Pension Commission Statement to the House of Commmons

The Rt Hon John Hutton MP
Secretary of State for Work and Pensions

Pensions Commission Report Statement

Wednesday, 30th November 2005

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With permission, Mr. Speaker, I should like to make a statement on the publication of today’s report by the Pensions Commission.

Mr Speaker, in making its recommendations, the Pensions Commission have acknowledged the progress we have made since 1997. Their proposals are designed to build on this success – and I believe it is important to consider them in this context.

As Lord Turner has recognised, the Government's first priority on coming into office in 1997, was to tackle pensioner poverty. This was absolutely the right thing to do.

Mr Speaker, we have succeeded in lifting nearly 2 million pensioners out of absolute poverty. We are now spending £11 billion extra each year on pensioners with almost half of this spending going to the poorest third. And thanks to measures such as the Minimum Income Guarantee, Pension Credit, Winter Fuel Payments and a 7% real terms increase in the Basic State Pension, we have ensured that pensioners will never again suffer the indignity of living on as little as £69 a week – the scandalous legacy of pensioner poverty we inherited when we came into office.

In our second phase of reform we took action to tackle the loss of confidence in the private pensions market. This included the pensions mis-selling scandal we inherited. In 1997, less than 2 per cent of pension mis-selling cases had been satisfactorily resolved. By the end of 2002, over 99 per cent of consumers with mis-selling claims had been compensated – with total compensation reaching £11 billion.

Through the Pension Protection Fund, the Pensions Regulator and the Financial Assistance Scheme – the Pensions Act 2004 is helping to respond to the problems experienced by defined benefit occupational pensions and to boost security for scheme members. And the introduction of the Sandler suite and the Stakeholder pension has been an important step in facilitating low cost private savings.

Mr Speaker, I believe this amounts to a record of achievement of which this Government can be proud.

Despite this progress, we recognise there are still significant and serious issues we need to address. I believe there are three.

Firstly, the demographics. When our grandparents reached 65 they could expect to live another 11 years. The 20th century's tremendous advances in science, welfare and health means that today we can expect to live another 19 years beyond 65 and our children another 24 years. In 1950 we spent 18% of our adult life in retirement. We now spend 30%. By 2050 there will be 50% more pensioners than today. Critically, by 2050 there will be 2 people of working age for every pensioner compared with 10 people 100 years ago.

Secondly, we know people need to save more. Our 2002 Green Paper first highlighted the need to enable people to save more or work longer to achieve the income they want in retirement. And it established the Pensions Commission to review our long-term savings regime. The Commission themselves have calculated that nearly 10 million people are not saving enough for their retirement. While some have suggested that this challenge will be averted by the growth in housing assets, this is at best a partial solution. People would need to release £100K to generate £100 per week pension, which is far from easy when the average house price is only just over £180K – and when people still need to live somewhere in retirement.

Thirdly, we know the existing system is complex – possibly the most complex in the world. It produces unfair outcomes for women and carers; and there remains the question over how to ensure an adequate and sustainable state pension for future generations.

As today’s report makes clear:

“the problems in our pensions system will grow increasingly worse unless a new pensions settlement for the 21st century is now debated, agreed and put in place.”

Put quite simply, Mr Speaker, I do not believe we can afford to ignore the problems the Pensions Commission has identified. We must instead ensure that future generations can plan for their retirement in a sensible way. The choice is not between the status quo and reform. The question is over how we act – not whether or when.

The Pensions Commission were very clear in their first report last year that there was not a pensions’ crisis now. They have made this clear again today. But the pensions of tomorrow depend on decisions people make to save today. They argued that the failure to respond to this challenge would lead to a crisis in 20 years time. If we do nothing future pensioners will be 30% worse off relative to workers, than they are today.

So the Pensions Commission has put forward a comprehensive package of reforms to address these challenges. In relation to State provision, the Commission recommends, “a reform of State pension provision to make it simpler to understand and less means tested than it would become if current indexation arrangements continued.”

The Commission makes clear that there are a variety of options to secure their objectives. Their preferred way forward is a higher basic state pension indexed to average earnings growth, ideally starting in 2010 or 2011 as the public expenditure benefits of the rise in women’s state pension age begins to flow through. The Commission has also proposed a universal Basic State Pension based on residency rather than contributions.

The trade off would be a higher State Pension Age. This would be phased in gradually in proportion to the increase in life expectancy. For example, it could rise to 66 by 2030, 67 by 2040 and 68 by 2050. This would not affect anyone 50 and over. Furthermore, based on the Commission’s assumptions, a 41-year-old could face only 1 years increase from now; a 32-year-old 2 years; and a 23 year old 3 years.

These changes are designed to underpin a major extension of workplace savings. Here, the Commission recommends a new, simple, low cost savings scheme. All employees would be automatically enrolled into either a high quality employer pension scheme or a newly created National Pensions Saving Scheme but with the right to opt out. Employers would be required to make a matching contribution.

The Commission also makes proposals to tackle inequality in the pension system, particularly for women and carers.

Mr Speaker, the Government welcomes the broad framework of the Pensions Commission proposals and options and believes they are the right basis for the debate to come. There is much to be discussed and decided in relation to the detail of that framework. Our response will be based on the 5 key tests that I set out last week.

Firstly, do these proposals promote personal responsibility? The role of the State is to provide a floor through which no one can fall but, as we have made clear, the primary responsibility for security in old age must ultimately rest with the individual and their family.

Secondly, are they fair? Our future system must continue to protect the poorest; it must be fair to women and carers; fair to employers and workers – both in the public and private sectors - and fair to those who have saved.

Thirdly, are they affordable?

There are a number of points of the Commission proposals which raise the prospect of additional Government spending. For example, there is the re-linking of the Basic State Pension to earnings, scrapped by the last Conservative Government in 1980. There is also the proposal making the Basic State Pension universal from 75 - which would benefit women. In particular, we therefore have to test all the costings. We cannot take decisions without first determining the affordability of proposals and there is no point in us or anyone else making commitments on anything other than a sensible and sustainable financial basis. As the Chancellor has made clear, there will be no relaxation in our fiscal discipline. And we will not put the long term stability of the public finances at risk.

This test will be absolutely central. A near 50% rise in the number of pensioners between now and 2050 presents challenges and choices for the country about the proportion of its wealth that should be used to support retirement.

Fourthly, do they simplify the system? Any credible package of reform must represent a clear deal between citizens and the state, so that people know what the Government will do for them and what is expected of themselves.

Fifthly, are they sustainable? People must have the confidence to plan for their retirement. An enduring national consensus must be our goal.

Mr Speaker, the Pensions Commission’s 1st report last October was a comprehensive analysis of the UK pensions system. I believe today’s report is an important milestone towards a lasting pensions settlement.

I should like to put on record on behalf of the Government - and I hope the House as a whole - our thanks to Lord Turner and his fellow Commissioners Jeannie Drake and John Hills for their work during the past three years. They have made a tremendous contribution to one of the most important public policy challenges facing the country today.

The publication of this second report from the Pensions Commission today marks the beginning of this national debate not the end of it. As far as the specific recommendations are concerned, we are ruling nothing in and nothing out. We will welcome ideas and proposals from the political parties, employers, trade unions and everyone with an interest in the future of our pensions system.

Over the next few months, we will examine the policy recommendations made by the Commission in detail. The Pensions Commission have called for a national debate about the right way forward to start as soon as possible. I agree. We will therefore be undertaking a major consultation exercise – talking to people of all ages, in all parts of the country. I have asked the Pensions Commission to continue their involvement in this debate over the next few months as we move from diagnosis and analysis to proposition and decision. I want this debate to involve every section of our community as we work towards the publication of a White Paper in the Spring.

Previous Labour Government’s have risen to the challenge of securing long term reform of our pension system to meet the challenges of their time. From Clement Attlee to Barbara Castle, crucial decisions have been taken by politicians who could see the benefits of long term reform.

Mr Speaker, I believe it is our turn. To see the scale and depth of the challenge in the way that previous generations of politicians have seen those challenges. This should be our benchmark. To lay the foundations for reform in the 21st century.

Mr Speaker, the need to get this right is clear; the responsibility to do so is even clearer - for this generation and the next.

I commend this Statement to the House.