Tag: James Purnell

Below is the text of the speech made by James Purnell, the then Work and Pensions Secretary, to the Employers Conference on 28th January 2008.

It’s a pleasure to be here to give my first speech as Secretary of State for Work and Pensions. People keep on telling me there’s no such thing as a job for life any more. With four ministerial positions in less than three years, I’m starting to take that personally!

In this job, you rarely get the opportunity to think reflectively about the nature of your task. It might seem strange therefore that I should offer any reflections at all when my period for reflection has been precisely four days.

But, in truth, I’ve had welfare policy on the brain for a long time. So to be appointed as a Labour Secretary of State for Work and Pensions is a great privilege.

My title is more than an honour. It also embodies an ideological break with the past. It is not all that long ago that my predecessor was called the Secretary of State for Social Security.

What a telling name: security as something handed down; welfare as bureaucratic transfer; people as recipients of funds. The title said nothing about people’s actual lives and ambitions, nothing, in fact, about the best way of securing their welfare.

The new title, Secretary of State for Work and Pensions, tells a wholly different story. It tells you that work is the best route to personal welfare and well-being : it tells you that if you work hard and contribute then you deserve your retirement to be free from anxiety about money.

For a long time we lost sight of these common sense truths. If you’d ever said to William Beveridge that work could be divorced from welfare he would have been astonished. Yet, until this government put the two back together again, that was exactly the cul-de-sac we were in.

For Beveridge, the very notion of welfare was bound up with the idea of independence. That was what was so depressing about the debate that ran, and in some quarters still runs, about welfare dependency.

The welfare state was conceived as a way to support human flourishing. To foster independence, to give people the support they need, not so that they became dependent but precisely so that they would not.

To foster that independence will be my main aim. I am fortunate that I inherit a radical policy framework from John Hutton and Peter Hain. I will accelerate those reforms and deepen their reach to build on what has been achieved over the last decade.

Over those ten years, we’ve shown full employment is achievable on the old definition – those who want work have been able to find work.

But getting people into work isn’t enough. People also want to get on. That’s why the Prime Minister has made clear we need to improve the skills of our workforce. And that’s where you come in.

Thank you to all of you for your commitment. Your commitment to helping people into work. Your commitment to helping them raise their skills. Now, we need more employers to offer jobs to those out of work. To invest in apprenticeships. To boost our economy by giving everyone who can the chance to work.

And as for people who can’t work, for them the maximum independence too – with more support, and control over the care that they receive. I want to work with Alan Johnson to expand the principle of individual budgets, so that people who can’t work still have the dignity of controlling the support that they get.

Our goal is a welfare state that is a way out of worklessness and a way up the career ladder, but not a way of life.

And that means tackling inactivity. Our goals are ambitious. 1 million people off incapacity benefit.  300,000 more single parents at work. 1 million more older workers.

To get there, we will need major reform of inactive benefits.

Incapacity Benefit is a test case. We do not think of people as incapable. We think of them as being perfectly capable, with the right support. That’s why IB will go, replaced by the Employment and Support Allowance with the emphasis on what a person with a physical or mental health condition can do rather than cannot do.

The Employment and Support Allowance will recognise that some people face greater barriers to work. But for the rest, we will require them to look for work. We will start with new claimants and with existing claimants under 25.   But our ambition must be to help everyone in this group look for work, with special attention given to those who face problems of mental illness and alcohol or drug abuse.

To that end, we will follow through on David Freud’s groundbreaking report on reforming the welfare system. That means using the best provider, whether they are from the private, public or voluntary sectors. I want to create an effective and growing market for these services – because we shouldn’t be ideological about who provides the service we should just work out who is best at providing it. I’m glad to announce that David has agreed to come back to advise the department on implementing his ideas.

We also need to think hard and honestly about our policy for the socially excluded. We don’t fail for lack of spending. But the return on our efforts can be poor. This is where our radicalism is most needed.

We need to rewrite the terms of the welfare contract. On one side: a decency floor to wage rates, making work pay through in-work benefits, tax credits, a credible ladder of opportunity from low paid jobs to higher skills and better pay.

Dynamic market societies cause friction and change. A civilized welfare state makes the change as smooth as possible. And it gives societies confidence to welcome globalization rather than turn to protectionism.

In return those who can work will be obliged to look for work or train for work and if they do not then they will face sanctions. There should be no free riding on the welfare state. It is an insult to people who have contributed.  And it is an insult to the people who deserve help.

Of course cash transfers will remain part of a modern welfare state. But the Beveridge model lost its way when we began to think of welfare recipients as people who were done to by the state. We began to accept that maybe they needed our support in perpetuity. That mentality is the enemy of social justice and fair life chances for all.

People who live independent lives tend to flourish. The economist would say they experience an increase in welfare. That is the idea of welfare that, as Secretary of State, I will seek to promote. Social justice through independence, not a socially regressive culture of dependency.

Below is the text of the speech made by James Purnell, the then Minister of State for Pension Reform, to the National Association of Pension Funds conference on 16th January 2007.

Thank you for giving me the opportunity to address your seminar here today.

I’d like to start by thanking NAPF for all the advice you have given us in the months leading up to December’s White Paper. Not just because you endorsed many of our key proposals – although that was nice! – but because you put forward some important and helpful proposals that we were able to accept.

The title of your seminar today begs the question have we got our Personal Account proposals right. We think we have. By giving millions of people an easy way to save, by providing clear incentives through employer contributions and, crucially, by reforming the state and private system to ensure it pays to save; we’re confident that the proposals in the White Paper will help millions more workers save.

Without these reforms, most people would have been retiring on Pension Credit in 2050. Thanks to our reforms, that proportion will fall from over 75% to around 30%.

Employees will see their savings matched pound for pound by a combination of contributions from their employer and the Government. Low charges, achieved through economies of scale, will mean that people will see the more of their money going directly into their pension pot rather than being lost in administration.

This combination of policies will transform incentives to save. As the Pensions Policy Institute have made clear, that means that automatic enrolment into personal accounts will be possible.

However, the PPI also said there should be good generic advice for those groups that should think about opting out of personal accounts.

We’ve listened and yesterday, Ed Balls and I announced that work we’ve asked Otto Thoresen – Chief Executive of Aegon UK – to research and design a national generic financial advice service. Otto will be reporting by the end of the year and I am looking forward to developing this project to help meet the information needs of personal accounts.

The central announcement in the December White Paper was the decision that the National Pension Saving Scheme model represented the best method for delivering personal accounts.

We chose this model for two reasons: cost and simplicity.

On cost, our evaluation found that the Commission’s model is likely to be significantly cheaper than the alternatives that were put forward. We are confident that we will be able to achieve the level of charges Turner set out, which could mean savers keeping up to 25% more of their pension pot.

In your response to the White Paper the NAPF rightly identified that simplicity was going to be key. And for us, it was one of the main reasons for choosing the NPSS model. Under this model consumers will not be forced to make choices about who administers their fund. This is particularly important when you consider our target market will be moderate to low earners – a group who historically have had low levels of financial literacy.

But our White Paper measures are not simply about the introduction of personal accounts. They are also about protecting and supporting good existing provision.

Personal accounts are to be focused on a target market – those not currently making adequate provision and without access to a good workplace scehme. In the main, median and low earners, a significant proportion of whom are women. Personal accounts are designed to fill a gap in the existing market, not replace it.

And we’ve taken measures to mitigate against any ‘mission creep’. There will be no transfers into or out of personal accounts from or to existing pension schemes. There will be an annual limit of the level of contirbutions an individual can put into their account. £10,000 in the first year – to allow individuals currently without access to a good quality occupational pension to save in non-pension products before 2012 and then to move them to personal accounts. We have proposed a limit of £5,000 for subsequent years and have asked for views as to whether this is the right level.

Many employers today provide excellent occupational pension schemes – and we are determined that alongside the introduction of personal accounts, they should be supported in continuing to do so.

So we’re taking forward a rolling deregulatory review with the aim of reducing the administration currently associated with occupational schemes. An advisory group has already been set up and last month we appointed two external reviewers – Ed Sweeney and Chris Lewin – to set the direction of the review.

We know that we can also help by ensuring that the exemption process for high quality schemes is as simple and straightforward as possible – and so we are planning for it to be largely based on existing tests and self-certification.

I know the NAPF and colleagues in the pensions industry have raised concerns about “levelling down” – fearing that the introduction of personal accounts will usher in a future in which a 3% employer contribution will be the norm for all schemes. So I’d like to make a few points on this issue.

Firstly, we should not lose sight of the fact that employers are currently free to make no contribution at all if they wish. Indeed, nearly 9 million employees currently work for such an employer. From this perspective the minimum employer contribution could be considered as “levelling-up”, creating a floor below which no employer can fall. This minimum floor will also help those employers who provide a pension today, creating a more level playing field by ensuring that their domestic competitors are at least contributing 3 per cent.

And secondly, we need to remember that a 3% minimum employer contribution, along with automatic enrolment and personal accounts, will mean that total contributions into pensions will increase significantly. We don’t think that levelling down is inevitable. But it’s worth noting that even in the worst case scenario modelled by the NAPF, in your research report published last month, pension saving would still increase overall. Your analysis shows that in 2012 total pensions contributions could increase by around 60%, from under £20 billion to over £30 billion.

We think the reality may be more positive. Our research, conducted with over 2,500 private sector employers, about how they might respond to the reforms in 2012 suggested that levelling down would not have the dramatic effect that some are predicting.

But we do take these concerns seriously. If levelling down is to be minimised, it is important that existing good provision is supported, and that employers continue to view offering a high quality pension as a way of attracting employees. So we welcome the proposals put forward by the NAPF to support existing provision, many of which we have also proposed in the White Paper – a simple exemption test, for example, and an objective for the personal accounts delivery authority around existing provision.

And we agree with you that more needs to be done to help employees see the value of employer contributions. I was particularly interested in the NAPF’s proposal for a ’Good Workplace Pension‘ quality mark – so that employees can easily recognise a scheme that offers high quality pensions.

The NAPF envisaged the quality mark would be awarded to employer’s schemes that offered total and employer contributions higher than personal accounts. And that all scheme members would be provided with information about the quality mark, thereby helping them better understand the value of the pension on offer.

We’re keen to see this happen, although it is the responsibility of the pensions industry to develop further details and ultimately establish a quality mark. But I think this could be a very useful tool in encouraging employers to raise, rather than lower, their standards: The 3% minimum will provide one floor below which no employer can fall. But with a quality mark we would be aiming to set a second floor – a standard to which employers will want to rise.

And this could be linked to another area we’re exploring: whether there should be waiting periods for companies that make these higher contributions.

Personal Accounts are only one of a number of significant steps this government has taken in securing the long term future of work based pensions. The Pensions Act 2004 saw the creation of two new independent bodies, The Pensions Regulator and the Pensions Protection Fund.

Personal accounts will also be an occupational pension, so it is important therefore that we consider how these institutions fit within the Government’s overall pensions policies. In the May White Paper, we therefore proposed an Institutional Review.

The institutional review will consider how the functions of organisations involved in the regulation and protection of workplace pensions – such as the Pensions Regulator, the Pension Protection Fund and the FSA – fit with our new proposals.

I’m very pleased to announce today that we have appointed an independent external reviewer to lead the Institutional Review – Paul Thornton. Paul has a wealth of experience in this field. He is currently a Managing Director of Gazelle Corporate Finance. And has previously been a President of Institute of Actuaries and a senior partner at Watson Wyatt.

As with our White Paper proposals, in taking forward the review, we want to encourage debate amongst the stakeholders involved and build a consensus on the best way forward. Ensuring we have appropriate regulation and protection for all work based pensions – including personal accounts – means we need to think carefully about how the functions of the various institutions involved can best be arranged. The review will commence from today and report – with recommendations – to Ministers by Spring 2007.

Advice on how to contribute to the Review is available from today on the DWP website.

I’d like to conclude by thanking you for your positive engagement with us as we have developed the proposals in our White Paper and also make a plea for you to continue with this engagement as we refine and finalise our plans over the coming months. “Getting it right” – to borrow from the title of today’s event – and delivering a robust, enduring and comprehensive pension settlement is something in which we all have a vital interest.

Below is the text of the speech made by James Purnell, the then Minister of State for Pension Reform, to the IPPR Conference on 12th July 2006.

Building consensus with future policy makers

We published our White Paper on pensions in May. I’m spending much of the summer trying to build a consensus around its core proposals.

When I talk to people about how to do that, they often suggest holding events with pensioners. And of course, that’s important.

But the White Paper is about saving, and our core target for that message isn’t today’s pensioners.

It’s the people in this room. Because the White Paper is not about solving a problem today. It’s about solving a problem that would develop over the next few decades. It’s a problem that would affect today’s twenty and thirtysomething generations most, because those are the generations that are under-saving most.

So, today I would like to talk to you about how we can build a consensus that will last. Of course, the detail of the policy will change over the next forty years. But if we can agree on a general approach, we can create a more stable framework. And just like Bank of England independence has made it easier for companies to save, a real consensus on pensions would make it easier for workers to save.

But such a consensus can only be achieved if our generations are part of the consensus-building process.

This new pensions policy is built on a new set of foundations. Linking the Basic State Pension to earnings rather than prices. Retiring at 68 rather than 65. Automatic enrolment rather than purely voluntary saving. These foundations won’t be solid unless they lead to behavioural change with people working longer and saving more to provide for their retirement.

And they will only be solid if they are scrutinised now. And scrutinised by those of us who it will affect the most. We don’t want this to be a mushy, wishful agreement. It needs to be a consensus built on confidence that this solution will work.

And for you to have that confidence, we need to focus on the areas where concerns remain, not the areas where consensus is developing.

Because any mistakes in the design of this policy won’t emerge in the next few years. They would emerge on the watch of the next generation of policy makers – in other words, potentially on your watch.

Avoiding being the live fast, die poor generations

Today’s twenty and thirtysomethings can expect to live longer than ever before. But if many don’t change their pattern of saving, they risk becoming the live fast, die poor generations.

That’s because at the moment, people are acting as if they expect to be able to fund a longer and longer retirement, with less and less saving.

It’s striking how fast retirement is lengthening. In 1950, the average retirement lasted about 10 years. Today’s it’s around 20. In 2050, that would have risen to around 25 years, if we didn’t raise the retirement age.

Yet we are not saving more to fund those extra years of retirement – on the contrary, we are saving less. Young workers are saving much less than their parents did, even though they can expect to spend 50% more time in retirement.

Again, the facts are stark. Since 2000, the proportion of 20 to 29 year olds contributing to a private pension has fallen from one in three to one in four. From one in three, to one in four, in just five years. In contrast, figures for their parents’ generation remained unchanged over the same period.

This is what the Pensions Commission meant when they said that if we did nothing, a crisis would develop. And they themselves estimated that 3.7 million people aged 26-35 are either under-saving or not saving at all.

The three C’s: confidence, complexity, culture

What has caused this situation? I can see three main factors – confidence, complexity and culture, the three C’s if you like.

Firstly, confidence. Many of today’s pensioners have got very good pensions. Two in five pensioner couples have private pension income of £180 per week or more. But high profile scandals have created the impression that saving generally is not safe – from pensions mis-selling to Equitable Life. These cases are very much the minority: fewer than 1 per cent of pension entitlements in Defined Benefit schemes are in schemes which have wound up underfunded. The tragedy of this minority of cases can too easily overshadow the vast majority that still provide good benefits for their employees.

Secondly, complexity. For the last thirty years, policy has changed frequently, under successive governments, leaving us with what the Pensions Commission described as the most complex system in the world. The savings decisions required have just been too complicated. Recent research found that over 70% of 22-34 year olds find all pensions confusing – and almost half felt they did not understand the options available to them in saving for retirement.

Thirdly, culture. In a recent survey, half of 22-34 year olds agreed that ‘it’s more important to live well now than to save for the future’. That’s partly about a desire to enjoy the leisure that modern society makes possible. And we should be careful about seeming to condemn that or lecture people about enjoying themselves. There’s nothing wrong with that.

So, we shouldn’t set up a false choice between living well now and saving for later. Not only would that be untrue, it’s also unlikely to work: if our message is that people shouldn’t enjoy themselves, but should save instead, then we are unlikely to persuade very many people.

But we need to be careful of caricature here – it would be easy but simplistic to say that young people don’t think about the future. A survey out today has found that just under half say they are worried about how they will fund their retirement. So how do we explain them saving less?

It’s not only a question of living for today, but of other financial priorities and immediate financial needs, like saving for a mortgage or paying off debt. In a recent survey by the FSA, over half the population reported no borrowing other than their mortgage. For 20-29 year olds, that figure fell to 1 in 3, with a quarter reporting borrowing more than three times their monthly income. And for some, it’s simply the case that good intentions to save do not carry through to action.

We need to persuade people that it’s easy to save, by tackling the three C’s – restoring confidence, tackling complexity, and creating a culture where people achieve a balance of spending and saving.

Confidence

The 2004 Pensions Act addresses the first challenge – confidence. The new Pensions Regulator is taking a risk-based approach to occupational pensions. This should allow well-funded pensions to have less regulation, whilst requiring others to increase the investment in their pension funds.

This new regulatory framework should be more effective and increase confidence. But we cannot eradicate the risk of schemes winding up under-funded, so we created the Pensions Protection Fund to ensure scheme members receive at least a proportion of their pension.

Complexity

The Pensions White Paper aims to tackle the second challenge – complexity. It does this by reforming both the state and the private pensions system. It makes the state pension simpler and reduces means testing. And it introduces a new type of saving, based on automatic enrolment to overcome the weaknesses of a purely voluntary system.

The Pensions Commission found that if current policy continued unchanged, then 70% of pensioners in 2050 would have been on a means-test. This was never the Government’s intention. But the possibility that it might happen would have clouded incentives.

We believe our proposals will reduce means testing to around a third by 2050. This is an issue we may want to discuss during questions, as the Pensions Policy Institute have produced estimates that put this figure at over 40% by 2050.

Far from wanting to ignore this debate, we want to engage with it. This is exactly the kind of issue where we need to address concerns if this policy is to succeed. We will therefore publish our analysis in the Autumn, so that everyone can examine the assumptions underlying it. And we will explain why we believe this architecture will create a system that makes the next part of our reforms possible – the introduction of automatic enrolment.

This is the most significant innovation in the White Paper. It starts from the Pensions Commission’s finding that the current voluntary system will never be able to increase saving sufficiently. Some argue that we should concentrate on simplifying saving. We agree that simplification is important – that’s why we will abolish contracted out rebates for defined contribution schemes, and why we are planning to deregulate occupational pensions.

But even if we made the system as simple as possible, under-saving would be likely to remain. That’s because savings decisions for pensions are inherently complicated. Research shows that people have a tendency to procrastinate and to under-estimate how much they need to save for their expected income in retirement.

So, while nearly three-quarters of 22-34 year olds disagree that it’s too early to start saving for retirement, far fewer are in fact actually saving themselves – with only around one in three currently contributing to any sort of non-state pension. People know they should save – they just don’t get round to it.

That’s why the Pensions Commission recommended a system of automatic enrolment, backed up by compulsory employer contributions. From the age of 22 onwards, employees will automatically have 4% of their salary deducted, on a band of earnings between around £5000 and around £33,000. This will be matched by a compulsory contribution of 3% from their employer and 1% in tax from the State. Although they will be able to opt out, they will be re-enrolled automatically every three years. We expect that between 6 and 10 million people will save in this scheme of personal accounts.

These reforms will make it easier to save and also more profitable. The gains result from a combination of a more generous state pension, lower charges and the added impact of the employer and state contribution. Reducing the annual management charge from 1.5% to 0.5% would mean a pension fund around 20% larger at retirement for someone saving for 40 years. And as a result of the employer and state contribution, each pound an employee saves is matched by another pound. By 2050, as a result of our reforms, a regular saver on median earnings of £23,000 could be up to £50 a week better off than if the system continues as it is.

And these reforms not only deliver a higher income in retirement – they should also deliver an improved return on an individual’s pension saving. For example, for a lifetime median earner starting to save in a personal account from around age 25, the return on an individual’s own personal accounts saving could roughly double as a result of our reforms.

Of course, the outcomes of savings depend on a wide range of factors, including charges and the stock market; but all things being equal, these reforms represent a stark difference.

Culture

So these reforms will make saving simpler and easier. But they should also help us to create a culture where people start saving earlier and realise that they can combine it with spending for today.

In this system, a person in their 20s on income of around £19,000 would pay in just over £10 a week – about the price of a DVD.

If they continued saving at this rate, this same hypothetical person could expect to retire at 68 with a pension fund worth around £69,000 in today’s earnings terms.

But if they delayed starting to save until age 30, their pension pot would reduce to £55,000 – and if they delayed until age 40, it would go down to £38,000.

Ten pounds a week doesn’t sound an impossible amount to ask someone on median earnings to save. I would be interested in your views on this, but it seems possible to create a culture where the default reaction is for employees not to opt out of this new system of personal accounts.

Engaging with concerns

So, that’s our goal – a simpler, more trustworthy system, which creates a new culture of saving. It is aimed at younger workers, because they are the ones who are saving least now. That’s one reason why I was keen to discuss these issues with you today.

But I also want to ask your views as policy makers. No policy is perfect – and pensions policies are even more imperfect than others. They are complex, long-term and involve inevitable trade offs. We should therefore beware of seeking perfect solutions.

But neither should we run away from concerns that people raise.

The key issues that have been raised so far have been:

– How much will we really reduce means testing?

– Will automatic enrolment be possible?

– Have our reforms done enough to restore confidence?

– Will the automatic enrolments cause employers to withdraw from occupational pensions, or to reduce their level of contributions?

– How do we encourage people to save now, before the introduction of personal accounts?

– What role should the private sector play in delivering personal accounts – in particular, should consumers choose between different providers?

– Is the rise in the State Pension Age to 68 enough or too much? Will it be fair given that poorer groups die younger?

– If we are expecting people to work longer, how do we make sure they can?

– How do we help young people to balance the need to pay off debt, or to get a foot on the property ladder – with the need to start saving for a pension now?

I look forward to discussing these issues with you today. But we won’t finish addressing them today. So, over the summer, we want to provide a forum for debating these issues, using both face to face meetings, but also our pensions website to bottom them out. We will be giving opportunities to experts and stakeholders who have concerns to put them forward.

We will then aim to address them – for example, by publishing research showing how we believe that automatic enrolment is justified.

We believe we can reassure people on many of these issues. And where we can’t, it will be up to others to decide whether they are so significant that they don’t want to sign up to the emerging consensus around this approach – or, I hope, for future generations to come up with answers to the parts of this problem that we failed to solve.

Below is the text of the speech made by James Purnell, the then Minister of State for Pension Reform, to the Cicero/Moneymarketing Financial Services Summit on 12th October 2006.

I’d like to thank Cicero Consulting and Money Marketing for the opportunity to speak at today’s event.

The White Paper we published in May set out a series of major reforms to create a new pensions settlement for the future. I’ve spent much of the past few months talking to the public and to stakeholders – including some of you here today – to build a consensus around those reforms. The consultation period following the White Paper has now officially ended – but work on our reform proposals continues.

Over the next few months my officials and I will be developing further the detail of these reforms – and in particular, the detail of the new scheme of personal accounts. In the May White Paper we committed to a further technical consultation paper later this year on personal accounts. That is still the timetable to which we are operating, but we now intend the document to be a White Paper rather than a technical document.

This decision reflects the significance we are placing on this element of our reforms. The introduction of personal accounts will be a significant institutional change – one of the most important institutions created since World War II – and one which deserves to be widely assessed in policy as well as technical terms.

Personal accounts are designed to effect a widespread change in the savings culture of this country. I’d like to spend a few moments reminding ourselves why that change is so necessary – why it is that there is currently widespread undersaving, and how our reforms will tackle the problem.

On an individual level, the problem lies in the fact that significant groups in society – and particularly low to middle income earners – have low incentives to save. And there are three clear reasons why this is.

Firstly, because the market has not served this group effectively. The costs to market providers of serving these groups of people are high, which has traditionally made it difficult to serve them profitably. This means that charges are relatively high – and so the cost of saving in the product is too high for these individuals.

Secondly, because the complexity of the current state pension system means that people are not clear what they will get from the State in retirement. Over several decades, there has been a series of modifications, reforms and adjustments by various governments, with the result that very few people today understand how the pensions system all fits together. Against this background, it is very difficult for someone thinking about their retirement to assess what their income from the state will be, and make a judgement about how much they will want to save on top of that.

And thirdly, because many people, when faced with financial decisions that seem complex and difficult, have a tendency to disengage entirely, and do nothing. Even though most people realise that they need to save for retirement, inertia frequently means that they simply don’t get round to doing it.

These three individual factors combine to produce a stark collective problem: there are simply not enough people saving. We’ve estimated that there are around 7 million people today who are not saving enough for their retirement.

And that is where our reforms come in. The policies we set out in our White Paper will address undersaving – at an individual and a collective level.

Let’s take the three barriers I just described. Our reforms will address each one.

First, the lack of suitable savings products for low and moderate earners. Our new scheme of personal accounts will provide everybody in this group with a suitable savings vehicle – suitable because charges will be low. That’s something that we are absolutely clear about. We don’t buy the argument that the level of charging is a secondary concern. Neither did the Pensions Commission. They argued that low charges in personal accounts were essential in order to ensure that individuals would benefit from cost-efficient pension saving, and therefore to increase the incentives to save for precisely those groups where undersaving is most prevalent.

We have looked in detail at the significance of charges in personal accounts, and remain convinced of the importance of keeping charges low. Every 0.1 % reduction in the annual management charge we manage to make could increase a long-term personal account holder’s fund by around 2%. That’s a crucial difference to retirement income.

If we manage to reduce annual management charges to 0.5% the average employee in personal accounts would be just under £600 per year better off in retirement.

And the other crucial difference that our reforms will make, of course, is the presence of the employer contribution. This is, for all employees, the very clearest incentive to save. Every £1 contributed into a personal account will be matched by the employer contribution and by tax-relief from the state, so £2 will go into the fund. Over a working life, with investment growth and low charges, that contribution might almost double. So you could end up with nearly £4 in the fund for every £1 invested by the individual. That’s a pretty good return.

Let’s look at the second barrier – the complexity of the current system. Our reform of state provision– wider coverage, fairness for women and carers, and linking the basic State Pension to average earnings – plus additional measures such as the abolition of contracting out for DC schemes – will mean that the state system in the future will provide a solid and clear foundation for private saving. Planning for retirement, and the decision to save, will be straightforward when individuals can be clear about what the State will do, and what they must do for themselves.

And, finally, the third main barrier – the prevalence of inertia when it comes to savings decisions. Our reformed system will overcome this barrier through automatic enrolment. All employees will be automatically enrolled into either good quality employer-based provision, or a personal account, with the freedom to opt out if they choose.

There is wide consensus that automatic enrolment is the right approach to tackling the behavioural barriers to saving inherent in our current voluntary system. Evidence suggests that it is one of the most effective ways of combating people’s tendency not to act when faced with difficult financial decisions. In other words, it ensures that those employees who do not take an active decision to save will not lose out on the very real benefits offered by tax relief and employer contributions.

Our reforms will tackle the problems that currently mean that many individuals have low incentives to save. And in tackling these, they will tackle the collective problem of undersaving: in the reformed system, saving will increase dramatically. Up to 10 million people could be saving in a personal account.

There has been a counter-argument made that automatic enrolment into personal accounts will constitute mis-selling. The line of this argument is that people will be automatically enrolled, but that it will not be in everyone’s interests to save because of the presence of means testing. And it claims that incentives to save will therefore still not be clear enough because we won’t be able to say to everyone that they will be better off.

We are determined to build a consensus around the reforms we have set out. But that should not be a sloppy consensus – it should be based on the fact that people have examined our proposals thoroughly. And so we welcome scrutiny and debate. But in this case, we believe that the evidence simply does not support the argument being made.

The test criteria by which to judge whether saving was beneficial for an individual is whether they ended up with more money in retirement.

I’ve explained that personal accounts will give a good return on contributions paid into them. Our analysis shows that an average earner saving in a personal account from the age of 25 to State Pension age might get an increase in retirement income of nearly £50 a week. But some people argue that they won’t work if there is still means testing in the system.

The problem is that this misunderstands how Pension Credit works. By 2050, our reforms will mean that only around a third30% of pensioners will be entitled to Pension Credit. And 80% of these would be on Savings Credit.

Savings Credit exists to reward people who have made some provision for their own retirement. And this won’t change under these reforms. People on Savings Credit would clearly be better off for having saved: for every pound they put in to Personal Accounts, their employer and tax relief would also put in a pound.

Add investment growth to this, and an individual on Savings Credit would still be receiving over £2 back in retirement for every pound they’ve put in. And again, that’s a good return on their investment.

But what about Guarantee Credit? I know that people’s real worry is about 100% withdrawal rates, which only occur on the Guarantee Credit. But again, we need to be clear about where this might feature. Our reforms to the state system mean that, by 2050, someone would have had to work or care for less than 20 years in order to be on the Guarantee Credit only at retirement.

This will be a pretty rare occurrence – people who, out of a working life of 50 years, had spent less than 20 earning, or caring for a child, or a sick friend or relative. Our analysis indicates that only about 6% of pensioners by 2050 would fall into this category, and therefore have private income fully taken into account.

And, typically, most of these people would have worked for very few years in which they were paid enough to cross the earnings threshold for automatic enrolment. They would therefore by and large not have been automatically enrolled. And, if they had managed to build up a small pension pot then they could take it as a lump sum, and might therefore avoid 100% withdrawal rates.

So, we think the vast majority of people will be better off in retirement for staying in personal accounts. And we think the argument that claims we would be mis-selling on the individual level is therefore wrong.

It is important to remember that automatic enrolment does not remove choice or responsibility from the individual. It will still be up to the individual to decide whether they remain in a personal account. The test for us in this will be whether we can give simple generic advice to people about whether they should do so. And we think that will be possible.

Widespread undersaving is a big problem to tackle. But because we think that our policies will work to tackle barriers to saving at the individual level, this makes it possible to address the collective problem. The vast majority of people will be better off for having saved in personal accounts. We are therefore justified in automatically enrolling them, but leaving them the choice about whether to stay in.

Let’s also not forget that the issues surrounding the interaction between saving and income-related benefits exist in all systems. For example, the system proposed by the Pensions Policy Institute has a similar proportion of people on 100% withdrawal rates to that we’ve outlined. The only way that you could avoid that would be to have no safety net for the poorest pensioners – and I don’t believe that’s a responsible suggestion in terms of preventing pensioner poverty.

It’s worth remembering, too, that this is what Pension Credit was designed to do – to tackle poverty. It doesn’t take money away from people – it gives them more money. And it will continue to do so. Under our new system, a pensioner with an income of £100 per week from their state pensions, and £20 per week from their private pension, would typically get an extra £15.50 from Pension Credit. That is extra money, topping up pensioner incomes.

And I am clear that that is the right balance. A safety net, in the form of Pension Credit, that ensures a basic income, and gives those with modest savings a higher weekly amount. And on top of this, automatic enrolment and personal accounts, which together will mean that millions of people will have more money in retirement.

This is a balance which will be sustainable over the long term. And that is why we are determined that it is built on widespread consensus – consensus that this is a pensions settlement fit for generations to come

Below is the text of the speech made by James Purnell, the then Minister of State for Pension Reform, to the Social Market Foundation on 30th October 2006.

Last November, the Pensions Commission published its second report, and recommended a comprehensive reform of the British pension system. In May, we published our White Paper, which accepted those recommendations and set out how we would implement them. Today we publish our summary of the consultation responses to the White Paper, alongside our response to the Work and Pensions Select Committee’s report on pension reform. And, subject to the Queen’s speech, we plan to publish the first Bill on state pension reform as soon as possible during the next Parliamentary session.

I want to start by thanking the Select Committee for their serious and important report. Their cross-party support for the thrust of our reforms has helped to establish a political consensus around them.

This is a comprehensive, integrated package of reform. But it also involves difficult decisions –for Government, business, individuals and the Pensions industry. The paper we’re publishing today shows that our reforms have been broadly endorsed by these groups – and that is a significant tribute both to the work of the Pensions Commission in establishing the principles behind these reforms – and to the progress made during our National Pensions Debate.

In pensions, consensus isn’t a symptom of having a good policy, it’s a necessary component of having an effective policy. That’s because pensions policy is, by definition, long term. When people today take out a pension, they are putting that money away for twenty, thirty and forty years and more. They expect that the framework in which they make that decision to save to remain as stable as possible over those years.

But over the last thirty years, the pensions environment has failed to provide that stability. On top of demographic changes and market fluctuations, policy has changed frequently, under numerous governments, and left us with what the Pensions Commission described as the most complex system in the world. Instability has made pensions saving harder.

That’s why consensus is so important. We can’t remove risk entirely from pension saving, and we can’t halt demographic shift. But we can and should reduce the risk of political instability by building a system whose core building blocks are shared across the political parties. We’ve been working closely with the Conservatives and Liberal Democrats and are grateful for the constructive approach they have taken to these reforms.

But consensus isn’t just a political issue. It’s also about building a shared approach with stakeholders. The paper we’re publishing today shows that they have welcomed the broad thrust of the reform package and understand the necessary trade-offs involved.

We received nearly 350 responses from individuals and organisations during the consultation period. Today’s report highlights the issues that were raised by respondents, and shows what impact the comments we received have had on our proposals. It outlines how we are going to take forward the proposals set out in the White Paper, and includes some further explanation of why we have taken the decisions that we have.

The positive reactions from stakeholders on the publication of our reforms back in May have largely continued throughout the consultation process and in the responses that we have received. There are some differences of opinion on the detail of the policy, but there is nonetheless a broad agreement on the ultimate outcome that must be realised: a simpler, sustainable and fairer pensions system for the UK.

We’ve said all along that we don’t want this to be a mushy consensus, an agreement born of the desire to agree rather than a shared analysis of the likely success of the reforms. That’s why we’ve tried to encourage genuine scrutiny of our proposals – through publishing our research, holding seminars and using the DWP website to encourage discussion of the detail.

Through that process, a number of important points have been made. Today I want to set out how we have changed our proposals where we agree with those points. Where differences of opinion remain, we will publish further research so that our assumptions and decisions can be scrutinised further.

So, today I want to discuss four key areas that emerged from the consultation:

First – how to prepare for and implement personal accounts, whichever model is chosen;

Second – the basic structure of the State Pension, and in particular whether it should have one tier or two;

Third – incentives to save under the reformed system;

And finally, increases in State Pension age.

First, personal accounts. The new system of personal accounts was, of course, a critical focus for government and for stakeholder groups during the consultation process.

We’ve been consulting widely amongst stakeholders through a programme of seminars, summit meetings and one-to-one discussions on the specific detail of policy design and implementation – and this programme of consultation around personal accounts is still going on.

When we published the White Paper in May, the debate was polarised between two models – the NPSS model put forward by the Pensions Commission, and the insurance industry’s suggested model. During the consultation process that polarisation has softened, with a number of different models being put forward – for example, looking at how choice could be combined with the core features of the NPSS model.

Because this is such a significant reform, we’ve decided to publish a separate White Paper on personal accounts, in December. This will set out our detailed policy proposals for personal accounts, and will include the proposed organisational design.

But one key point did come out of the consultation: that how we implement personal accounts will be as important as what the policy is, and that we should involve private sector skills as soon as possible.

So, ahead of this forthcoming White Paper, today’s report sets out our intention to establish a Delivery Authority for personal accounts. The Delivery Authority would be an independent body to help design the operational structure of personal accounts and manage the necessary contracting processes as soon as the scheme is established in legislation.

By creating a Delivery Authority we will be able to use the experience and skills of the private sector to deliver the scheme – and give a degree of autonomy in operational decision making. Again, there’s still a lot to think about here. We need to consider what the duties of any delivery authority might include – whether that’s advising Government, managing procurement, or, over the longer term, ensuring that participation levels remain as high and charges as low as possible. We’ll set out more detailed proposals on the potential role and responsibilities of the authority in the Personal Accounts White Paper.

The second issue I’d like to talk about in more detail today is the structure of the State Pension system. This was a subject that received a lot of attention in the consultation responses. In particular, there have been calls for a move to a flat-rate single-tier State Pension, perhaps at the level of the Pension Credit standard minimum guarantee. This is often referred to as a Citizens’ Pension.

We absolutely recognise the merits of simplifying the state pension as far as possible. A simple and transparent state pension system is one of the central aims of our reforms. We need to create a system in which people know what to expect from their state pension, to enable them to plan and save effectively for their retirement.

In theory, single tier pensions could perform well against our objective of simplicity, by providing a single, flat-rate foundation income from the state.

But we’re not convinced that the arguments in favour of a single-tier pension outweigh the problems. In practice, introducing a single tier-pension would undermine the contributory principle of ‘something for something’, and would either be prohibitively expensive or have to sacrifice simplicity.

Take the example of the simplest model of a Citizens’ Pension, with a single rate of £114 a week, uprated by earnings. The Pensions Commission’s analysis suggested that this approach would cost around £30 billion more a year by the middle of the next decade – that’s a rise in spending of nearly 2% of GDP, more than £20 billion more than our proposed reforms. So, a simple switch to a Citizen’s Pension is not affordable.

We have looked at the ways respondents suggest making a single-tier state pension affordable. However, we’ve concluded that they would reintroduce exactly the kind of complexity the Citizen’s Pension is meant to remove. We’d have to use an offset approach to the rights people have already accrued, and introduce extremely complex transitional arrangements which would mean that many people would not receive the promised £114 per week. Moreover, a Citizen’s Pension would also generate a significant number of losers – namely those who would have received above £114 per week through their State Second Pension. I don’t believe that’s an acceptable way forward either.

So there are practical reasons why we don’t believe a single-tier pension is the right approach. But our fundamental reason is one of principle. We are firmly committed to the principle of ‘something for something’, that the pensions system should reward contributions to society. Under our proposals, every year spent working or caring would count. Someone who worked or cared for 43 years, for example, would get around £135 a week from the State on retirement, whereas a person working or caring for 30 years would get around £115. Under a universal single-tier system, someone who had not contributed to society through working or caring would get the same amount as someone who had worked or cared for several decades.

This is not an outcome that most people would consider fair. During the National Pensions Day, when members of the public were asked whether social contributions should be reflected in additional State Pension entitlement, the overwhelming majority thought that they should. 84% of participants, for example, thought that years spent caring for children or a sick friend or relative should count towards entitlement.

So, we’re clear that a single tier policy would fail to meet the basic tests of affordability and fairness, and to deliver on the simplification that it promises. The two-tier approach we’ve outlined in the White Paper provides an improved foundation for private saving through moving over time to a flat-rate system. But it does this within a cost envelope that is sustainable, whilst rewarding more generously those who contribute to society.

We do recognise, however, the view that has come through in the consultation process that the current state system is too complex, and that we could have gone even further in our reforms to tackle this. And in response, we have looked yet further at whether we could do any more. We’re now exploring a major simplification to the State Second Pension that would create a more transparent and simpler state pension package.

As it stands, State Second Pension is currently calculated in a very complex way, based on how much someone earns in a year. We are giving serious consideration to replacing this, at the same time as linking the basic State Pension to earnings, with a fixed amount of money that everyone will receive, based upon the amount of time they have spent working or caring for someone.

This fixed figure could be worth in the region of £1.40 a week for each qualifying year spent working, caring, or a combination of both activities.

This would give people a much clearer picture of what they would receive from the state in retirement. When added together with the basic State Pension, this simplified entitlement could effectively provide a single State Pension for most contributors.

I’d be interested to hear your views on whether, if we were to proceed with this approach, we should formally merge the two parts of the state pension into a single, rebranded pension, or whether people would prefer us to retain the term State Second pension.

But whatever it were called, this approach would continue to reward social contributions, whilst also providing people with significantly better outcomes than a single-tier pension of £114 a week. By the 2050s, for example, someone who contributed for most of their life through working or caring would be entitled to around £135 a week from state pensions in retirement. And because they could be confident of that entitlement, they would also be able to plan their private saving.

A third issue that was raised during the consultation period was incentives to save. I’ve talked about savings incentives in some detail recently so I don’t want to dwell on it again for too long here. But in short, we are clear that our reforms will mean that the vast majority of individuals – including those entitled to Savings Credit – will be better off in retirement for having saved.

We are clear that this justifies automatic enrolment with the freedom to opt out. But we also recognise that the provision of clear generic information will be important in enabling individuals to make the right choice for themselves. That’s something that will be considered in more detail in the personal accounts White Paper. And we will be publishing further research on projected levels of Pension Credit and incentives to save in the next month.

The final reform I’d like to touch on today is the increase to State Pension age. This is, perhaps more than any other, the reform where I’ve been pleased with the progress we’ve made towards consensus. This was a proposal which only 3 years ago would have been widely opposed. Yet the overwhelming majority of responses to our consultation accepted that a rise in State Pension Age is a logical move if we are to create a pensions system that is affordable and sustainable in the long term.

I think it’s fair to say that most respondents have also accepted that this is the only way of ensuring that the challenges arising from an ageing population are spread fairly across the generations. Our proposed increases will broadly maintain the proportion of male adult life spent over State Pension age at around 30% – as it is today.

People have raised concerns over the difficulty in predicting future longevity, and about differences in life expectancy across socio-economic groups. I think it’s important to remember, firstly, that although there are health inequalities that we need to tackle, life expectancy is rising across all groups. Of course, it will be important to keep in view the changing data on future life expectancy. And as we announced in the White Paper, we intend to commission periodically reviews to provide advice to Government on whether the timetable for increasing State Pension age – as set out in legislation – remains appropriate.

Increasing State Pension age is, like most of our reforms, a policy which has involved necessary trade-offs being made. The reforms work as an integrated package precisely because different elements have had to be combined in order to meet all the objectives. And, as I began by saying, it’s a package that needs consensus behind it if it is to meet that crucial objective of stability.

But, as I hope our consultation period and the report published today have shown, it’s also a package that has room for flexibility and scrutiny. The scrutiny of our proposals by all our stakeholders has been extremely valuable – and has had a real impact. This scrutiny needs to continue as we move into the next stage of the reform process. As we move towards legislation and continue to develop the detail of our personal accounts proposals, we’ll continue to need your views and expertise. And that way, we can continue to build a real and lasting consensus.

Below is the text of the speech made by James Purnell, the then Minister of State for Pension Reform, on 7th November 2006.

I want to start by welcoming this analysis from the PPI. You’ve posed today the question ‘is there a consensus on pension reform?’ – and you’ve sought to answer it by conducting a detailed assessment of stakeholder responses against the key planks of our proposals. It’s exactly this kind of thorough scrutiny and analysis that is needed to build that consensus.

We’ve come a long way since we established the Pensions Commission, back in 2002. Then, the big questions about the future of our pensions system were still unanswered. Should we persevere with a voluntary approach to private saving or introduce more compulsion? Should and could we raise the State Pension Age? Should we abandon the contributory principle? Should we re-link the Basic State Pension to earnings?

Our White Paper set out a comprehensive, integrated package of reform that tackled those fundamental questions. And the analysis the PPI has presented today, like the summary of responses to the consultation we published last week, shows that there is broad agreement around those key questions. Of course, in some areas, people would like us to go further. And agreeing on one set of questions raises a new set.

The diagrams on the screen now show one way of looking at the emerging consensus: here, we’ve taken the responses from our key stakeholders and used their position on each of the main reform proposals to develop a broad view of the level of agreement around each one.

Perhaps the most pleasing of the responses to the White Paper were those that show just how far we have moved towards consensus in the past year or so, and how willing groups on all sides have been to accept the necessary trade-offs involved. We can see here, for example, that there is now an established consensus around the principle of automatic enrolment – one that includes the CBI, the EEF and the British Chamber of Commerce, as well as consumer groups.

On the State Pension side, there is very strong agreement around our proposed reforms of the Basic State Pension. And the overwhelming majority of responses accepted that a rise in State Pension Age is a logical move if we are to create a pensions system that is affordable and sustainable in the long term. This was a proposal which only 4 years ago would have been widely opposed. We consulted on this issue following the Green Paper on pensions in 2002 – and we can see here the massive shift in attitudes since then.

So, we’ve established a solid foundation of consensus around the core architecture of our reforms. But, of course, when a basic level of agreement is reached around a policy, it throws up, quite rightly, questions about the next level of detail. So, within the framework of a foundation of consensus, stakeholders are now concerned with specifics – automatic enrolment is the right way forward, for example, but in what circumstances is it appropriate? A more generous State Pension is welcomed, but should it be delivered through a single or two-tiered system? Improved outcomes and fairness for women and carers have been widely commended, but some people are asking whether we can go any further in improving coverage.

We want to engage with these questions in the same way as we engaged in the White Paper with the fundamental questions. We’ve said all along that we don’t want a sloppy consensus, an agreement born of the desire to agree rather than a shared analysis of the likely success of the reforms. That’s why we’ve tried to encourage genuine scrutiny of our proposals – through publishing our research, holding seminars and using the DWP website to encourage discussion of the detail. And we’ll continue to do that.

Today we’re publishing, for example, our analysis of the projected entitlement to means-tested benefits, which we hope will address some of the concerns commentators have raised in that area. This analysis explains in detail how our reforms will ensure that those who contribute to society through raising a family or caring for relatives are rewarded in retirement – and why that will reduce the number entitled to income-related benefits.

Today, a couple in which one person has taken time out of the workplace to raise a family or care for relatives could find themselves with a smaller pension as a result. This is because instead of both partners having a full pension in retirement, one person is claiming from their partner’s contributions.

After these reforms, the same couple, reaching State Pension Age in 2053, would receive a higher joint pension – because our reforms are fairer and make it easier for individuals to build up a pension in their own right. We’re reducing the number of years of contributions needed for a full basic state pension to 30, and we are crediting caring in the same way as work. Those taking a break to bring up children, or care for family members will be recognised and rewarded by the system – so couples with children will still be building up pension entitlements even if one is staying at home with the children.

Our reforms mean that over 90 per cent of couples will be lifted clear of means-testing by 2050 – only 1 in ten will be eligible for means testing compared to a quarter today. Pension Credit will be a safety net for those who really need it. Approaching half those eligible for Pension Credit will qualify for higher rate disability or caring premia. Only around six per cent of pensioner households will be eligible for just the Guarantee Credit element alone. And as few as one in 50 pensioner households will actually retire directly on to the Guarantee Credit only at State Pension age.

I know there has been concern that our projections of the proportion on means-tested benefits was very different from PPI’s. We have been working with PPI over the summer to understand the differences. I think we agree they come down to two differences:

Firstly, differences in the way we model outcomes from State Second Pension. And secondly, differences in assumptions about the growth of private pensions. Our forecast in the White Paper was actually conservative, in that it didn’t assume that Personal Accounts increased pension saving, which is of course the aim of our policy.

Now that we’ve published these projections, we want to continue to work with the PPI and others to see if we can narrow what I’m told is called the funnel of doubt about the effect of our policies.

I hope that by publishing this kind of analysis, and continuing to engage in open discussion with all our stakeholders on this sort of detailed issue, we can begin to build a more detailed framework of consensus on top of the foundation we’ve established.

But consensus isn’t, of course, just about building shared approaches with stakeholders.

Over the last thirty years, political instability has been one of the biggest obstacles facing the pensions environment.

On top of demographic changes and market fluctuations, pensions policy has changed frequently, under numerous governments, and left us with what the Pensions Commission described as the most complex system in the world. Political instability has made pensions saving harder.

That’s why political consensus is so important. We can’t remove the risk entirely from pension saving, and we can’t halt demographic shift. But we can and should reduce the risk of political instability by building a system whose core building blocks are shared across the political parties.

This is a demanding aim. We shouldn’t underestimate what a big break with political history this package represents. Linking the uprating of the basic State Pension with earnings is something that both Labour and Tory governments resisted for years. Widening State Pension coverage – through a modernised contributory principle – is the most significant move towards equality between men and women since the introduction of Home Responsibilities Protection in 1978. And personal accounts represent a totally new method of saving.

We’ve been working closely with the Conservatives and Liberal Democrats to build understanding and agreement around the reform package, and I’m very grateful for the constructive approach they have taken.

It would be foolish to state that a good degree of political consensus now will completely prevent any further change in the future. We recognised, in the White Paper, the fact that it is important that certain areas of policy are kept under review, in order to ensure that they reflect changes in society – the default retirement age, for example, or life expectancy projections.

We are serious about consensus. But that doesn’t mean we expect everyone to sign up to everything. It means that we want to create a circle of consensus around the core architecture of our reforms, that is based on a shared understanding of the problems and the reasons why we are tackling them in this way. And it means that, rather than trying to score points, we will continue to address the concerns and proposals put forward by others.

Future governments may in time wish to reform the pension system further. But what is crucial is that these reforms provide a foundation for any future reform agenda.

Building a lasting consensus is something that I believe we can achieve. But I also believe that it’s something we must achieve if this White Paper is to successfully avoid the historical pitfalls of instability.

Pensions policy is, by definition, long term. When people today take out a pension, they are putting that money away for twenty, thirty and forty years and more. They expect that the framework in which they make that decision to save to remain as stable as possible over those years. And that kind of long-term stability is derived from an underlying consensus.

People in this country deserve to have confidence in their pensions system – the confidence that future governments won’t pick it apart again. That’s a confidence that these reforms, with a lasting consensus, can give them.