Below is the text of the speech made by Stephen Timms, the then Minister of State for Pension Reform, made at the Institute of Materials on 25th July 2005.
Thank you for inviting me here today. I’m very pleased to have the opportunity to respond to Peter this morning and to engage in a discussion with you all on this central issue in the pensions debate. And we see raising the effective age of retirement as not just about pensions, but also as addressing the wider welfare reform challenge which confronts us. We want to create an inclusive society where we can all benefit from the skills and contributions of people who want to work but who are currently excluded from the labour market, whether their exclusion is because of their age, their lack of skills, or for any other reason.
Age and retirement
As the report points out, developing active labour market policies and tackling age discrimination are crucial. With over a third of men outside the labour market by the age of 60, for many the debate is not about working beyond 65, but actually about having the opportunity to work as long as age 65. We’ve made some progress on this, thanks in part to initiatives such as New Deal 50 plus. Employment rates for those aged 50 to State Pension Age have now increased by 8% in the last 10 years. There is much further to go, but there’s no dispute that we should try and get there. There is, as the report says, a clear consensus on tackling economic inactivity and breaking down the barriers facing older workers; and success among older workers will be crucial if we are to achieve our ambition of an 80% employment rate overall.
With the introduction next year of the age component of the EU Directive on Equal Treatment, we are setting in place a legislative framework which ensures that people can not be barred from employment on the basis of age. Mandatory retirement ages below 65 will be prohibited other than in very exceptional cases. And we have been running the “Age Positive” campaign, drawing employers’ attention to the business benefits of an age diverse workforce. We have issued 130,000 copies of the Age Positive Code of Good Practice, which sets the standard for non-ageist approaches to recruitment, training, promotion, redundancy and retirement.
There is no consensus, however, around the desirability of raising the state pension age. There is a growing recognition that working longer is going to have to be part of the solution, and we have seen in recent years an increase in the average age of leaving the workforce, after a long period when that age was falling. But many who would agree that we should be removing the barriers to working longer would strongly oppose steps to compel people to work longer, and who can blame them?
What I think is particularly powerful about today’s report, is the way that it considers public attitudes alongside the reality of the challenges we face. The idea of having to work longer is an emotive subject – we’ve all seen the scare stories and the national newspaper headlines. The Pensions Minister who announces that “we’re going to make you work longer”, and does so without having first built a political and wider national consensus, is likely to be one person whose working life does not end up being extended!
We need to work with people to understand the reality of the challenges that we face – and contribute to a sense of ownership of the problems and the possible solutions. That’s why David Blunkett and I are engaged in a National Debate in which we are going around the country meeting people of all ages and backgrounds – sharing the problems and listening to their views. We’ve already held events in London and Manchester and we’re in Bristol tomorrow – part of a programme that will run up to and beyond the Pensions Commission report later this year. We want to include as wide a cross-section of views as possible, including academics, trade unions and industry representatives; and we are looking for a ground-breaking political consensus from across the parties.
Incentives to work longer
One of the things that has been particularly striking in the early National Debate events, is the extent to which people don’t know about state pension deferral. As a result of last year’s Pensions Act, someone can choose to delay taking their state pension, and be rewarded with a higher state pension – increased by a full 10% for each year of deferral – or a lump sum of, on average after a five year deferral, £20,000 to £30,000.
You don’t have to defer for five years to obtain a significant reward. A 65-year-old single man entitled to an average state pension of £107.45 who defers for two years would be entitled to an increased pension of over £129 a week, or a lump sum of nearly £12,000.
People are hostile to the idea of being compelled to do something – but when it is a choice and there are clear incentives to do something, attitudes begin to change. But Peter is right to sound a cautionary note that we don’t yet know how effective these incentives will be. I was in Washington discussing pensions with policy makers in the US last week, and there it is possible to draw your state pension early, at the age of 62 rather than 65 at which the full benefit is payable, at the price of suffering an actuarially fair reduction in the pension you receive. It is striking, as Peter points out, that over half of US retirees choose to start to draw their state pension at 62 rather than waiting for the full rate which they can receive at 65.
The choices we face
There is no escaping the tough choices we face as a society. In 1951, just after Beveridge introduced our present pensions system, the typical man reaching 65 could expect to live only a further 11 years. In 2005 this has risen to over 19 years. Life expectancy of a 65 year old has risen by two to three months every year for the past twenty years, and there is no sign of the trend slackening off. It is a wonderful transformation, but the pensions system needs to be adjusted to reflect the new realities rather than the old ones.
This improvement in mortality has been contrasted by a fall in birth rates over the same period. By 2052 one in four of our population will be over 65. And this is a global phenomenon, and in the UK we are better placed than in many other countries. In China, for example, between 2000 and 2050, the number of people aged 60 or over is set to increase by 250%.
Adair Turner’s first report offered us four options. Leaving aside the option of pensioners having lower incomes, Adair left us with what’s been called an “iron triangle of choices”. We either save more and/or we increase our taxes and/or we work longer.
But a key part of the challenge is to build a lasting solution that will work in a changing world – not just for today and tomorrow. We can’t consider these practical choices in isolation from people’s attitudes, nor without thinking about the society and the culture we are trying to build for the future.
We want the welfare state for the 21st Century to be driven by a something-for-something ethic. Making the most of the opportunity of longer, healthier living means enabling people to contribute to society throughout their lives – not only through the workplace, but through the wider community. It’s why our “Opportunity Age” consultation launched in March, and other cross-Government initiatives, are designed to tackle the fear of isolation by encouraging and supporting older people to contribute to their communities. Only a quarter of over-60s today feel that they can influence local decisions.
And, of course, the proportion of older people who live alone is likely to increase in the next 20 years. So encouraging older people to build alternative networks of support and interest, and tackling this sense of exclusion are crucial if we are to make the most of the opportunities for our society of increasing age.
An asset state
Much of what the Government has done to date has focused on tackling pensioner poverty. To prevent future poverty, the support we provide to enable people to build assets – both at an individual and a community level – will be absolutely crucial. As David argued at an IPPR seminar earlier this month, we face a new equality challenge and increasingly people’s assets are going to be as, if not more, important than people’s income.
We need attitudes to change towards savings. There is a great need for information that people can trust. It demands that Government and the financial services industry work together with individuals, families and communities themselves to unlock the potential of an asset state.
The Child Trust Fund, providing a Government contribution to open an account for every child born in the UK after September 2002, offers a first stepping stone to self-reliance, and a stake in the world for those without inherited assets or substantial family income. Savings vehicles like the Savings Gateway, where Government matches the saving contributions of people on low incomes for whom tax incentives for saving offer little attraction, will also play an important role in encouraging saving on the part of future generations.
Financial literacy and access to mainstream financial services have previously too often been restricted for many people on low incomes. Last December as Financial Secretary to the Treasury I reached an agreement with the banks that we would work together towards the goal of halving the number of adults in households without a bank account – and to demonstrate significant progress in that direction within 2 years.
The quality of information that people have, and the extent to which they trust it, will be key. Whether we are talking about pensions forecasts or life expectancy statistics – if people don’t trust this information they won’t use it to change their behaviours. What more we can do to build trust is a key question for Government. But it’s not a question for Government alone. It’s a fundamental question for our communities – for our business ethics – and for the society that we build for tomorrow.
We already know that tomorrow’s attitudes will be shaped by the reality that people are more likely to have ten jobs in a career than one – and they are going to demand ever greater flexibility in how and where they live and work. With increased mobility and an ever greater ability to communicate across the world, our sense of community will not just be about the geographical area where we live, but also about people and friends with whom we share interests, and aspirations for the future.
And that’s important for the question of increasing the effective retirement age and the State Pension Age. Today’s report argues that the State Pension Age can act as a signal – impacting on the normal retirement ages set by employers and the expected retirement ages of individuals. That is undoubtedly true.
But the report also points out the deep hostility that people have to the idea of being made to work longer. Far better, one would think, that any future increase in the State Pension Age should be underpinned by a broad consensus that reflects a change in people’s attitudes and understanding; and that any such change, if there is to be one, should be seen less as an imposition that forces people to change their behaviour than as a reflection of the new expectations of individuals and communities in a changing society.
The State Pension Age is a very blunt tool for changing effective retirement ages. The report recognises the concerns that many of us hold over the potential inequity of raising the State Pension Age when people from less well off backgrounds often have lower life expectancy. Even in a future world where there may be fewer people doing manual work and where general improvements in quality of life could narrow this distribution of life expectancy, it’s difficult to get away from the objection that an increase in the State Pension Age would hit the poorest hardest.
We need to be quite creative in thinking about this. If we did ultimately increase the State Pension Age, could we take steps at the same time to protect the least well off from losing out? We heard evidence in Washington last week that the Pension Credit and Winter Fuel Payments have extended lives. Do we need to think beyond the traditional concept of a State Pension Age? Could we achieve an increase in the effective retirement age by building on and extending our State Pension Deferral policy?
Measures in last year’s Finance Act will now give people the option to work for the same employer whilst drawing an occupational pension. This will give employees greater flexibility to plan a gradual move from full time work to retirement. Could we support this with an extension of State Pension Deferral which allowed people the option of deferring some of their State Pension rather than all of it? Could we extend this concept to the State Pension Age – moving from a single date to a series of options where people are incentivised to take some or all of their State Pension later, but where the least well off are not left behind without adequate support? Are there other things we might do within the State Pension to send out the right signals and address people’s concerns about fairness?
These are the issues we are reflecting on as the Turner Commission finished its work. I’d be interested in your views in the discussion that follows about what more we can do as a society to help people understand the challenges that we face – to show people that we have not made up or imagined the trend in rising life expectancy but we do need to address it. And crucially how we can do more to build trust – not just in Government – or even in statistics and information on life expectancy – but actually across the financial services and within communities themselves.
And I’d be interested to know what people think about how we prepare for and shape a society that makes the most of longer and healthier lives; that enables older people to contribute fully to their communities and supports them to enjoy the independence and opportunity that we are all entitled to expect in a modern Britain.
Increasing the effective retirement age needs to work against this background of flexibility and fairness; of community support and financial asset-building; of trust and choice. It can’t be considered in isolation from public attitudes or from the society we are trying to build for the future. But the reality of the challenges we face must shape these attitudes. I welcome this chance for a discussion and I look forward to exploring these ideas further in the coming months of our National Pensions Debate.