain its value over time and act as a stable platform upon which people can save for retirement;
We will simplify the second state pension;
We will modernise the contributory principle so that more women and carers get a better deal;
We will take the first steps towards a new system of personal accounts to make it easier for people to save;
And we will introduce a higher state pension age so that we keep the proportion of adult life spent receiving the state pension stable for each generation.
Together, these measures will help to secure the long-term financial stability and sustainability of the pensions system.
The Pensions Bill will make pensions fairer for women and carers – replacing Home Responsibilities Protection with a new deal of weekly credits for carers; reducing the number of years needed to qualify for the Basic State Pension to 30; and introducing a new modernised contributory principle so that for the first time, a life of social contribution will be recognised and rewarded on an equal footing with a life of work.
Today less than a third of women reaching state pension age get a full state pension. In 2010, as a result of these reforms, it will be over 70%. By 2020, 90%.
The legislation will go further than the May White Paper in simplifying the State Second Pension to create a more transparent and simpler overall state pension package.
Instead of the current system where State Second Pension is calculated based on how much someone earns in a year, we will replace this - at the same time as linking the Basic State Pension to earnings - with a fixed amount of money that everyone will receive, based upon the amount of time they have spent working or caring for someone.
This will mean people receiving £1.40 a week on top of their Basic State Pension for each qualifying year spent either working, caring, or doing a combination of both.
It will give people a much clearer picture of what they will receive from the state in retirement. And when added together with the Basic State Pension, this simplified entitlement could effectively provide a single State Pension for most contributors.
So, for example, by the 2050s someone who contributed for most of their life through working or caring would be entitled to around £135 a week from state pensions in retirement – instead of between £90 and £100. And because they could be confident of that entitlement lifting them clear of means-tested benefits they would also be able to plan their private saving.
The introduction of a new lost-cost system of personal accounts combined with mandatory matching minimum employer contributions and automatic enrolment will give future generations an unprecedented opportunity to take personal responsibility for building that private saving – and helping to embed a new pensions savings culture.
At least 7 million people are not saving enough for their retirement. Many are from low income households and the majority are likely to be women. It’s an area where existing pension products have not served this potential market well.
Personal accounts will rectify this. It’s expected that between 6 and 10 million people could save into personal accounts – particularly low to moderate earners who do not currently save in a private pension. By retirement, their pension funds could be worth up to around 25% more because of lower charges. And it’s estimated that personal accounts will generate an additional £4-5 billion of new saving – equivalent to around half a per cent of GDP.
So by 2050 a regular saver – saving into a personal account from age 25 with total contributions of 8% and on median earnings - could be up to £50 a week better off than if the system continued as it is today. Additionally our changes to limit the spread of means-testing, will help provide the right incentives on which to build personal saving. By 2050 only about a third of pensioners will be eligible for pension credit and only about 6% of these will be receiving the guarantee credit alone – so in the vast majority of cases those receiving pension credit will actually be rewarded for voluntary saving.
While there will always be specific individual circumstances which will affect people’s savings – fundamentally our package of reforms will mean that people should be better off in retirement by having saved.
And that is the crucial point. Personal Accounts and auto-enrolment will help to facilitate personal responsibility. The goal of our policy is to give people a good expectation that if they contribute to the state system for most of their career, they will be better off for having saved. Whether they save – will remain the individual’s decision. And it will be crucial that we have clear, generic information to enable people to judge whether or not it will be in their interests to remain in personal accounts.
Next week’s Pension’s Bill will provide for the creation of a Personal Accounts Delivery Authority - an independent body that will in the first instance advise Government on the design of the operational structure of these accounts and provide support to get the necessary contractual arrangements in place.
We will seek to use the best experience and skills of the private sector to deliver the scheme - and give a significant degree of autonomy in operational decision making. This is very much a first step. We will outline how we would propose to expand the remit and responsibilities of this authority in our Personal Accounts White Paper next month.
This White Paper will also set out in detail the choice of model to deliver personal accounts. Since May there has been a very helpful debate and discussion, to which the ABI and its members have contributed in a very constructive way.
The White Paper will set out our views on the best way forward. Today I want to make three things clear:
Firstly – private sector expertise will be crucial to the success of personal accounts – which is one reason why the new delivery authority is so important. And we envisage that personal accounts will be delivered by the private sector.
Secondly, that we should strive to incorporate a proper opportunity for savers to exercise choice over the management of their fund and that this will be one of the prinicpal responsibilities of the delivery authority.
And thirdly, we must guard against ‘mission creep’. The system of personal accounts needs to be focussed on its target market. They are designed in order to fill a gap in the existing market, not substitute for it.
Because it’s not about one type of provision at the expense of another – but actually about supporting the widest range of suitable options that will allow people to plan and achieve the income in retirement that they want.
The Pensions Commission recognised the importance of getting this right and floated ideas around restricting transfers between personal accounts and existing pension vehicles; and imposing an annual limit on contributions into a personal account. This is something that ABI have rightly highlighted with their own five tests – and we are looking at this very carefully ahead of the White Paper.
But protecting existing provision isn’t just about the safeguards put in place to ring-fence personal accounts. Supporting good quality existing employer provision is also about reducing the regulatory burden and making the existing system simpler for employers and providers.
We have already set out measures which, over the next three or four years, will deliver year on year reductions in administrative burdens. And we will set targets for reducing the burdens arising from requirements for businesses to provide information.
But we are determined to go further in removing unnecessary regulation and simplifying regulatory burdens wherever we can. That’s why, as well as the abolition of contracting out for defined contribution schemes and the change to allow occupational pension schemes to convert Guaranteed Minimum Pension rights into scheme benefits – we’re taking forwards a rolling deregulatory review. This, I believe, offers the potential for radical change. Not merely to re-write legislation – but a real opportunity to cut red tape and to make it easier to deliver workplace pensions.
The final but possibly most significant part of next week’s Bill is to legislate for gradually raising the State Pension Age to 68 by 2046. It is a big step to ask one parliament to set a course for forty years. But it is the right thing to do. We need to lock in stability in pensions policy to allow future generations to plan ahead with confidence. We need to be straight with people on this crucial issue so they know where they stand and can plan accordingly.
Over the last fifty years, there has been a seismic shift in the balance between the proportions of life spent in work and retirement. In 1950, of those men that made it to retirement, the average age for stopping work was 67, and they then had an average of 10 years in retirement. Today not only do the vast majority of men survive to retirement, the average age they retire is actually 64, and at that point they can expect to spend another 21 years in retirement.
As unpopular as it may be to talk about working longer – the simple fact is that if we aren’t prepared to increase the state pension age, we will simply pass an ever greater and frankly unsustainable burden onto our children and grandchildren.
We’re not alone in grappling with this issue – the ageing population is a truly global phenomenon for all of the developed countries. In the US the pension age has already started increasing and will reach 67 in 2027; it is increasing from 60 to 65 in Japan. And it has recently been increased in 6 EU countries including Austria, Slovakia and the Czech Republic.
The UK can not remain immune to this process of change. In fact in the UK people are already working longer. Two thirds of new jobs currently are taken by older workers.
If we are serious about preparing the country to meet long term demographic challenges, raising the state pension age cannot be ducked.
The reforms in next week’s Pensions Bill make up an integrated package. We cannot pick and choose from within this package to avoid the tough choices. Those who want to change some element of the reforms need to explain how they could do so without jeopardising those key outcomes of fairness, simplicity and affordability.
Those who would oppose the increase in the State Pension Age, for example, must do so in the full knowledge of the predicted consequences. If we do not increase State Pension Age, it is the equivalent of a 4p rise in the Basic Rate of income tax in 2050 to pay for a population spending more and more of their lives in retirement.
We have said we will keep the increase in state pension age under review in the years ahead, particularly in regard to life expectancy in the most deprived areas in Britain, where health and longevity has so far improved more slowly than the richest.
But when around a quarter of men in Manchester and Liverpool die before reaching 65 it’s clear that the pension age is only part of the picture. Life expectancy is rising for all socio-economic groups – but we need to continue investing more in improving people’s health throughout life – and especially in areas which have traditionally suffered greater deprivation. You don’t deal with differences in life expectancy through the pension system. You do it through more effective public health strategies, early intervention to tackle the route causes of child poverty, effective childcare, education, skills, opportunities to work, the promotion of inter-generational social mobility.
But we also need to remember in this debate about the State Pension Age that life expectancy is increasing in all parts of the country. In Scotland, for example, where life expectancy has been lower, longevity is now expected to improve faster than in other parts of the UK. And the increase in State Pension Age to 68 will still leave men in Scotland with a longer period of time above the pension age.
Yet again, this year’s Saver Summit comes at a crucial point for pensions reform. It’s been a period of extraordinary change. In one year we’ve gone from the Pensions Commission report to a landmark Bill and a set of proposals for personal accounts that will transform the opportunities to save for those who – as this summit’s research has highlighted on many occasions – have simply not been saving enough for their future.
The more traditional approach of the centre left to this problem would have been to compel people to save, to lock their savings into a social insurance fund that they couldn’t see or understand how it related to them.
Personal accounts will be different. They will help people to save rather than compel them; the accounts will be transparent – it will be their money, not Government’s.
We will give people choices over which funds to invest and auto-enrolment will secure economies of scale so that individuals will benefit from lower charges. Collective means to realise individual ends.
The challenge now is to deepen the consensus we have built around the key elements of next week’s Bill – and to ensure the effective design of the new personal accounts. The next twelve months represent an historic opportunity. By this time next year, we will have cemented the path for the long-term future of pensions in this country.
I look forward to continuing to work with you as we take these steps towards a sustainable, affordable and trusted pensions settlement which will meet the challenges of social and demographic change and enable both this and future generations to save for a long and healthy retirement.
So, that’s that. We’re on a journey like it or not. And we’re definitely going to end up somewhere. See you there!
29 November 2006
Source: Department for Work and Pensions media Centre 23 November 2006 - "ABI Saver Summit".
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