Below is the text of the speech made by Stephen Timms, the then Minister of State for Pension Reforms, at the National Union of Teachers in Mabledon Place, London, on 1st February 2006.
I am delighted to be here.
I very much welcome opportunities like this for a discussion on the options for future pensions policy. The more debate we have – and we had a very constructive debate about this in the House of Commons last night – the more people have the chance to get their heads around the ideas and the challenges, and the better the prospects for building a consensus.
And I believe we need a consensus in order to achieve confidence that we will be introducing a package of reforms which will endure for the long term. And that’s key. People need to be confident that decisions they make in the next few years about saving for their retirement will still seem like sensible choices to have made when they come to draw an income on the basis of them in 20 or 30 or 40 years time.
Pensions policy since 1997
Pensions have never had such a high profile. This is my second stint as pensions minister, and in 1999 it was a fascinating and vital area of policy, but one of little interest outside quite a small circle. Today, everyone is talking about pensions. I am pleased about that. That level of discussion is much more appropriate given the importance of the topic.
We have already made a range of very important changes in pensions policy since 1997 – and it has been those changes which have delivered a platform now on which we have the chance to build a pensions settlement for the long term.
If you look at what happened to pensioner incomes in the 1980s and 1990s, many people saw big improvements. But the problem was that far too many people were completely left behind by the general improvement. It meant we were left in 1997 with hundreds of thousands of single pensioners with a total income of £69 per week through income support – and, if they had managed to save up a modest pension income of a few pounds per week on top of the state pension, that was taken off their income support pound for pound.
And tackling that problem was our highest priority in pensions policy when we were elected in 1997, leading up to the introduction of Pension Credit in 2003. As a result, for the first time ever in a period of growth in the economy, retired people are no more likely than anyone else to be poor. It is a remarkable change – particularly – after a period like the last eight years in which working incomes have been rising so quickly. We have seen particularly large gains among older single women, and the dramatic improvement of the incomes in that group is arguably the most significant of all the big social improvements since 1997.
We have also brought forward measures to bolster confidence in occupational pensions, through the Pension Protection Fund and the Financial Assistance Scheme. We have introduced the state second pension which greatly boosts the pension savings of people on low incomes, and enables carers now for the first time to build up a second pension. And we have introduced stakeholder pensions which make it possible to save economically for people for whom it was not possible in the past.
The Pensions Commission
But there is much more interest in all of this today. And that change is in no small part thanks to the work of the Pensions Commission, which has thrust the debate about pensions onto the front pages of the newspapers, no longer the preserve of a handful of insiders but a debate the public at large are engaged with.
I think it’s worth just pausing for a moment to reflect on what the Commission has achieved. There were three Commissioners: a former Director General of the CBI; last year’s President of the TUC; and a distinguished social policy academic from the LSE. And simply in producing for us a unanimous, well thought through report, which addresses the issues people have been raising, they have done us an enormous service.
Life expectancy has gone up by two or three months every year for the past quarter of a century, and the trend shows absolutely no sign of slackening off. In 1950, average male retirement age was 67 and we spent 19% of our adult life in retirement. Today we spend almost 30%. And life expectancy is continuing to race ahead.
It’s a wonderful transformation – arguably the greatest achievement of our civilisation – but it’s one which presents major challenges to our public and private pension systems. We need to manage the impact of demographic, social and economic challenges to support security and dignity for everyone in old age. And I believe we can.
The Turner Commission was very clear that there is not a pensions crisis today. I agree. But they identified 9.6 million people who were not saving enough for their retirement. Failure to respond would lead to a crisis in twenty or thirty years time. We need to adapt our policies today, and our response will influence the shape of our society for decades to come.
I would characterise the Pensions Commission report as comprising essentially four bold ideas:
Auto-enrolment into a national system of personal accounts;
Mandatory matching employer contributions at 3% of salary;
Basic state pension linked from 2010 to earnings rather than prices;
A gradual increase in state pension age in line with rising life expectancy, starting with a rise from 65 to 66 sometime in twenty years time.
The Commission has done a very impressive job. They have sifted a lot of evidence; they have weighed a great variety of opinions; and they have carried out a lot of impressive analysis of their own. There are big questions around all four of these recommendations, but they have produced a set of recommendations which address the concerns people have been raising and which hang together in a coherent way.
The National Pensions Debate
David Blunkett and I launched the National Pensions Debate last summer. We have held events in different parts of the country to sound out views and get a sense of how people feel we should go forward.
John Hutton recently announced the next phase of the National Pensions Debate. We recognise that taking full account of public opinion – not least contributions from pensioners’ organisations and trade unions – will be absolutely vital to achieving a successful package of reform.
We are planning a number of public engagement events over the next couple of months, building up to a large scale national event in March – a National Pensions Day. We have let a contract to Opinion Leader Research to organise the programme. The Day will provide an opportunity for a large number of people in half a dozen different locations around the country to deliberate and express considered views on the choices we have to make in dealing with the challenges ahead. It will be an important contribution to shaping a long term pensions settlement. And there will be other activity, such as a toolkit for people to hold deliberation events of their own.
I don’t underestimate the challenge. No-one wants to hear they will have to work longer, or pay more tax, or have to spend less to save more. But nor do they want to hear that they will face a lower standard of living relative to rest of society – which is the alternative.
Among the Pensions Commission recommendations, we are ruling nothing in and ruling nothing out at this stage. We have an open mind and we continue to welcome feedback on the Commission’s proposals, and ideas on alternative ways forward.
The work of the Pensions Commission, the National Pensions Debate and our own analysis of the situation will come to fruition in the Spring, when we publish our pensions White Paper. In advance of that, and in welcoming the Pensions Commission report as providing a good basis for building the consensus that we need, John Hutton has said that the Government’s package of reform proposals will need to meet five key tests and I’d like to take a moment to outline them now.
First, does it promote personal responsibility?
The primary responsibility for security in old age has to rest with the individual and their families. We must enable people to provide for themselves, giving everyone the opportunity to build a decent retirement income to meet their needs and hopes.
Second, is it fair?
The system must protect the least well off, and – I think this is going to be critically important in the public debate – the new system will need to be fair to women and carers, correcting past inequalities. At the moment, only about 30% of women reach state pension age with a full basic state pension, compared with almost 90% of men. It will take the current system twenty years for that discrepancy to be put right. I think people are going to want us to achieve fairness much more quickly than that.
The new system must also be fair to those who have saved – rewarding those who have contributed, and giving an incentive for those who can save to do so.
Third, is it affordable?
This test will be absolutely central. We anticipate a near 50% rise in the number of pensioners between now and 2050. So what proportion of the nation’s wealth should we use to support retirement? Already we are spending £11 billion a year more on pensioners due to our tax and benefit changes since 1997, compared incidentally with £3 billion, which would have been the bill if we had simply put in place an earnings link for the basic state pension in 1997. The bulk of that extra spending has been focussed on the least well off pensioners. But in planning for the future, we certainly mustn’t put long term stability of the public finances at risk, and we won’t.
Fourth, 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 them. The choices people have to make need to be clear and straightforward. That doesn’t necessarily mean the details of the system will be simple, but the choices do have to be.
And fifth, 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. We want new arrangements that stand the test of time; that will allow people to plan ahead and make decisions with confidence – whilst being flexible enough to adapt to whatever challenges will emerge in the future.
The Government can’t solve the pensions challenge on our own. We need all of us to work together to build a lasting settlement. I need you – for example – to feed back to us the observations of your members.
I am optimistic about what we can achieve over the next few months, about the prospects for securing this lasting pensions settlement, but we need all of us to be engaged and contributing to the debate in order to be successful.
I am grateful to have this opportunity with this group today.