John Hutton – 2006 Speech to Work Foundation Pensions Conference

johnhutton

Below is the text of the speech made by John Hutton, the then Work and Pensions Secretary, to the Work Foundation Pensions Conference on 7th February 2006.

I’m grateful to Will and the Work Foundation for the opportunity to join you this morning. And I’m very pleased that the Work Foundation is holding this Pensions Conference – because ultimately the opportunity to work will underpin any successful pensions policy and it must play a central role in the way that our society responds to the challenges we face today.

Since 1997 we’ve taken decisive measures to address the most immediate and serious problems that we have faced since coming into office.

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’ve ensured help for the poorest pensioners; that never again will they have to suffer the indignity of living on as little as £69 a week – a shameful legacy of pensioner poverty to which we must never return. Today we are spending almost £11 billion extra each year on pensioners with almost half of this spending going to the poorest third. And we’ve succeeded in helping nearly 2 million pensioners escape from the poverty line – with figures from the Institute for Fiscal Studies showing that we are now in an almost unprecedented position where pensioners are no more likely to be poor than any other group in society.

The Pension Protection Fund and the new Pensions Regulator are helping to respond to the problems experienced by defined benefit occupational pensions – and acting to boost security for scheme members. The Financial Assistance Scheme offers the prospect of help for those who have lost the most in the past. And the introduction of the Sandler suite and Stakeholder Pensions have been important steps in facilitating low cost private savings.

But we must now go further to build a system that will enable us to meet two significant challenges. Firstly, unprecedented demographic changes where there will soon be more people over 80 than under 5; and secondly, the extent of under-saving, which the Pensions Commission calculated as leaving nearly 10 million people not saving enough for their retirement.

Work is key to meeting both of these challenges. If we are to support an ever-ageing population successfully we need all those who are willing and able to work to do so. That’s why our Welfare Reform Green Paper last month set out to meet our ambition of an 80% employment rate – including encouraging and supporting an extra 1 million older workers into the workplace. And, as the Pensions Commission concluded, a major expansion of workplace savings must be fundamental to meeting the problem of undersaving – perhaps now the biggest issue we face as we look to the future.

You’ve heard from Lord Turner already this morning. His report at the end of last year marked a major new phase in the debate we are now having about the long term future of our pensions system. We believe that the framework of proposals and options set out in the Pensions Commission report is the right basis for this debate – the analysis is comprehensive and thorough; the recommendations radical and far-reaching. It provides us now with an opportunity to build consensus on the direction of travel we should take.

And that consensus is crucial. If we are to lay the foundations for a lasting pensions settlement, we need a system that allows people to plan with confidence – one that will stand the test of time and not be pulled apart by successive Governments. We need to take difficult long-term decisions with not just cross-party support – but underpinned by an enduring national consensus. Because when it comes to pensions, almost by definition, we have to build for the long term.

That is why we are engaging in a National Pensions Debate – reaching into every section of our community – from business and industry to individuals of all ages and backgrounds; and in all parts of the country.

We all face a challenge here. Business and industry must facilitate workplace saving. Government must determine the right role for the State in providing a basic pension, in regulating the savings market and correcting inequalities. Individuals must plan their retirement saving. And as citizens, we must all be involved in deciding the trade-offs and making the choices that are inescapable if we are to succeed in laying the foundations for a new pensions settlement.

In the coming weeks we will be addressing all these issues in the build-up to a National Pensions Day. Later this month there will be regional events in Southampton and Manchester. Industry, Government and, I hope the main political parties, will come together on Tuesday 28th February for an examination of alternatives to Lord Turner’s National Pensions Savings Scheme – in which the industry have responded to the challenge laid down by my colleague Stephen Timms, the Minister for Pension Reform – to design a better model for personal accounts and deliver a simple, portable and flexible product that can enable people to save at low cost.

And in March I will use a series of speeches and events to set out some thoughts on the role of the State, the challenge for employers, questions of affordability, the options for improving the position of women’s pensions; and the trade-offs and balances that we are going to have to strike to achieve a long-term solution which meets my five tests of personal responsibility, fairness, affordability, simplicity and sustainability.

All this activity will culminate with the National Pensions Day – on Saturday 18th March – an innovative consultation taking place simultaneously in 6 cities – Birmingham, Newcastle, Glasgow, Swansea, Belfast and London. Over 1000 people will come together to consider the choices and options resulting from Lord Turner’s report – to build the platform for a nationwide consensus on which we will build our Spring White Paper and ultimately the legislation that will deliver a long-term solution to the Pensions challenge.

I would like to use the remainder of my time this morning to address one of the most difficult issues which will need to be at the heart of that nationwide consensus – namely the length of working lives and the question of the State Pension Age.

In his report, Lord Turner suggested that the State Pension Age should rise broadly in proportion to the increase in life expectancy.

Certainly there is a growing recognition that working longer is going to have to be part of the solution. But the idea of having to work longer is an emotive subject – we’ve all seen the scare stories and the newspaper headlines.

We’re not alone in grappling with this question – the ageing population is a truly global phenomenon for all of the developed economies. In the US the pension age has already started increasing and will reach 67 in 2027; it’s increasing in Japan from 60 to 65. And it has recently been increased in 6 EU countries including Austria, Slovakia and the Czech Republic. I do not believe the UK can remain immune to this process of change.

What matters of course is the effective retirement age – and it’s worth just dispelling a few myths. Although the State Pension Age is a strong signal and determinant of the length of working lives – it’s not the same as a retirement age. Many retire before the State Pension Age – and increasingly others choose to work beyond it.

Our Age Positive Campaign has influenced employers by promoting the business case for age-diverse workforces and this year will see the introduction of legislation which, for the first time, will give people the right to challenge age discrimination in the workplace. A new default retirement age will mean that employers can no longer force an employee to retire before 65, without objective justification. And in 2011 we will undertake an evidence-based review which will consider the abolition of the default retirement age altogether.

What’s striking when we look at effective retirement ages is that there has been a seismic shift in the balance between the proportions of life spent in work and retirement. In 1950, the average male retired at 67 and could expect to spend 10.8 years in retirement. Today he retires on average 3 years earlier – at 64 – but can expect to spend a further 20 years in retirement. Growth in life expectancy at 65 also shows no sign of slowing down. Every year between 1975 and 2005 it grew by 3 months for men and 2 months for women. By contrast between 1950 and 1975 the annual improvement had been of slightly more than half a month for men and less than a month and a half for women.

As unpopular as it may be to talk about working longer – the simple fact is that if we aren’t prepared to consider the option of increasing the state pension age, we will simply pass an ever greater burden onto our children and grandchildren.

Of course there are concerns about the impact of this on sections of the community. There are issues that have to be worked through – but in principle it would be irresponsible for us now not to at least contemplate some redressing of this balance between work and retirement.

Looking at the data and available research on current retirement patterns, I think three things really stand out.

Firstly, with a third of men outside the labour market by the age of 60, for many the debate is not about working beyond 65 but actually having the opportunity to work up to the State Pension Age. There are 8.8 million people aged between 50 and the State Pension Age in private households in Britain. Of these, 2.6 million – nearly 30% – are not working. And 1.4 million are claiming sickness and disability benefits.

Secondly, while life expectancy has risen across the country, it can vary considerably between more and less deprived areas. For example, in the local authority with the highest life expectancy at birth, namely Kensington and Chelsea, average male life expectancy is 11.5 years higher than in the local authority with the lowest, Glasgow.

And thirdly, flexibility is key. A recent research study has found that for 50-69 year olds, most of those in work wanted to carry on working and half of those who were retired would have worked for longer if there had been part-time or flexible work options available.

So what does this mean for pensions policy. Let me suggest a few thoughts.

Firstly, with half of those on Incapacity Benefits aged over 50, last month’s welfare reforms have a crucial role to play in meeting the pensions challenge and in helping those who can and want to work to do so. And of course, the Green Paper also included other important measures to help older workers – with an extension of New Deal 25+ to those aged 50-59; improved back-to-work support for JSA claimants and their dependent partners who are over 50; and more work with employers to extend flexible working opportunities to older workers.

Secondly, we can not look at pensions policy in isolation from wider policy on health and education. While I’m committed to looking at whether there are ways within the pensions system in which we could address inequalities in life expectancy – this would come at a cost of additional complexity and we have to ask whether the pension system could and should address these problems. There is strong evidence that differences in life expectancy are driven by differences in health and education. We’re already working towards a significant reduction in mortality rates by 2010 and a reduction of at least 10% in the gap between the fifth of areas with the lowest life expectancy at birth and the population as a whole. Tackling pensioner poverty today has been our top priority. Tackling it tomorrow – means that pension reform can not be conducted in isolation from whatever measures are necessary to address inequality in life expectancy.

Thirdly – and finally – we need to do all we can to ensure greater flexibility. The 2004 Pensions Act is helping to achieve this flexibility with more generous options for delaying taking up the State Pension and the tax change coming in this April will allow people to take up their occupational pension while continuing to work for the same employer.

These measures combined with the age discrimination legislation I mentioned earlier, will give employees greater flexibility to plan a gradual move from full-time work to retirement. But we can and should look at whether there are other ways to increase this flexibility further. For example, looking at whether there are workable ways to make State Pension Deferral more flexible such as the Pensions Commission proposal to allow people the option of deferring some of their State Pension rather than all of it.

My view is that some increase in the State Pension Age from 2020 is now inevitable. But any rise will only be acceptable to people if it comes as part of a package to improve pension provision in other key areas that Lord Turner’s report addresses. And we must keep in mind that the State Pension Age is a fairly blunt tool for changing effective retirement ages. It can only be one part of the policy response. It needs to be accompanied by tailored support to help people back into work; by greater flexibility to help people plan a gradual move that breaks the cliff-edge between work and retirement. And it can not be considered in isolation from our health and education policies which must support our welfare priorities of tackling poverty and eliminating disadvantage.

Ultimately, increasing the effective retirement age can only be achieved when it is underpinned by a broad consensus about whatever long term pensions settlement we need for the future. One that meets our goals of promoting greater personal saving as well as reducing financial hardship in retirement.

Public attitudes are absolutely crucial – but they must be shaped by the reality of the challenges we face. Any change needs to be seen less as an imposition that forces people to change their behaviour and more as a reflection of the new expectations of individuals and communities in a changing society.

That’s why we are having this National Pensions Debate. I look forward to hearing your thoughts this morning and over the coming weeks. Together we can build that enduring consensus and ensure that we take the right long-term decisions to deliver a lasting pensions settlement for our children and grandchildren – and for the generations to come.