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 24th May 2007.
I’m grateful to Joanne and the NAPF for the opportunity to join you again at your annual conference – what is without doubt, the leading forum for occupational pension provision in Britain.
A year ago today, we published our White Paper on Pension Reform. It set out a new structure for the long-term future of the UK Pensions system based on the proposals of the Turner Commission.
At its heart a simpler, fairer and more generous state pension paid for by a higher State Pension Age; and a new system of personal accounts that will help more people to build these savings by extending the benefits of an occupational pension to those without good company schemes.
These proposals have laid the foundation for a consensus around a lasting pensions settlement that would meet the challenges set out so vividly by the Pensions Commission – rapid demographic change; chronic under-saving and the historical legacy of an overly complex system that delivers unfair outcomes with excessive means-testing. We need to sustain this consensus because this will be in the long term interests of our society and our economy.
Thanks to the leadership of the NAPF – along with many others – I believe the broad consensus around the main elements of our reforms is stronger than ever.
The Pensions Bill currently before Parliament is fixing the main elements of these reforms in legislation. The restoration of the earnings link will mean that by 2050 the Basic State Pension will be worth twice as much in real terms as it is today. And there are signs of political consensus too – with no votes against the Bill at its Third Reading in the Commons last month.
Thanks to the work of the new Pensions Regulator, most companies facing pension fund deficits now have, or are putting in place, comprehensive and affordable programmes to make good these shortfalls. Just last weekend, research from Aon consulting found that the UK’s largest pensions schemes are back in the black for the first time in more than five years.
And a range of surveys highlighted in this year’s NAPF Conference Magazine even suggest some signs of optimism and confidence returning. In March, the ACA found that while half of firms had reviewed their schemes in the last year, less than a fifth planned a review in the coming year; and Towers Perrin found that around half of employers surveyed saw their occupational pension schemes as having significant recruitment and retention benefits.
But my argument today is not that we have solved every problem connected with our pensions system. This is far from true. Real challenges remain.
Public confidence will not be restored overnight. Many employers are still finding that there is too much red tape in running good schemes. Overall participation in occupational schemes has been falling since the late 1960s.
My argument today is that if we get the next stage of reforms right – in particular around auto-enrolment and personal accounts – then we can embed a new savings culture in Britain – not one that competes with existing occupational pension provision – but actually builds on it, expanding its coverage and making occupational pensions the centrepiece of retirement saving in Britain for all.
Achieving this will depend on three things.
Firstly, the effectiveness of the new system of personal accounts in targeting this key group of moderate to low earners who do not have access to a good quality occupational pension.
Secondly, ensuring that personal accounts complement rather than compete with existing occupational schemes – and that we take steps to strengthen this existing provision; not weaken it.
And thirdly, the quality of information and guidance on which people can make savings decisions with greater confidence about how much they need to save to achieve the income in retirement they want.
I’d like to say a few words about each.
Firstly, personal accounts.
Last December we published our White Paper on Personal Accounts. It began a consultation on a number of important issues – and we will be responding formally to this consultation next month – along with our response to the report from the Work and Pensions Select Committee.
But what I can say today is we are determined to ensure that the accounts are designed as a no-frills occupational pension. Research shows that simplicity is a crucial design feature in reaching our target group of under-savers. Aside from keeping costs down, we know that too many options can be confusing – and the majority do not want to be taking decisions over the investment or administration of their savings.
We’re also clear that accounts must be independent of Government. That is why we are creating the Personal Accounts Delivery Authority to commission the infrastructure to deliver the scheme from the private sector. The delivery of the scheme will be a huge undertaking – one of the biggest challenges our pensions system has faced for many years.
Personal accounts will be the biggest step forward for workers seeking to build up a pension since National Insurance was introduced in the 1940s. But if we are to make them a success for the millions of people who currently aren’t saving for a pension, we must put in place measures to ensure they have the interests of future members at their heart.
It is protecting the interests of members that underpins our decision to establish the scheme as a trust-based occupational pension. As such they will face the very same level of regulation as all other trust-based occupational schemes.
A Board of Trustees will take ultimate responsibility for setting the strategic direction for the scheme from the collection of contributions to the investment of assets and payment of benefits. This will include deciding on the choice of funds and the strategy for the investment of the default fund; the appointment and management of external fund managers and ensuring that contributions are invested in the best interest of members.
This will be important in ensuring that personal accounts deliver for our target group. As we emphasised in our Personal Accounts White Paper, it is essential to the success of the scheme that members’ needs remain at the core of operational decision-making. Trustees are legally obliged to handle the scheme’s assets in the best interests of the beneficiaries. They must have a good level of knowledge and understanding of the law relating to pensions and trusts – the principles of funding and the investment of assets of occupational schemes.
We want the trustees to be highly-qualified experts in their field in order to make the best decisions possible for the millions of members and to retain the confidence of the public.
We know from the National Pensions Debate and from the examples of the consultation procedures of the National Institute for Clinical Excellence and the BBC Trust, just how important it is to involve members in the key decisions that will affect them. That’s why I’m keen for the Personal Accounts Delivery Authority to draw up an ambitious approach to deliberative consultation around the implementation of personal accounts and automatic enrolment.
We are making the system of Personal Accounts an occupational pension; because occupational pensions are the gold standard in pension provision. That’s why, in building personal accounts, we’re modelling the new scheme on what you do – as leaders in the field.
We want to follow the best practice of other occupational schemes in ensuring an appropriate degree of member representation whilst being mindful of the costs and practicalities of a scheme on the scale of personal accounts, with multiple employers and millions of members.
In taking this forward, our plan is to create a members’ panel along similar lines to the Thrift Savings Plan in the USA.
The Panel could nominate a proportion of the trustees and would be consulted by trustees on key decisions, providing them with access to the views of members, and a stronger sense of collective ownership.
Given the scale of personal accounts, I believe such an approach could be absolutely critical to the success of the scheme and to increasing confidence across the whole pensions industry.
Secondly, we need to go further in supporting existing occupational schemes.
We have always been clear that personal accounts are designed to complement, not compete with, existing occupational schemes. And the NAPF has played a pivotal role in helping us to ensure that this will be the case.
As a simple defined contribution scheme, with a limited amount of choice and a basic structure, personal accounts will not compete with existing high-quality occupational provision. And neither should they.
We’ve been clear that there will be no transfers into or out of personal accounts. There will be a simple self-certified scheme exemption test based around clear principles not heavy-handed regulation. And I can confirm today, that a similar approach will also apply to hybrid schemes. Rather than a complex series of specific tests, employers will be able to use their discretion to apply just one of the three simple high-level tests or an appropriate combination.
And, of course, there’s the annual contribution limit. I think it’s important to be clear that while the NAPF and others in the financial services and pensions industry have always felt that a cap of £5000 was simply too high, many others, especially those that are consumer-based, would prefer not to set a limit at all – concerned about placing a cap on people’s aspirations for their retirement and the need for flexibility for the consumer, so individuals can deposit inheritance sums or other windfalls.
This is a very difficult balance to strike and we are still looking carefully at how we can best meet these varying objectives. But I do not under-estimate the importance of getting this right and it will be an important part of our response to the consultation next month.
Strengthening existing provision is not just about ensuring that personal accounts remain focused on their target group. We must also revitalise the whole occupational pensions sector with reforms that will help all schemes.
From 2012, employers will automatically enrol their employees into personal accounts or into their own existing occupational pension scheme, as long at it meets the specified minimum standards. This simple but radical step will affect around 10 million employees in Britain, and will be vital in overcoming the barriers that prevent many people from making the decision to save. Around 1 million employees will be auto-enrolled into existing schemes as a result of our reforms.
Again we will look to support those good employers who offer higher contributions or benefits in meeting the costs of extending their scheme by permitting a short waiting period. And by allowing employers the flexibility to re-auto-enrol employees at set points in a way that suits their business, rather than on an individual basis.
I believe the NAPF’s own Quality Mark is also an important development in supporting existing schemes and valuable too in helping employers to communicate the benefits of good quality schemes. I know there are a number of issues that are still being worked through, in particular around the clarity of exactly what the mark would indicate but I’m keen to re-emphasise my support for the principle of the industry developing such a scheme.
Government does, however, need to be careful not to become part of the Governance chain and confer legal or technical status on it. Not least because the mark must never become a benchmark for future regulation such as raising the personal accounts minimums.
For our own part as Government, the Deregulatory Review represents a real opportunity to simplify the regulatory framework for all occupational schemes – to make running schemes easier; to lighten regulation and reduce bureaucracy. I’m serious about having a real debate here. There is nothing more frustrating for those of you engaged in running good quality schemes than feeling as if the system is working against you. But equally, our duty to protect the saver is also crucial.
As with the National Pensions Debate, people have to come to this debate prepared to achieve a consensus; and to compromise. But be clear about one thing. Now is the chance to make a real difference on this agenda. There is a genuine opportunity here for real change.
Thirdly and finally, information and guidance.
Embedding a new pensions savings culture will depend critically on being able to offer people the right information and guidance.
But the challenge is wider still. Because people don’t just want pensions advice, they want to talk about their money in general. That’s why the Generic Advice Review being led by Otto Thoresen is so important.
In developing Personal Accounts, we need to consider carefully the relationship between any generic advice service and the Personal Accounts board; and the appropriate protocols on which to base generic advice. Further, to consider who would monitor the advice provided and how any generic advice service could get the balance right between communicating the uncertainties inherent in pension saving and the simplicity that most people want in practice.
These are real challenges. But your PensionsForce project report today shows the appetite of savers for good quality information and advice. Funded by my Department’s Pensions Education Fund, since last September we’ve seen 1000 employees in over 70 meetings for employers of all sizes. This can be particularly important for women and many in small and medium sized companies who can tend to be bypassed by the traditional adviser community – as well as, of course, for workers who already have access to a workplace pension and employer contribution but who do not take full advantage of it.
And therein lies the ultimate challenge of embedding a new pensions savings culture in Britain. Enabling each and every individual to take control of their retirement planning; to make informed choices over their retirement provision and to save for that retirement with confidence.
The last year has seen tremendous progress in building a consensus on a new foundation for long-term savings. I am clear that in taking decisions on the next stage of legislation, we must now go further in not only maintaining our commitment to consensus – but actually deepening that consensus around the details of the Personal Accounts system. The coming year could be the most important of all in getting this right.
After 80 years at the heart of occupational pensions in Britain, I know I can count on the NAPF to work with us in rising to the challenge. And with it we can not only secure – but actually revitalise the workplace pension as the foundation for retirement savings for generations to come.