John Hutton – 2006 Speech on Pension Reform

Below is the text of the speech made by John Hutton, the then Work and Pensions Secretary, to Parliament on 25th May 2006.

With permission Mr Speaker I should like to make a statement on the future of our pensions system.

Our first priority has been to tackle pensioner poverty.

Compared with 1997, we are spending more than £10 billion extra each year on pensioners. Almost half of this spending is going to the poorest third. We’ve raised the minimum income from a totally inadequate £69 in 1997 to over £114 today. And as a result, for the first time in a generation, pensioners are now less likely to be poor than anyone else.

We have acted to tackle the loss of confidence in the private pensions market. We have legislated to clear up the pensions mis-selling scandal, created the Pensions Regulator and the Pension Protection Fund.

We established the Financial Assistance Scheme to help some of those who stood to lose the most from schemes that collapsed before 14 May 2004. I know, Mr Speaker, that many members have been concerned that the scheme is limited to those within 3 years of retirement.

My Rt Hon Friend the Prime Minister announced in March that we were expediting a review of the Financial Assistance Scheme. I am delighted to announce today that the scheme will be extended to cover eligible people who were within 15 years of their scheme’s normal retirement age on 14th May 2004. Under this extension, the Government will top-up to 80 per cent of expected core pension for those within seven years of scheme pension age, 65 per cent for those within eight to eleven years of scheme pension age and 50 per cent for the remainder.

So we have made real progress on pensioner poverty. Despite these improvements there remain significant challenges.

We established the Pensions Commission in 2002 to consider what reforms might be necessary to meet them. And I am grateful to three Commissioners – Lord Turner, Jeannie Drake and John Hills for the work they have done.

In their report last November, the Commission made clear that there was no immediate “pensions crisis” – but that there would be if we did not act soon. They identified four major challenges.

Firstly, they found that between 9 and 12 million people are not saving enough for their retirement.

Secondly, they estimated that by 2050 there will be 50% more pensioners than today. And over the same period, the ratio of people in work to those in retirement will halve.

Thirdly, as a result of historical legacy, the current State Pension system is complex and delivers unfair outcomes – especially for women and carers. Of those recently reaching State Pension Age, 85% of men have a full entitlement to a Basic State Pension compared to only 30% of women.

Finally, if we maintained currentindexation, the Basic State Pension might be worth only £35 by 2050 in today’s earning terms and over 70% of pensioner households could be eligible for Pension Credit – never the Government’s intention.

The Commission urged the government not to duck the long term challenge of reform. Mr Speaker, I believe the proposals in our White Paper I am publishing today address the challenges the Pensions Commission identified.

We will therefore introduce a new system of personal accounts that will make it easier for more people to save.

We will reform state pensions so that they are simpler and more generous.

We will modernise the contributory principle and make the state pension fairer and more widely available.

We will increase the State Pension Age – keeping the proportion of life spent receiving the state pension stable for each generation and helping to secure the long term financial stability and sustainability of the state pension system.

Let me take each of these in turn.

A new system of personal accounts will be introduced from 2012, providing over 10 million people with the opportunity to save in a low cost savings vehicle. Employees will be automatically enrolled into either their employer’s scheme or in the new personal account but will have the right to opt out.

The accounts will provide a simple way for people to take personal responsibility for building their retirement income.

Employers will be required to contribute 3% of employee earnings in a band between £5000 and £33,000. Employees will contribute 4% on the same band of earnings and a further 1% will be contributed in tax relief.

I recognise Mr Speaker, that these changes represent a major change in the pension system. Accordingly we are taking steps to help smooth the introduction of this reform. Employer contributions will be phased in over at least 3 years. The contribution rate will be fixed in primary legislation. In order to minimise the burden on the smallest businesses, we will consult on additional transitional support and whether a longer phasing period is needed.

However, the government is clear that reforms to private pensions must go hand in hand with reforms to the state pension system.

Mr Speaker, during the next Parliament, we will re-link the value of the Basic State Pension to average earnings. Our objective, subject to affordability and the fiscal position, is to do this in 2012, but in any event at the latest by the end of the Parliament. We will make a statement on the precise date at the beginning of the next Parliament. This will help to preserve the value of the basic State Pension. We will also simplify the State Second Pension so that it gradually becomes a flat-rate weekly top-up to the Basic State Pension.

This means that a person retiring in around 2050 who has been in employment or caring throughout their working life could receive a contributory state pension worth £135 a week in today’s earnings terms – which is £20 a week above the guaranteed income level. Without these reforms people retiring in 2050 would receive a total contributory state pension worth between £90 and £100 a week – well below the means tested threshold.

We will continue to up-rate the standard guarantee in the Pension Credit with average earnings from 2008. The Pension Credit will continue to help the poorest pensioners. But we will also be able to limit the spread of means testing. We will make an immediate start on this by modifying the calculation of the Savings Credit from 2008. This gives a clear indication from the outset of our determination to make clear people’s incentives to save. As a result of this change and our restoration of the earnings link, by 2050, far from rising to 70%, we estimate that only about a third of pensioners will be eligible for Pension Credit.

Our reforms to the State Pension must also achieve fairer outcomes for women and carers. But we do not believe that a residency test for future accruals as proposed by the Pensions Commission would be the right way to achieve this. It would offer no immediate help to a group of women aged 45 and over who have poor contribution records and no time to put this right.

That’s why, Mr Speaker, from 2010 we will introduce radical changes to the current rules – reducing the number of years needed to qualify for the Basic State Pension to 30 and improving the system of credits to better reflect the different ways in which people contribute to society.

As a result, by 2010 70% of women reaching the State Pension Age will receive a full Basic State Pension, compared with 30% today. By 2020 up to 270,000 more women will get a full Basic State Pension – approximately three times the number under a residency-based approach.

Mr Speaker, we propose to increase the State Pension Age in line with life expectancy. The State Pension Age for women is already due to rise from 60 to 65 between 2010 and 2020 to equalise with men’s State Pension Age. There will be a subsequent rise for both men and women from 65 to 66 over a two year period from 2024 – and further increases, also over two years, to 67 starting from 2034 and to 68 from 2044. No-one over 47 today will be affected by these changes.

Finally Mr Speaker, today’s White Paper proposes a number of simplifying measures that will streamline the regulatory environment. We will abolish contracting out for defined contribution schemes at the same time as we restore the earnings link. We will reduce the burdens on schemes by bringing forward legislation to allow them to convert Guaranteed Minimum Pension rights into scheme benefits – reforms that will, I believe, be of significant benefit to employers and employees.

We will bring forward legislation to begin implementing these reforms in the next session.

Mr Speaker, in November I set out five tests for the reform of our pensions system. They needed to promote personal responsibility, be fair, especially to women and carers, simple to understand and affordable and sustainable for the long term. I believe we have met these tests.

Today’s White Paper seeks to entrench a new pensions savings culture where future generations can take increasing personal responsibility for building their retirement savings.

Mr Speaker, while there will always be specific individual circumstances, such as debt or stock market performance, which will affect people’s savings, fundamentally these reforms mean that people should be better off in retirement by having saved.

What’s more, this package of reforms continues to protect the poorest pensioners from poverty. And for the first time, delivers fair outcomes for women and carers with a modernised contributory principle operating within a more simple overall architecture.

Over the period to 2020, our proposals broadly keep spending on pensioners as a proportion of national income constant at today’s levels – helping pensioners to share in rising national prosperity.

In the long term, the rise in the state pension age will help secure the long term financial stability and sustainability of the state pension system

Together it represents a comprehensive, integrated package of reform. I believe it can lay the foundation for a new and lasting consensus on a long-term resolution of the pensions challenge we face as a country.

I commend this White Paper to the House.