Below is the text of the speech made by Alan Johnson, the then Work and Pensions Secretary, to the ABI Conference on 9th March 2005.
It’s a great pleasure to have this opportunity to speak at the ABI Conference.
The UK insurance industry is a world leader –- the largest in Europe, the third-largest in the world. It has a crucial role to play in the UK economy not least as a major employer, with a third of all financial services jobs – nearly 350,000 people – and as a source of overseas earnings.
And it has a crucial role to play in our society. You only have to look at recent natural disasters such as the Tsunami (where the first life insurance payments were made last month) or the floods in Boscastle last Summer.
In today’s world, we are all more aware of the risks that we face and of the challenges of managing them. I’m grateful to the ABI not just for representing their members so well but for working in partnership with Government to help address so many of these challenges.
One of which is the reform of liability insurance where the ABI’s “Making the Market Work” initiative has helped trade associations and others to access the insurance market more easily. Earlier this week, an ABI survey revealed a dramatic slowdown in the rising cost to employers of liability insurance. And through the new Health and Safety Performance Indicator – which the ABI helped to develop – we’re making it easier for small businesses to improve their management of risks.
And, of course, the ABI’s support has been crucial in addressing the pensions and savings challenge that is now higher in the public consciousness than ever before.
The demographics are stark – two years from now, the number of people over State Pension Age will overtake the number of children. In just over 30 years, the proportion of the population aged 65 and over will increase by 50% while the number of pensioners aged 80 and over will double.
Given this expanding longevity and a lower birth rate, we set up the independent Pensions Commission to guage the extent of the problem we face.
In their first report the Commission said that we had all been living in a fools’ paradise as far as pensions are concerned since the late 1970s – and that whilst there is no crisis now this would develop into a crisis in 20 to 25 years time, if we didn’t begin to plan for that future soon.
The past few years have been a difficult time for all those involved in pensions:
– for the insurance industry re-building trust after pensions mis-selling;
– for companies facing rising costs and soaring pension scheme deficits as the stock market plummeted;
– for the thousands of employees who lost their pensions when their employer went bust, leaving the pension scheme underfunded;
– for Government trying to balance regulation to protect pensions with the need to make it easier for people to save.
The Pensions Commission’s second report will deal with the question of compulsion in occupational pensions. But while there’s still a long way to go to make a success of re-vitalised voluntarism, we’re beginning to see signs that, together, we are turning the corner.
Mis-selling is now increasingly a distant memory. Government and the industry has worked to create a new independent Financial Services Authority, restoring confidence and improving regulation.
Stakeholder pensions and the Sandler suite of products mean a choice of new, low charge products and more flexible and tailored ways in which people can save. Between April and October 2004, contributions to Stakeholder pensions went through the £1bn barrier for the second half-yearly period running.
We’ve lifted 1.8 million pensioners out of abject poverty since 1997.
Through the Pension Credit, we have revolutionised the targeting of state support to poorer pensioners. Over 3.2 million pensioners are now in receipt of Pension Credit – with take-up strongest amongst the very poorest.
For those who would otherwise be below the Guarantee element, our best estimate is that take-up rates are running at over 80%. And for single women in this group, take-up could be as high as 90%.
With an extra £10 billion a year spent on pensioners, we are starting to change what it means to be old in our society.
Since time immemorial, old age has been associated with poverty – from the workhouse, through the studies of William Booth, to the 1980s when many pensioners had to choose between heating and eating.
But figures from the Institute for Fiscal Studies show that we are now in an unprecedented position where pensioners are no more likely to be poor than any other group in society. And we’re beginning to see signs that we are turning the corner with occupational pensions. Company pension schemes are benefiting from a resurgent stock market and an increase in employer contributions.
The FTSE 100 is now back over 5000 points; one survey showed that employer contributions to defined benefit schemes in 2004 were up almost 50%; and other studies show that the value of pension funds last year grew on average by around 10%.
As one recent survey suggests, with over two years of steady growth now behind them, pension funds have recovered most of the losses they sustained during the savage bear market of 2000-02.
And over the longer-term, that stock market risk is actually producing positive real returns – over and above inflation – some 4% over the past 10 years.
But this doesn’t mean we can slip back into our fools’ paradise.
Last week I launched the new occupational pensions regime handing over the Pension Protection Fund and the new Pensions Regulator to the respective Chairs of the new bodies.
In April they will be up and running – moving from vision to reality.
The new flexible and pro-active Pensions Regulator will further bolster security by tackling the risks to members’ benefits while enabling well-administered and secure schemes to continue without unnecessary regulatory burden.
The Pension Protection Fund will mean bringing real security and peace of mind to over 10 million members of defined benefit schemes. For an average cost of £20 per head per year – roughly what one might pay for a fortnight’s holiday insurance – scheme members will get meaningful protection for life.
And through the Financial Assistance Scheme, we are offering some financial assistance to those who have lost the most in the past.
We’ve been able to make some progress in simplifying the system for employers with last year’s Finance Act untangling eight separate tax regimes which have been thrown on top of each other over the years and replacing them with one coherent system.
And the Pensions Act is freeing up the old Section 67, making it possible for businesses to rationalise pension rights into a single system retrospectively; As well as removing the requirement to index Defined Contribution Schemes, and reducing indexation for Defined Benefit Schemes.
There is much further to go – but gradually our joint working in informed choice and financial education is making a difference.
Today’s ABI research shows that people are starting to understand the need to work for longer in order to ensure an adequate income in retirement. And it suggests strong consumer support for our measures which increase choice and flexibility over longer working – whether through the new rule that will allow people to claim their occupational pension while continuing to work for the same employer; Or through improved terms for State Pension Deferral where people can for the first time choose between an enhanced pension 50% higher for life or a lump sum of up to £30,000 for taking their State Pension at 70 rather than 65.
These are small but important steps on the road to a long-term solution which avoids that much heralded crisis in 20 to 25 years time.
At the end of last month we set out our principles for wider pensions reform, seeking to establish a national debate as a first step towards building a lasting consensus on the way forward.
This was welcomed by the ABI, CBI, TUC and many of our other partners.
We’ve never really had a lasting political consensus that gives our citizens the ability to plan ahead with confidence.
The NAPF claimed a consensus for the idea of a Citizens’ Pension set at £105 a week, replacing the Basic State Pension and the Second State Pension.
But the ABI, CBI and many others say that this is too costly and far from the panacea that it is claimed to be.
The Pensions Commission report provides an opportunity to start to build a true consensus – and this is an opportunity we intend to grasp.
I disagree with the doomsayers and scaremongers who proclaim the end of the final salary scheme and claim to hear the death-knell for company pensions.
Last week I was with employers large and small as well as the CBI, TUC, ABI, CIPD and others, at the Employer Task Force launch of the new Good Practice Website –- showing how employers are adapting to the changing economic climate and maintaining their pension commitments. Many of them through innovative hybrid schemes.
We need to spread this best practice and to innovate further – which is why it was important that the ABI led the consortium on the Workplace Information Pilots and why I believe that auto-enrolement could be a powerful tool to be utilised much more widely.
Why is it that 4.6 million people aren’t taking advantage of contributory schemes that their employer provides?
Effectively these workers are turning down the equivalent of a pay rise – and the evidence suggests that this isn’t an informed decision.
Seeking to provide security in a risky world – is about being honest and open about those risks and doing all we can to control them. But the risks are linked to opportunities – whether in investment growth or, the greatest opportunity of them all – longer, healthier lives.
Government has to be prepared to take unpopular decisions and ask difficult questions in order to build the right long-term solutions.
Increasing the retirement age for public sector workers, set for civil servants at 60 around two hundred years ago is one necessary change.
And I believe we need radical reform in order to tackle the scandal of women’s pensions – where on average, today’s single women pensioners have an income £24 a week lower than single male pensioners – with only 16% of newly retiring women qualifying for a full Basic State Pension on the basis of their own contributions.
One of the key questions we are asking in launching the national debate is whether the gains from a residency-based eligibility for the Basic State Pension would provide a cost-effective and practical alternative way of improving equity of entitlement.
I know that an outbreak of political consensus is unlikely in the next few weeks, but we do need a national debate to try to build such a consensus rather than knee-jerk reactions; we do need radical long-term reform not one party solutions that will be altered by future Governments of other political colours; and we do need a mature debate that requires us all to work together to explore affordable, sustainable and innovative approaches that build on the progress we have made in tackling pensioner poverty.
The ABI have already played a crucial role – and I know that I can count on your support in shaping this debate; building this consensus and ensuring that today’s workers, tomorrow’s pensioners, can look forward to a secure, active, independent and less risky old age.