John Hutton – 2006 Speech to the IPPR

johnhutton

Below is the text of the speech made by John Hutton, the then Secretary of State for Works and Pensions, to the IPPR Conference on 14th March 2006.

I’m grateful to Nick and the IPPR for giving me the opportunity to join you this morning.

The relationship between the State and the individual lies at the heart of the pensions debate. This relationship is so important because the state pension system reflects one aspect of a much wider social contract. A contract that binds our country and our communities together, based on the notion that risk should be pooled, that all should contribute according to their means, and that the there is a floor below which no person should be allowed to fall. Our ability to build a lasting pensions settlement hinges crucially on whether we can establish clear roles and clear expectations for that relationship within a rapidly changing world, and which reflects these fundamental values of solidarity and social cohesion.

If we are to meet the challenge of demographic change – where there will soon be more people over 80 than under 5; and if we are to help the 10 million people identified by the Pensions Commission as not saving enough for their retirement – then a new deal must be struck between the State and the individual.

One that gives individuals clarity over what the State will do for them and what they must do for themselves. A new deal that meets the five tests that I set out when I last spoke to the IPPR – that is fair, affordable, simple, sustainable and – above all – promotes individuals taking personal responsibility for building the income in retirement that they want and expect.

But to strike such a deal, we need to do two things.

Firstly, to achieve a step-change in public attitudes and expectations: Raising awareness of the difficult decisions and trade-offs that have to be managed; building an acceptance that choices have to be affordable, and that could mean working longer and saving more, and persuading individuals that financial prosperity in retirement simply can not be delivered exclusively by the State – that individuals themselves therefore have to step up to the challenge of taking much more personal responsibility for their own retirement planning.

Secondly, we need to get the balance right between a number of competing aims for the role the State does play. A balance that reflects the newly emerging public consensus – both in terms of what people now demand from the State and what this new deal requires of them – whether as individuals, employers or financial partners.

This is why we’re having a National Pensions Debate. It is precisely because we want to raise this awareness among members of the public; to allow them to see and understand the challenges we face; and to allow us to listen to their views on the most sensible way to proceed.

The Government welcomed the broad framework of the Pensions Commission proposals and options. The idea of a stronger State Pension funded by some increase in the state pension age and acting as a platform on which to build a radical expansion in personal saving through access to new and low cost savings options – is absolutely the right basis for the debate. It defines the 2 key roles of the State in this new deal with the individual. Firstly as a provider – funding a minimum income below which no-one is allowed to fall and providing a proper platform on which to build private savings. And secondly, as an enabler – offering the right incentives and regulatory framework for encouraging and supporting an expansion of personal savings.

The choices we make on pensions reform will ultimately depend on our objectives.

Lord Turner himself judged that an evolutionary two-tier state pension system was preferable to adopting a single-tier approach such as the citizen’s pension. The citizen’s pension would involve spending large amounts of extra money on helping better off pensioners rather than poorer pensioners, so while it offers greater simplicity more quickly – it does so at the cost of helping better off pensioners instead of others. And it also destroys completely the contributory principle – the concept of something for something – while carrying significant implications for the crucial test of affordability.

And even with an increase in the State Pension Age from 2020, which I believe is inevitable, affordability still remains the critical test both for the period from 2010 to 2020 and in the longer term.

Many of this Government’s reforms to date have focussed on fairness for current pensioners and in particular, on tackling the serious issue of pensioner poverty which we inherited in 1997. The Pension Credit has played a crucial role in helping to lift over 2 million pensioners of out abject poverty – and as last week’s statistics show, we’ve achieved a 15% fall in relative poverty in the last year alone.

Two-thirds of those helped by Pension Credit have been women – many of whom have suffered from incomplete contribution records or been prevented entirely from being able to build up a state pension in their own right. Indeed, among tomorrow’s pensioners, women account for around 60% of those who are not accruing any State Pension in their own right.

And there’s another critical group of women – currently aged around 45 and over – who are less likely than their younger peers to have benefited fully from Home Responsibilities Protection or to have benefited from increased participation in the labour market.

The need to achieve better outcomes for women was one of the objectives that led the Pensions Commission to suggest a residency basis for future accruals of the Basic State Pension from 2010.

The current system is projected to result in around half of women retiring with a full Basic State Pension in 2010. But implementing a residency based approach for accruals from 2010 will offer virtually no immediate help to that core group aged 45 and over, who tend to have poor contribution records and do not now have time to put this right.

After 15 years, in 2025, when even today’s current system is projected to offer a full Basic State Pension to around 80% of newly retiring women, the residency based approach only improves this to around 85%. And with a full 45-years before it matures into a virtually universal Basic State Pension, that critical group of women aged 45 and over are almost completely missed.

I believe we should therefore be looking at how we can develop a new contributory principle that gives women a fairer entitlement to the Basic State Pension more quickly – ensuring that we value social contributions equally with cash contributions and move progressively away from a system predicated on a 19th century view of both working lives and social relationships.

In fact, as modern lives become increasingly more diverse – and men and women alike spend time bringing up children and caring for family and friends – we are not just talking about redressing the balance for women affected by the unfairness of the system in the past – we are talking about reforms that could actually reverse what is now a projected decline in men’s entitlement. This could be a classic win win for both men and women alike.

Finding a way to extend coverage of the state pension of course goes hand-in-hand with wider coverage of private pension saving – and the role of the State in enabling more people to both take more responsibility and make more provision for their own retirement.

This means Government providing the right framework to support an increase in private saving. It means getting the right incentives to save, appropriate regulation and protection of those savings; and ensuring access to low cost savings vehicles such as the National Pension Savings Scheme suggested by Lord Turner.

Finding the right approach to achieve a personalised, flexible tool that can enable people to save at low cost, is I believe a key part of any long-term pension solution – and crucial for individuals and families to take personal responsibility for their retirement planning.

Lord Turner’s scheme still remains the one to beat – but the question of whether to compel employers to contribute is a finely balanced one – especially when considering the potential impact on small businesses.

What is clear is that the role of the State as an enabler and its role as a provider are inextricably linked. Reforms to the state pension scheme, must provide a clear foundation on which people can save with confidence. And they must therefore by definition, seek to halt the otherwise inevitable spread of means testing.

As research from the National Institute for Social and Economic Research commissioned by my Department makes clear, means-testing has played an important role in improving outcomes for today’s pensioners – and I believe the Pension Credit will rightly be an important part of any future pensions settlement.

That same research also showed that for middle-income households means-testing could be a disincentive to save and that allowing Pension Credit to extend further up the income distribution was not expected to generate any further benefits from work or saving.

We want future generations to aspire to saving for retirement incomes above the level of means-testing and that means giving people confidence that they are not going to have savings unfairly clawed back through means-tested benefits.

As well as a clear platform on which to build, the State must act in a way that gives people the confidence to save.

Our responsibility must be to set the right regulatory framework. That is what the Pension Protection Fund and the new Pensions Regulator can offer. And with the Financial Assistance Scheme we have been able to offer help to some of those who have lost out the most in the past – while the Pension Credit has, of course, also ensured a minimum income floor.

But I know from the recent meetings I have had with people who have lost much of their pension when their defined benefit pension scheme wound up under funded, that they believe they have been robbed of their pensions. And I completely understand that feeling of injustice.

So while we should always be prepared to look at how we can help people trapped in this situation, we must be clear that taxpayers cannot guarantee the value of occupational pensions on behalf of employers. That would take away the responsibility from employers – where it properly lies.

And pension forecasts are an important tool to help with this. Since their launch in October 2001, nearly 6 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 any long-term pensions settlement.

Ultimately, delivering this new deal between the State and the individual – requires us to achieve consensus on a lasting settlement. It requires us to deliver an integrated long-term State package that explicitly links state pension reforms and incentives to encourage more private savings. And it requires us to achieve that shift in public attitudes so that the changes we make are seen not as personal intrusion into individual lifestyles – but that instead, genuinely reflect the new expectations of individuals and communities in a changing society.

One of the reasons why, for many decades, the UK has not fulfilled its social, cultural and economic potential, is because too often Governments of all colours have been tempted by the short-termist quick fix. It is all too easy for politicians to avoid the challenges of long term reform. But one of the hallmarks of this New Labour Government has been our explicit determination to take decisions that are in the long-term interests of the country. Whether giving the Bank of England independence to set interest rates or setting child poverty reduction targets that stretch over decades not just years, and sticking to them however difficult and challenging they are to meet. This Government has shown itself able to put the collective long-term vision above short-term political gain.

Pensions is perhaps now the most important test of our resolve to continue in this vein. To create that national consensus; achieve that step-change in public attitudes; and deliver a new deal between the individual and the state.

I believe it is right for our economy and for our society that we meet this challenge of long-term reform,. We have always made the argument that a economic efficiency and social justice go hand in hand. That you cannot have one without the other. Establishing a new national consensus on pensions reform will be one of the greatest challenges we face in our third term in office. If we are clear about our values and what we want to achieve, then we can lay these new foundations on which successive generations can plan for their future.