UK Pensions and Pension Reform

1. UK Pensions and Pension Reform Presentation by Alex Beer Senior Work, Pensions and Education Adviser British Embassy 24 February 2006

2. Contents • Pension Provision • Pension Sustainability and Adequacy • Pension Reform • Responses to Reform

3. State Pensions and Pensioner Benefits

4. UK state pensions (1) • Financed on a pay-as-you-go basis from National Insurance contributions • State pension age 65 for men, 60 for women. 65 for all by 2020. • Generous deferral options available • State pensions in payment indexed at least to inflation

5. UK state pensions (2) • Basic State Pension £82.05 a week (2005/06) • Credits for unemployed and people with disabilities • ‘Home Responsibilities Protection’ for those caring for children (up to age 16) • State Second Pension replaced SERPS from 2002 • Now strongly redistributive – those earning below £12,100 a year credited in • Also mothers of children under 6, carers, long-term sick • It is possible to contract out of state second pension into an occupational or personal pension

6. UK state pensions (3) • Pension Credit (developed from Minimum Income Guarantee) • Guarantee Credit; means-tested at £109 • Savings Credit; payable on top with 40% withdrawal rate • Guarantee Credit indexed to earnings for the remainder of this Parliament • Discretionary age-related payments and winter fuel payments • Help with housing costs and local taxes for those on low incomes

7. Composition of State Income for a Single Male Retiring in 2004 £250 £200 £150 State Income in Retirement £100 £50 £0 £100 £130 £160 £190 £220 £250 £280 £310 £340 £370 £400 £430 £460 £490 £520 £550 £580 £610 £640 £670 £700 £730 £760 £790 £820 £850 Savings Credit Gross Weekly Income whilst in Employment Guarantee Credit Figures in 2003 earnings terms Additional State Pension GRB Basic State Pension

8. Private Pensions

9. Private (Occupational and Personal) Pensions • Tax privileged saving into: • Occupational pensions: Established by employers: DB/DC/Hybrids • 1988: Personal pensions introduced, principally provided by insurance companies • 2001: Stakeholder pensions introduced as simple, low-cost option for moderate earners • Overlap with state scheme through contracting out • Requirement to annuitise

10. Pension Sustainability and Adequacy

11. Today’s Pensioners • Men retiring on final salary pensions, or were paying into SERPs when accrual rates were at their peak • Unequal distribution of increases in income between 1979 to 1997 • Situation for women not as good • Nearly 2 million pensioners lifted out of absolute poverty since 1997

12. The Ageing Society Old age dependency ratio (over 65s : 20-64 year olds) will rise significantly over next 3 decades x X 2005

13. Pension Spending by the State Other pension benefits comprise Winter Fuel Payments, other age-related payments, Over 75s TV Licences and Christmas Bonus Source: DWP Long term benefit expenditure tables

14. Active Members of Occupational Pension Schemes: by Sector millions

15. Private Pension Participation • Occupational pension membership in decline: 12.2 m in 1967, 9.8 m today • Expansion of personal pension participation, but product suitability? • Stakeholder pensions have dramatically increased coverage to 92% of the workforce, but not participation

16. Employment declines after 50

17. Reasons for Reform • Driven by concerns about adequacy not sustainability • Pension income flowing to normal age retirees will rise from 9.1 per cent to 10.8 per cent by 2050 (Pensions Commission) • Poorer pensioners or significantly higher average retirement ages

18. Pension Reform

19. Recent Action • Pensions Commission established in 2002 • Pensions Act 2004 • Intended to provide more security in occupational pensions • Pensions Protection Fund • Pensions Regulator • Finance Act 2004 • Simplification of tax regime for pensions • Informed Choice programme

20. Pension Reform: Five Government Tests • Does it promote personal responsibility? • Enabling all to provide for themselves • Is it fair? • Protect the poorest, fair to women and carers, those who have saved • Is it affordable? • Is it simple? • Clear deal between citizens and state • Is it sustainable? • Basis of an enduring national consensus

21. Pensions Commission’s ‘Choices’: First Report • Relatively poorer pensioners, &/or • Save more, &/or • Work longer, &/or • Higher % of taxes to pensioners

22. Pensions Commission Second Report: The Short Version • Auto-enrolment in national system of personal accounts • Mandatory matching employer contributions (3% of salary) • Erosion of state role in earnings replacement • Basic state pension indexing linked to earnings from 2010 • Gradual long-term increase in state pension age in line with rising life expectancy (66 by 2030, 68 by 2050)

23. Responses to Reform

24. Pensions Commission Report: Government Response • Welcomes broad framework of proposals and options • Much to be discussed and decided on in detail • Nothing ruled in or out • Response to five key tests • National Pensions Debate to step up: • Was focusing on diagnosis and generating ideas • Now debate and test those ideas • Talking to people across society • And with key stakeholder groups • Intend to produce government proposals in Spring

25. There will be a proper basic state pension; and alongside it, because, in the modern world the state cannot provide it all, a simple easy way for people to save and to reap the rewards of their savings Prime Minister - Labour Party Conference 2005 My view is that some increase in the state pension age from 2020 is now inevitable John Hutton, Secretary of State for Work and Pensions, February 2006

26. Other Responses • Widespread agreement that there is a problem • Less agreement on the solution • Public seem reluctant to accept the hard choices: retirement age and tax increases

27. UK Pensions and Pensions Reform Presentation by Alex Beer Senior Work, Pensions and Education Adviser British Embassy alex.beer@fco.gov.uk

28. BSP entitlement of newly-retired men and women