With permission, Mr Speaker, I would like to make a statement setting out the government’s strategy for future pension provision in the light of the Chancellor’s bold and radical reform proposals announced in the Budget statement yesterday.
Our first priority has been to do the right thing by people who have already retired – people who have spent a lifetime paying in to the system and who now have a right to expect a decent income in retirement. That is why one of the first measures taken by this coalition government was to implement the triple lock policy, which ensures that the basic State Pension increases each year by the highest of the growth in earnings or prices, with a minimum increase of 2.5%. As a result of this policy, the basic State Pension is now a higher share of the average wage than at any time in the past 2 decades. But we also need a system that works for tomorrow’s pensioners. That is why we have introduced the single-tier State Pension. This will provide a simple, single, decent State Pension, set above the level of the basic means test, so that working people will know what they will get in retirement from the state and can plan accordingly.
We also needed to reverse the decades-long decline in workplace pension provision. With barely 1 worker in 3 in the private sector building up any pension provision at all, urgent action was required. That is why in 2012 we began the process of automatically enrolling more than 10 million people into workplace pensions. That programme has been a stunning success. Last week, we announced that over 3 million workers have already been automatically enrolled. Only about 1 in 10 workers is exercising their right to opt out of the scheme, as most realise that the combination of an employer contribution and tax relief from the government make this a very attractive proposition. Figures published at the end of last week for April 2013 showed the biggest rise in workplace pension coverage since figures began in 1997, and we expect the figures for 2014 to show a much bigger increase.
We need to make sure that these pension savings are invested in value-for-money schemes that are well governed, and we plan to publish next week measures to deliver this policy goal. We will also ensure that individuals do not build up multiple stranded small pension pots but that their pensions follow them when they change jobs so that they build up a worthwhile sum in their current scheme. In addition, we will create a new ‘defined ambition’ framework for workplace pensions, enabling new forms of risk sharing between employers and employees.
Having ensured that the vast majority of workers build up a worthwhile pension pot on top of a simplified State Pension, we now have a new opportunity to think about the choices people have in retirement. In the past, retirement was often a relatively short period of time, and the priority for most was to turn their pension savings into a regular income for as long as they lived. But in a world where people will routinely live for 25 years in retirement, we need to think more creatively and give people new options about what they will do with their own money. In the past, governments were concerned that if people had freedom over their pension pots, they would run them down too quickly and then depend on state support in later life. The single-tier pension provides a game-changing opportunity to rethink this model. With people receiving a full single-tier pension already clear of the basic means test, the state need be much less prescriptive about how people use their accumulated pension savings.
That is why the government have announced a plan for radical liberalisation of the retirement savings market with effect from April 2015. Gone will be the detailed rules on how quickly people can turn their pension pot into annual income. Instead, for the first time, we will treat people as adults, giving them the flexibility to choose how best to use their hard-earned savings in the way that suits their personal circumstances. People will still be free to take a tax-free lump sum and turn the balance of their pension pot into an annuity, providing a guaranteed income for life, but they will also be able to withdraw the whole of their pension pot as cash to spend as they see fit, subject only to taxation on the balance in excess of the tax-free lump sum. Or they can decide to allow their money to go on growing, drawing cash as and when they wish, perhaps as part of a phased retirement – something that we have talked about for years and are now delivering. By lifting the rules, we anticipate that industry will respond with new products that meet consumers’ income needs in new and innovative ways.
These reforms will increase the attractiveness of saving for retirement, and will allow people to shape their finances in retirement as they see fit, not as the government tell them. To support people in making good choices we will introduce a guidance guarantee – a legal requirement on pension schemes to offer all scheme members a conversation about their options with someone who is impartial. This may lead them to take full independent financial advice, or it may enable them to make informed choices without further advice. As a down payment on these increased flexibilities, we will dramatically relax the rules on turning small pension pots into cash and the rules on existing drawdown products with effect from 27 March.
We anticipate that annuities will continue to be an important part of retirement provision and the FCA will continue with its review of the workings of the annuity market, to ensure that consumers get maximum value for money from their hard-earned pension savings. But we also expect that our reforms will pave the way for new financial products which will give people new freedoms over how they turn their retirement savings into quality of life in retirement, as well as potentially link to options for funding the long-term costs of social care.
The pensions system that was inherited by this coalition government was broken. Declining coverage of workplace pensions and a declining basic State Pension meant that mass means-testing had become the order of the day. We were determined to reverse that spiral of decline. We have done the right thing by today’s pensioners by starting to restore the real value of the State Pension through the triple lock. We have reformed the State Pension to provide a simple, decent foundation for retirement saving and have implemented automatic enrolment, leading already to millions more in workplace pensions. And now we have ripped up the red tape that prevented people in retirement from making their own choices about how they want to spend their own pension pot. This is truly a pensions revolution, and I commend this strategy to the House.
Read the freedom and choice in pensions consultation.