I’d like to thank Age UK for the invitation to speak to you today.
I want to use this opportunity to be absolutely clear about my priorities for the pension system.
When we came into office we were faced with the challenge of securing the incomes of today’s pensioners.
We acted immediately to introduce the triple guarantee, meaning that someone retiring today on a full basic state pension will receive £15,000 more over their retirement by way of basic State Pension than they would have done under the old prices link.
We also committed to a permanent increase in Cold Weather Payments.
And we protected other key areas of support for pensioners, including free eye tests, free prescription charges and free TV licenses for the over 75s.
Having put incomes on a firmer footing, we moved to secure older people’s rights to work.
We are phasing out the Default Retirement Age from April of this year, despite concerns from some in the business community.
I believe this sends out a message that age discrimination has no place in modern British society.
I’m proud to say that we fought for these reforms against the backdrop of the worst fiscal position in living memory.
Our public debt alone is the equivalent of over £14,000 for every man, woman and child.
We’ve had to take tough decisions, but I believe that we have managed to protect the areas that matter most to today’s pensioners.
And I should use this opportunity to pay tribute to my colleague Steve Webb, Minister of State for Pensions, whose work since we entered office has been nothing short of remarkable.
It is a real privilege to work closely with someone who is so passionate about pensions and the issues facing older people in this country.
Of course we cannot be complacent.
There is always more to be done to help the poorest in retirement.
However, having worked to put incomes and rights for today’s pensioners on a firmer footing, we must also turn our focus to the next generation.
The challenge is immense.
A diminishing group of younger workers will have to work longer just to help fund the pension promises made to their parents, even before they invest in their own future.
The comparison with previous generations is stark.
When the State Pension Age was set back in 1926 there were around nine people of working age for every pensioner.
Today, there are only three people working for every pensioner, and by the second half of the century it will be down to nearly two.
For the first time in more than 30 years our children are expected to have retirement incomes which will fail to keep up with average earnings in the rest of the economy - **despite **our decision torestore the earnings link in the State Pension.
This is our children’s legacy - unfunded obligations and insecurity in private pensions.
Few will be able to look forward to a guaranteed income in retirement.
The numbers saving in Defined Benefit pensions in the private sector have more than halved in the last 20 years and have been on an inexorable downward trend.
There are currently only one million active members in open private sector Defined Benefit schemes, down from five million members in the mid 1990s.
But, because the numbers in Defined Contribution schemes have so far failed to take up the slack, fewer people than ever are saving in any form of scheme at all.
Indeed, less than half **of the entire working age population **is currently saving in a pension.
Even those who are saving face an uncertain retirement.
This is because contribution rates are weak, and annuity rates have fallen significantly since the late 1990s.
They can only be expected to fall further as life expectancy increases.
And the next generation will not be able to rely on bricks and mortar in the way their parents have been able to.
While 70% of today’s pensioners own their homes outright, their grandchildren are struggling to even get a foot on the housing ladder.
The average cost of property for a first-time buyer has increased by 40% in real terms in the last decade.
It’s no wonder our children are increasingly cynical about saving.
And they won’t be able to afford a stable and secure retirement unless we do something radically different.
Acting in the long term
So it is absolutely imperative that we take steps to secure the position of the next generation.
It would be easy to shirk our responsibilities.
But what will we say to the next generation if we don’t act now?
That it was too difficult?
That there were no votes in securing our childrens’ pensions?
That attitude must be consigned to history.
Otherwise we will bear responsibility for the burdens on our children.
Surely we have to act now to secure their future?
Parallels to welfare reform
But this challenge isn’t unique.
After all, this is, in many ways, the challenge that confronted us when we looked at welfare reform.
We could have continued with the short term option - increasing child welfare payments at budget after budget and triumphantly announcing the number of children we had pushed just over the poverty line.
But we knew that if we were going to make a real difference to people’s lives - transforming them rather than just maintaining them - we had to tackle the problem at its roots.
In welfare this meant simplification of the system.
And it meant getting rid of the perverse incentives which rewarded the wrong choices and meant that work didn’t pay.
The challenge in pensions is exactly the same.
We have to fundamentally simplify the system.
And we have to make it crystal clear to young savers that it pays to save.
We have made a start by pushing ahead with plans for auto-enrolment, building on the groundwork laid by Lord Turner back in 2005.
By providing a low-cost and dependable pension scheme for those who wouldn’t otherwise put money aside, we can start to push up savings rates and move away from a culture of debt.
This should ensure that between five and eight million people start saving or save more, and it will enable us to start the process of rebuilding confidence in private pensions.
It will also challenge other providers to look hard at their service charges, at the way they communicate information to their customers, and at the quality of the product they are providing.
Auto-enrolment is as much about cultural change as improving saving rates.
All of those who have played such an important role in the development of the existing UK pension system have to recognise that the world is changing, and they need to start working in the interests of the next generation.
They need to get their shoulders to the wheel and help make this new retirement system work.
But this alone will not be enough.
Auto-enrolment cannot solve the savings challenge on its own, and we have to be prepared to look at the other side of the equation.
We now have to look at the State Pension.
For the two go together, and what we do in one affects the other.
Just like the chaos in the benefit system, piecemeal changes to state pensions have turned what started as a relatively simple contributory system into a complex mess.
S2P, Serps, graduated retirement pension, the additional state pension - these are names designed to strike fear into the heart of a young saver and confusion in almost everyone else.
The system is so complex that most people have no idea what any of this will mean for them now and in their retirement.
And for those on the lowest incomes, the complex rules governing Pension Credit have been a barrier to claiming the money they so dearly need.
That is not to mention the demeaning nature of the means-test, which we know puts people off from making a claim, as well as acting as a disincentive to save.
Too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing.
When they reach pension age they discover that while they have foregone spending opportunities and made plans to be self-sufficient, others, who haven’t saved a penny, are able to get exactly the same income as them by claiming Pension Credit.
Think about how this could affect auto-enrolment - low income savers will rightly be frustrated if they reach retirement and find they have paid in for nothing.
Confused and uncertain, they may never even get that far, choosing instead to opt-out of saving altogether.
We have to change this.
We have to send out a clear message across both the welfare and pension systems - you will be better off in work than on benefits, and you will be better off in retirement if you save.
I seek a debate on the next generation of pension reform.
Having acted immediately to protect the incomes of today’s pensioners, we have to turn our focus towards the next generation - tomorrow’s pensioners - and start working hard to secure their future.
I want a State Pensions system fit for a 21st Century welfare system, which is easy to understand and rewards those who do the right thing and save.
My Department has been working closely with colleagues at the Treasury on options for reform.
As the Chancellor made clear late last year, he is keen to look at options for simplifying the pension system, and that is precisely what we are doing.
We have worked together on this and he has been seized of the importance of this project from the start.
The Chancellor is determined to lift the burden of debt from the shoulders of our children and our children’s children, and to enable them to pursue, at the very least, the opportunities we have been fortunate enough to avail ourselves of.
Surely we cannot let this opportunity to put right the mistakes of the past pass us by?
That is why we seek your support to get this right.
Too often we forget that this isn’t just a system for those who are currently retired, but also for those who will need it in the years ahead.
That is why, together, we must make it work not just now but down through the generations, and make sure we leave hope and stability for those generations to come.