John Hutton – 2005 Speech to IPPR

johnhutton

Below is the text of the speech made by John Hutton, the then Secretary of State for Work and Pensions, to the IPPR Conference on 24th November 2005.

I’m very grateful to Peter and the IPPR for kindly hosting this event – to Gordon, Stephanie and to all of you for joining us this morning.

It is clear to me that we have reached an important point in the debate about the impact of the demographic and cultural changes facing Britain. And as a nation we need to understand how the impact of these challenges can be managed in ways that support security and dignity for everyone in old age. This is without doubt, one of the most important public policy challenges facing the country.

Indeed, developed economies around the world are confronted by the same challenge: to design and deliver a modern welfare and pension system that is in touch with and responsive to these changes in society and the aspirations of its people.

Our response to the challenges and opportunities posed by rapid social, economic and demographic change will influence the future shape of our society for decades to come. And we need to be clear: the forces of change are accelerating not diminishing.

When our grandparents reached 65 they could expect to live another 11 years. Today, we can expect to live another 19 years beyond 65 and our children another 24 years. In 1950 we spent 18% of our adult life in retirement. We now spend 30%. And if current working patterns continue this figure will rise even further for our children and grandchildren.

In the face of these statistics we should of course first pause to reflect that this is first and foremost good news, not bad!

The fact that we can now look forward to longer and healthier lives is a tribute to the great advances that were made during the 20th century in science, technology, health and of course, welfare. And as we look now towards the 21st century, we can anticipate an acceleration of those advances.

But this tremendous opportunity also brings tremendous challenges. This new world is one in which people can have ten jobs in career rather than one and maybe even several careers; where many more people are self-employed or work part-time; and critically, it poses questions over how we cope in a consumer led world that rationalises consumption today above saving for the long term.

Part of our response must lie in the workplace. As a society we can not afford to be denied the skills and contributions of all those who can and want to work. That’s why our aspiration of an 80% employment rate is so important and so relevant to the pension reform debate.

We already spend £5 billion less each year on unemployment benefits compared with 1997. And our demand-led approach to Jobcentre Plus, combined with the skills strategy and our Pathways to Work pilots are making a real and tangible difference in helping people to realise their own aspirations of getting back to work.

Our welfare reforms will be focused on renewing the welfare state, balancing rights with responsibilities and providing people with the right support to lift themselves out of dependency and move from inactivity to employment.

Maximising the contribution of all those able and willing to work is an integral part of the way we prepare to meet the challenge of an ageing society. So too, must be the support people receive about savings decisions they make.

We live in a world which has seen a revolution in consumerism and the ownership of assets. Since 1997 household net wealth has grown by around 50% in real terms – with total household assets, including savings, pensions, life insurance and housing, standing at over £6 trillion.

We need therefore to agree on a long-term sustainable pensions settlement that can deliver the outcomes people want for their future retirement with clarity.

We are, of course, not starting from scratch. We have come a long way in laying the foundations for this new settlement.

Our immediate priority in 1997 was to tackle the legacy of pensioner poverty where, as a result of the short term decisions of the previous Government, the poorest pensioners were expected to live on a mere £69 per week.

We took decisive action to address this failure. Through the Winter Fuel Payment, free TV licenses and a 7% real terms increase in the Basic State Pension, we’ve helped all pensioners. And by targeting resources through the Minimum Income Guarantee and then the Pension Credit, we have ensured help for the poorest pensioners, lifting nearly 2 million out of abject poverty.

Now the average pensioner household is £1400 a year better off than under the 1997 system – with the poorest third on average £1900 better off. We have started to change what it means to be old in our society – and figures from the Institute for Fiscal Studies show that we are now in an unprecedented position where pensioners are no more likely to be poor than any other group in society.

In our second phase of reform we acted to tackle the loss of confidence in the private pensions market. This included dealing with the pensions mis-selling scandal and the impact of the falling stock-market on occupational pension schemes.

In 1997, less than 2 per cent of pension mis-selling cases had been satisfactorily resolved. By the end of 2002, over 99 per cent of consumers with mis-selling claims had been compensated – with total compensation reaching £11 billion.

The Pension Protection Fund – working together with the new Pensions Regulator – will improve the security of occupational pension saving for some 10 million members of defined benefit schemes. And the Financial Assistance Scheme offers the prospect of help for those who have lost the most in the past.

Having put these reforms in place, we must act now to build on this and to lay the foundations for a long-term pensions settlement. Adair Turner was very clear in his first report last year that there is not a pensions crisis today. I agree with him. But the Pension Commission identified 9.6 million people who were not saving enough for their retirement. They agued that the failure to respond to this challenge would lead to a crisis in 25 years time.

Some have suggested that this crisis will be averted by the growth in housing assets. It is indeed likely to be the case that some people will be able to boost their pensions through accessing housing equity. However, it is at best a partial solution. You would need to release £100K to generate £100 per week pension. Not easy when the average house price is now over £180K. And of course, you still need to live somewhere in retirement.

Future Governments must not be left to face the kind of problems we had to face on coming into Government. And rather like the individual who can’t put off saving for retirement until tomorrow – we as a society can not afford to put off laying the foundations for the future retirement security that we wish to enjoy.

There will be no magic wand solution for this pension’s settlement. We will need to piece together a coherent package that builds on our progress in tackling poverty and restoring confidence in private and occupational pensions.

We will need to build on the steps we have already taken through our programme of informed choice to help people get the information they need to plan for their retirement; to facilitate and regulate low cost private savings tools such as the Sandler suite and the stakeholder pension; and to increase the rewards for people choosing to work for longer – with State Pension Deferral.

And we will need to consider the proposals Adair makes, together with everything we have learnt from our past experience and from the National Pensions Debate to forge a long-term approach for our collective future and the future of our children and grandchildren.

If we are to achieve a lasting pensions settlement for the 21st century, I believe that ultimately our long-term package of measures has got to meet five key tests.

First, does it promote personal responsibility?

Second, is it fair?

Third, is it affordable?

Fourth, is it simple?

And fifth, is it sustainable?

Let me spend a moment on each of these in turn.

Firstly – does it promote personal responsibility? As my predecessors have made clear, the primary responsibility for security in old age has to rest with the individual and their families. An active welfare state must provide a floor below which no-one should be allowed to fall but its primary role must be to enable people to provide for themselves, giving everyone the opportunity to build a decent retirement income that meets their needs and expectations.

Secondly – is it fair? The system must protect the poorest so that we never again see the pensioner poverty that blighted the lives of millions of pensioners at the end of the last century. It must be fair to women and carers correcting past inequalities and reflecting their changing role in today’s society. And it must be fair to those who have saved – rewarding those who have contributed and incentivising those who can save to do so.

Thirdly – is it affordable? Clearly any system needs to be affordable to taxpayers and the economy as a whole. As the country ages we will face pressures to spend more on pensions. Already since 1997 we are spending £11 billion a year more on pensioners. We have an obligation to continue to manage public expenditure prudently and responsibly. As Gordon Brown will say this evening, in his speech to the Institute of Directors, there will be no relaxation in our fiscal discipline. We will not put the long term stability of public finances at risk. And we should assess how re-prioritising welfare spending can make a contribution to supporting pension reform.

Fourthly – is it simple? There needs to be a clear deal between citizens and the state. People need to know what the Government will do for them and they need to be clear about what is expected of themselves.

Finally – is it sustainable? Any package of reform must form the basis of an enduring national consensus – and one on which people can make decisions about their retirement planning with confidence that it won’t be pulled apart by successive Governments fiddling with the system.

Our task now is to lay the foundations for a lasting pensions settlement. This means new arrangements that stand the test of time; that won’t be uprooted by successive Governments; that will allow people to plan ahead and make decisions with confidence – whilst being sufficiently flexible to allow it to adapt to unknown challenges in the future and the changing needs of tomorrow’s society.

Following the publication of the Pensions Commission report next week, I will launch the next stage of the National Pensions Debate. We will continue to talk with people of all ages, in all parts of the country and across all political parties; continue to listen to everyone’s views so that we create ownership of the challenges and the possible solutions.

But this next stage of the National Pensions Debate will also be very different. Before, we were focusing on diagnosis of the problem and generating ideas. Now we must debate and test these ideas, both those of the Pensions Commission and our own, against the criteria and objectives that will deliver this lasting settlement.

That is why I have set out my five tests today.

We must be committed to bringing about this long-term change – but that doesn’t mean rushing to judgement. Nothing ruled in. Nothing ruled out.

Previous generations of progressive politicians have risen to the challenge of ensuring that the State provides a foundation for security in old age. Lloyd George introduced the Old Age Pension Act in 1908 which provided a guaranteed means tested income for everyone over 70 years old. Atlee, through the 1946 National Insurance Act introduced a contributory State Pension for all. And Barbara Castle in 1975 created the Social Security State Pension Act, which set up the State Earnings Related Pension Scheme.

These crucial decisions, taken by politicians who see the benefits of long term reform, laid the foundations for our pension system in the 20th Century.

I believe it is now our turn. To see the scale and depth of the challenge in the way that previous generations of progressive politicians have seen those challenges. This should be our benchmark. To lay the foundations for reform in the 21st Century. To step up to the plate of long term reform in a way that can provide a viable and sustainable set of reforms.

We, the government, cannot solve the pensions challenge on our own. This requires all of us to work together to build a lasting settlement. So I urge you to work with us as we take the National Pensions Debate forwards and work towards the White Paper in the Spring of next year. Proposals which will pass the tests of personal responsibility, fairness, affordability, simplicity and sustainability. And – with your input and support – pass the most important test of all – securing our future with a lasting pensions settlement.