Below is the text of the speech made by John Hutton, the then Secretary of State for Work and Pensions, to the NAPF Conference on 8th June 2006.
I’d like to start by thanking the NAPF, its members – and many of its guests here today – for all that you have contributed to the pensions debate – not just in the last few months but over a number of years – as we have sought to build a long term response to the pensions challenges that we face as a nation.
No-one should underestimate the scale or the importance of that task. Building a long term approach requires all of us – whether individuals, policy experts or political parties – to see to what extent we can agree our objectives and then to work together to develop new and innovative solutions to achieve them.
The voice of the NAPF has been at the centre of the national pensions debate and your contribution has been crucial to the progress we have made. Our White Paper builds on long-standing big picture NAPF ideas – a simpler, fairer state pension, with broader coverage less means-testing and a clearer foundation on which to build private savings. And I think it’s important to recognise that when you welcomed our White Paper at the end of last month – you were setting aside previous disagreements over specific policy measures in favour of getting behind this wider package – showing real leadership in being prepared to work with us to develop the detail of our proposals and consolidate the emerging consensus on a lasting pensions settlement. I want to thank you for the leadership you are showing.
I do believe that the proposals we announced in our White Paper address the three big questions at the heart of the pensions challenge.
Firstly – how we remedy the problem of undersaving – affecting perhaps as many as 12 million people. The introduction of personal accounts combined with compulsory minimum employer contributions and automatic enrolment will help to embed a new pensions savings culture and overcome some of the many practical barriers that prevent people from saving for their retirement.
Secondly – how we make the State system fairer and simpler, with less means testing – ensuring it provides a better platform on which to encourage and support a sustained expansion of private savings. I believe that our reforms to modernise the contributory principle and enable more women and carers to qualify for the State Pension will deliver much fairer outcomes more quickly than other approaches. And that by restoring the earnings link and simplifying the State Second Pension we will make the State Pension simpler and more generous – while reducing the spread of means-testing.
By 2050 only about a third of pensioners will be eligible for pension credit, instead of some 70% if current uprating policies continued. And of this third, only about 6% will be receiving the guarantee credit alone – meaning that in the vast majority of cases, those receiving pension credit will be actually being rewarded for voluntary saving. That has got to be the sensible thing to do.
And thirdly – but absolutely critically – how we make the reforms affordable and therefore sustainable over the long term. That’s why we’ve said that we will aim to make the changes in 2012, subject to affordability and the fiscal position. We’ve made it clear that we won’t risk jeopardising the public finances – it would be completely irresponsible for any Government to say otherwise. Over the period to 2020, our proposals broadly keep spending on pensioners as a proportion of national income constant at today’s levels – taking advantage of the savings realised by the decade of State Pension Age equalisation and helping pensioners to share in rising national prosperity. And, of course, over the long term the rise in the State Pension Age in line with life expectancy, will help to secure the financial stability and sustainability of the state pension system.
With these reforms, I believe we can begin to change the pensions landscape in Britain. Our challenge now is how we take this forward. And it’s this, rather than the reforms themselves on which I would like to focus my remarks today.
Just as the NAPF has played a crucial role in laying the foundations for a consensus on a long-term solution – so we must now work together as we refine the detail of our proposals and seek to implement them.
Of course, one key area will be around the specific design of the new personal accounts. We have already said that we want to consult on the best administration model for personal accounts – particularly on whether there is value in offering consumers a choice of branded provider. And we announced earlier this week that will be hosting a summit before the end of July on their design and introduction – as well as engaging with our key stakeholders in advance. I hope the NAPF will be at the centre of this work.
Over and above this, I am conscious that personal accounts have to work alongside existing and future provision – and as we said in the White Paper, while we don’t think that Supertrusts have all the features needed for Personal Accounts, we are interested in looking at whether Supertrusts could work alongside personal accounts to offer more choice in pension provision. We need to test this idea further.
Because it’s not about one type of provision at the exclusion of another – but actually supporting the widest range of suitable options that will allow people to plan and achieve the income in retirement that they want.
This brings me to two immediate challenges that I think we need to address as we seek to develop our reforms over the coming months and to embed that long-term consensus. And they are challenges where I believe the NAPF and its partners can play a particularly important role.
The first is around strengthening existing pension provision, reducing the burden of regulation and making it easier for employers to provide good workplace schemes. And the second is around how we encourage and enable people to make the most of this existing provision and support people in the retirement planning decisions they make today.
I’d like to say just a few words about each.
The proposals in the White Paper are designed to encourage a radical extension of private pension saving – but this must be in addition to, not in place of, existing pension provision. Many of you here today will be associated with employers who already provide high quality pension schemes with valuable employer contributions and high-quality support and advice for their staff.
This has been one of the fundamental pillars of the success the UK pensions system to date – and the NAPF has been at the heart of supporting such provision for over 80 years.
The evidence for why this matters speaks for itself. In 2004, nearly 80% of contributions to funded occupational pension schemes came from employers. And the evidence about the value of an employer contribution was one of the main reasons why we opted to make employer contributions compulsory with the new system of personal accounts.
So it’s absolutely crucial that we continue to support good quality existing employer provision. The White Paper talked about measures to reduce the regulatory burdens and to make the system simpler for employers and providers. It was probably the part of the White Paper that got the least coverage – but it’s absolutely critical if our reforms are to be successful.
Last year’s NAPF survey highlighted how the regulatory burden is one of the main concerns that schemes anticipate over the next few years.
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. The abolition of contacting out for defined contribution schemes – as the Pensions Commission recommended – will reduce administrative complexity and remove a key source of confusion for individuals. And the the change to allow occupational schemes to convert Guaranteed Minimum Pension rights into scheme benefits – will all take us further towards a more streamlined, less bureaucratic system.
But the rolling deregulatory review offers further potential for radical change. We’re kicking this off in the next month and many of our key stakeholders, including the NAPF, have agreed to join the Advisory Group that will guide the direction of this work.
The White Paper gave a list of possible elements for this review. I want to make it clear today – that this list is the minimum of what we are prepared to consider. We want the deregulation agenda to be led by those of you out there who are actually involved at the sharp end of pension provision. And we want you to drive both the scope and content of this review. Nothing is off the table. Our objective is not about merely re-writing legislation or tinkering around the edges but a real drive to cut red tape and to make it easier for you to deliver workplace pensions.
Because, ultimately, this is the way to strengthen existing provision and enable employers to continue to provide high quality schemes in a new and changing economic climate. We have to strike the right balance between simplification and protection – between deregulation and good governance. You can help us get this balance right.
The second crucial challenge we face – is how we then encourage and enable people to make the most of this existing employer pension provision.
It was the first of the Pensions Commission reports that first highlighted the scale of this, showing that for the earnings bracket with the most people in it – namely those on £10,000 – £20,000 – there were more people who decide not to join their employers’ contributory scheme than there are workers who have no pension and no access to a scheme. Indeed – there are some 4.6 million workers who are not taking advantage of contributory schemes that their employer provides.
And last year’s NAPF survey found that nearly 1 in 10 of your members work for organisations where fewer than 20% of all eligible employees belong to the scheme and half work for organisations with scheme participation rates below 60%.
The White Paper has proposed automatic enrolment as the norm for pensions in the future. For many this will be into the new personal accounts – but for many others it could be into existing occupational pension schemes. And we know what a difference this could make. In case studies of private sector firms automatic enrolment has been clearly associated with increased participation rates. For example, in one firm the participation rate went from 25% for existing employees to 80% for new joiners who were automatically enrolled.
So there’s a key challenge for us to work with employers, unions and all our partners so more people consider joining their occupational schemes ahead of auto-enrolment being introduced.
Information and education will be crucial to meeting this challenge. That’s why the Pensions Education Fund is so important – in helping people to understand and take advantage of available pension provision. Your “PensionsForce” initiative – launched this afternoon – will help many people benefit from impartial and accurate information that will increase their awareness of the need to plan for retirement and the options available to them. In particular it could help many women, and workers in small and medium sized enterprises who tend to have lower access to a pension contribution and who tend to be bypassed by the advisor community – as well as workers who have access to a workplace pension, and employer contribution, but who do not take full advantage of it.
Pension forecasts are also important tool to help with this. Since their launch in October 2001, over 7 million combined pension forecasts have now been issued showing a State Pension forecast alongside information on private pension savings. Quantitative research is showing that these forecasts can and do influence people’s savings behaviour – and I’m very keen that a much more widespread and regular provision of forecasts should be an integral part of long-term pensions reforms.
Ultimately, that long-term settlement requires us to achieve a shift in public attitudes such that the changes we make are seen not as a personal intrusion into individual lifestyles – but that instead, they genuinely reflect the new expectations of individuals and communities in a changing society.
It is an evolving social contract. One that will hopefully bind the generations together. One that’s based on the notion that risk should be pooled; that all should contribute according to their means and that there is a floor below which no person should be allowed to fall. But one that’s also based on an understanding that the individual has a responsibility to take every opportunity to support themselves and their family – whether it be in employment or in retirement.
I believe the role of the workplace is crucial in helping us to achieve this renewal of the contact between the individual and the state. And the proposals in the White Paper rightly have a central role for employers at their heart. We must now do all we can to support employers in strengthening existing provision and enabling people to start saving now.
I’m confident that we can respond to this challenge – and I look forward to working with you over the coming months as we refine the detail of our proposals and continue to forge a truly national consensus – one that will enable us to put in place a sustainable, affordable and trusted pensions system that will enable both current and future generations to save for a long and healthy retirement.