David Gauke's speech to the Westminster and City annuities and drawdown conference
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Financial Secretary to the Treasury gives an overview of the government's pension reforms.
Good morning – and thank you, for that introduction.
I’m delighted to have been invited to speak at this conference.
Pensions is a topic that’s incredibly important to people.
As we live in a society where, every year, life expectancy creeps upwards, it is only right that pensions keep up with those changes. So having the right regime for pensions will only get more important in the future.
We are a government that believes in personal responsibility.
I think if you work hard, if you’ve saved all your life, then it’s right that you have responsibility to manage the money you’ve earned as you best see fit.
Again, I think it’s right that people should have far greater choices regarding how they use their pension pots. Because practically every day on the news we see stories which prove that there is no such thing as a typical retirement.
You have “pensioners” driving 550,000 miles round the world in a 1988 Mercedes.
You have “pensioners” working well into their nineties – like some of my colleagues over in the House of Lords.
And just last week we had the story of the woman in Saratoga, over in the States, who celebrated her 100th birthday by going skydiving.
So people want choice, they want freedom, they want flexibility, but – we shouldn’t forget this – they also need security. Not least because as people live longer, the prevalence of age-related illnesses is also rising. An ageing population brings with it challenges, too.
So the question we ask ourselves is: how can government and business work together to create the right pensions for the 21st century?
I see my role as a politician as creating the right conditions for that and allowing you, the market, to be able to respond accordingly.
During this Parliament, we’ve set out a comprehensive package of reforms to help people in their retirement.
And I’d like to spend a short time today talking about those reforms, because they are highly relevant to the topic I was invited to discuss – the flexibility reforms announced by the Chancellor at the Budget earlier this year.
I’d also like to talk about how I see the differing roles for government and industry in getting these reforms right for pension savers, and how we can work together to ensure people have the right options open to them when they retire.
Our starting point has been a very simple one: creating security in retirement.
When the state pension was introduced in 1908, only one in four people could expect to live long enough to “enjoy” it.
Today, by contrast, the average length of retirement is almost a quarter of a century. And retirement is more active than it’s ever been. As my colleague Andrea Leadsom likes to say, everyone has their own retirement journey.
So over the past five years, we’ve significantly improved the state support on offer to pensioners.
From April 2016, the new state pension will give people certainty about what they can expect from the state during their retirement, reducing the likelihood they will require means-tested benefits.
The triple lock, introduced at the beginning of Parliament, ensures that increases to the basic state pension will not be outstripped by earnings, growth or inflation.
This means that pensioners are now £440 per year better off than they would have been had the state pension only been increased by average earnings since 2011.
We’ve also carried out a great deal of work to boost the culture of people saving privately for their retirement.
Automatic enrolment, introduced just over two years ago, gives all employers a duty to enrol their employees into a pension scheme.
As a direct result of this, four million more people are now saving into a pension.
By the time the programme is fully rolled out in 2016, up to 9 million people will be newly saving for their retirement.
This radical reform will increase the amount being saved in workplace pensions by around £11 billion per year.
Automatic enrolment will ensure that individuals have the opportunity to save into a pension and are supported to do so.
But we also need to make sure that when they come to access those savings, they get a fair deal – that they can use those savings in the most appropriate way for their personal circumstances.
And that brings me neatly onto the rationale for the government’s radical flexibility reforms: giving people real freedom and choice in how they use their pensions.
That means making changes to legislation.
It means allowing industry the freedom to create products which are right for them.
And it of course also means ensuring the provision of free and impartial guidance.
One of the biggest financial decisions people will ever make is how to secure an income for themselves in retirement. But since the early 1920s, the tax rules have severely constrained that choice for most people.
We have always maintained it is unfair that people should be encouraged to save but not allowed a choice about what to do with those savings.
It is inappropriate and counter-productive for the state to attempt to force a ‘one size fits all’ solution on people.
So we have taken significant steps to introduce greater flexibility and choice in pensions.
In 2011, we removed the requirement to annuitise by age 75 and introduced flexible drawdown, allowing people who could demonstrate a secure retirement income of over £20,000 to access the rest of their savings as they wished.
And, as announced at Budget earlier this year, we are now going further.
From April 2015, the tax rules will allow everyone with a defined contribution pension to access their savings as they like during their retirement.
We are putting these reforms in place because we believe they are the right thing to do – that it is fair that people can make their own decisions about their own money. And we also hope that they will initiate a culture change.
For years, we – and by “we”, I mean both policymakers and industry – have been scratching our heads over people’s lack of engagement with retirement.
Well – what was there to engage with? Like a Soviet restaurant, just a narrow range of very similar choices.
So we have geared these reforms, alongside the guidance guarantee allowing people access to impartial guidance, to re-engage people with their pensions and transform the culture of savings.
In fact, the National Association of Pension Funds found in their spring workplace survey that 28% of workers were more likely to save into a pension following our Budget announcements, with young people and those on lower incomes the most likely to do so.
This is really encouraging news. It lends support to the idea that interest in pension savings has been undermined by a lack of choice.
Our reforms are addressing that.
The support for the principle of these reforms has been considerable.
And if, as we hope, these reforms increase people’s attraction to saving and their engagement with the options available, they will present a serious opportunity for both government and industry to transform the culture of pension savings.
Of course, none of this is simple. It is not possible to reverse years of disengagement overnight.
To build confidence in the system, we must work together to create an environment in which people are able to make the decisions that are right for them.
And I want to talk a little now about how government and industry can work together to meet that goal.
I’m quite clear that a key part of the government’s role is to maintain the conversation with experts from the industry.
Our reforms will deliver a framework to allow savers the opportunity to make their own decisions – but the pensions and insurance industries are the vital link between the government and savers.
Without that link, people will not be able to achieve the retirement outcomes they want with the money they’ve saved over their working lives. So we have listened to you.
We consulted extensively on the implementation of the flexibility reforms. The 12-week consultation Freedom and Choice in Pensions received hundreds of responses. Our officials worked closely with a number of industry experts to develop the right solutions to the questions posed in the consultation.
We responded to the consultation in late July – and shortly afterwards in August, HMRC published the draft tax legislation, which set out the proposed new tax framework, for technical consultation.
We’re making good progress in delivering these legislative changes.
The Taxation of Pensions Bill is currently at Committee Stage in the House of Commons.
And the Pension Schemes Bill, which delivers the regulatory changes needed to give effect to the reforms, including the guidance guarantee, has just completed Committee stage.
The tax Bill includes a number of changes designed to free up innovation in the retirement income market – including allowing annuities to decrease, and removing the ten year upper limit on guarantee periods for annuities.
These changes, among others, were the result of extensive consultation with industry. The aim is that in the longer term, they will result in new products tailored to customers’ changing needs in retirement.
In addition to the progress the government is making with legislation, I know – and welcome – that there is an incredible amount of work going on across the industry to get ready for next April.
I am relaxed about the fact that there is much that the industry can do which we cannot – and a lot that you know which, frankly, we don’t.
So please continue the dialogue with us. Having industry insights available to us is what makes it possible for government to make reforms on this scale in the confidence that they will be a success.
The industry knows its customers best. That allows you to play an important role in designing the detail of a system that really works.
Your customers will be relying on that system to deliver choice and flexibility.
While we, in consultation with industry, have designed the overall tax framework, we are aware that there is a lot more that sits beneath that, in terms of systems, in terms of products, in terms of how the new flexibilities actually work from the perspective of the people using them.
So we have designed these changes to allow you much more freedom to create new products and processes that fit with the demands of customers and the changing nature of retirement.
I see the industry’s main role as taking the new flexible framework and using it to create a new system which delivers what consumers want.
Some of this will be about new products.
Some will be about the adaptation of existing products.
And some will be about the way in which industry talks to its customers.
And all of it should be about increasing choice and engagement in one of the most important financial decisions a person will ever make.
It was the Finance Act of 1921 which put in place the basis of the current restrictive policy towards the use of tax-relieved pension savings, by introducing “the mandatory annuitisation of pension funds”.
I would like to think that things have changed sufficiently since 1921 – in terms of life expectancy, the labour market, and private pension provision in the UK – to merit a change in the way we treat the savings of people who, during their working lives, have put money aside for their retirement.
I am excited – not just about the new options opening up to people as they reach retirement age, but about the opportunity this creates for your businesses: to add a new kind of competition to the market that is shaped by peoples’ needs and desires.
I hope you will rise to that challenge, keep developing the new system with the changing needs of your customers in mind, and meet their aspirations for what are, for many, their best years.
Many thanks for your time – and I’m very happy to answer questions.