Speech

Reinvigorating Pensions

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by the Rt Hon Iain Duncan Smith.

Introduction

Good morning, and welcome to the launch of our strategy for pensions. It is good of so many of you to come here to listen as we set out our vision for the future of pensions.

After I have spoken, Steve Webb will talk about the changes we are planning in the short and medium term.

It is an interesting thought that two days after the Budget when the media is still churning the facts surrounding the budget, When they refer to welfare they actually mean working age benefits. Yet the DWP budget is in fact largely dominated by pensions.

What happens in this area should be of great interest to everyone as it will affect us all - the young and the old - in the years ahead, at the same time.

Before that though, I want to set out why it is so important that we start a proper debate in this area - and why it is crucial that we reinvigorate pensions through radical reform.

The Case for Reform

Pension age benefits make up two thirds of my Department’s annual expenditure (AME) - about £100bn/yr.

That’s almost as much as we spend on public order, defence and transport combined.

Pensions also have a huge impact on the finances of every single person in this country - whether they are receiving or contributing.

Yet the vast majority of people are either completely disengaged or utterly baffled by pensions.

Maybe it is apathy; maybe it is remoteness in time; maybe it is the complexity; or a combination all three.

But given the impact retirement will have on us all, it is time we started to get people really thinking about what it means.

Longevity issues

Much of the challenge we face comes from increasing longevity. We are living longer and longer.

Whilst I refer to it as a challenge, it is a challenge born out of a success story of course.

Medical improvements, higher standards of living and healthier lifestyles are all increasing life expectancy.

It is great news that more families are getting to grow up with the love and support of grandparents, great-grandparents and even great-great grandparents.

However, there is no doubt this raises some fundamental questions about how the state interacts with older people - especially when so many of them are active and healthy at ages even a generation ago would have been considered impossible.

History

When the first contributory state pension was introduced back in 1926, only 34% of men and 40% of women were expected to reach 65 at all

At that time, average male life expectancy was just 64 years and 4 months.

In 1940 when we set the retirement age at 60 and 65 for men and women, life expectancy was 72.

By the mid 1980s it was 85.

And it has continued to grow.

Today it is a staggering 89 for men and 90 years for women.

Indeed, it has climbed by over a year since Lord Turner completed his review of pensions, only 6 years ago.

The trends also show that one in four boys born in the UK today can expect to live to 100, while for girls the odds are as high as one in three.

Yet despite this incredible increase in life expectancy, pension ages have remained static.

Within one lifetime a person retiring in 1940 could expect retirement to last 7 years.

Today, someone retiring would expect retirement to last almost 30 years.

That means we can expect to spend almost a third of our lives in retirement.

I’m sure that was never contemplated when the pension regime was first proposed.

That is not the only issue though, for as longevity is growing, saving levels are declining.

UK Household saving rates are among the lowest of the OECD countries.

They dipped dangerously to just 1.5% during the debt-fuelled boom of the last decade and at 5.4% still lag well behind countries such as Germany (11.4%) and France (15.2%).

Today, only around one third of private sector employees are now saving into any form of pension.

Some 7 million people are not saving enough to meet their own retirement aspirations - they will fall back onto the shoulders of the next generation in the form of higher taxes.

Too many will find themselves beyond the reach of the state, in poverty facing a bleak old age of ill health and hardship.

So if we are serious about tackling poverty; supporting the economy; and helping people to make the right decisions for themselves and their families in the long-term; then radical reform of the pensions system is a must.

Older Talents

Crucially, many people today are fit and active in their 50s, 60s, 70s, and 80s.

Lots of people have told me that they have absolutely no desire to retire at 65.

When I was chairman at the Centre for Social Justice, I regularly came across older people in charities and in the voluntary sector who were very capable and wanted to give their time and experience.

Ros Altman is right when she refers to fulfilling part-time work in retirement.

Too many told me how they had felt forced out of employment, cast aside with a wealth of skills and experience which could and should be used.

Some of them were mentoring young people and others were working with some of the hardest to help such as drug addicts. These in a sense were the lucky ones, for every one I met there were many more who languished without any fulfilling activity.

With no shortage of talent, energy and experience out there and as in the next few years, we come out of recession, we simply cannot afford to let such a pool of talent go to waste.

After all, by the early 2020s, the over-50s will make up a third of the workforce and almost half the adult population.

In the private sector, I am pleased to say that there are far-sighted companies who have spotted this and acted on what they found.

Asda, who I’m visiting later today, already have thousands of over-65s on their books.

This is a prime example of a company that recognises the value of older workers and actively recruits them.

And at the same time, the evidence shows that many older people want to work.

One recent study showed that “almost nine in ten 50 year olds… would consider taking on paid employment once they had reached retirement age in order to have a better standard of living”.

That doesn’t surprise me one bit.

Most people recognise that working is good:

  • it’s good for their health
  • it’s good for their standard of life
  • it’s good for their pensions
  • and it’s good for their families.

Our figures show that working a single year beyond the current State Pension Age and deferring your pension can increase retirement salary by between 3% and 10%.

Just as importantly, working longer is also good for the economy.

If we can extend the effective working life of the country by just one year, it is forecast to increase GDP by 1% - that is around £13bn. Imagine that in the light of the budget two days ago.

Working Longer

If people are going to live longer, healthier lives, then we need to have a serious debate about both affordability and retirement income.

Undoubtedly, that will mean working longer.

But for many people this will be a positive thing.

People shouldn’t be forced to retire when they don’t want to.

By contributing responsibly and working for longer, people will benefit directly from a better quality of life and a better standard of living when they choose to retire.

I believe that the country is ready to face up to the challenges and make this happen.

Key measures we are rolling out:

1)Triple Guarantee**

As the Chancellor announced, we are phasing out the Default Retirement Age.

More immediately, we are also re-establishing the link between earnings and the Basic State Pension.

From April next year, the “triple guarantee” means that the basic pension will rise by the higher of earnings, prices or 2.5%.

This is generous at a time when the Government is under so much pressure to get the country’s finances in order, but I believe it is extremely important.

The triple guarantee will stop the erosion in the value of the basic state pension.

However, it also provides a basic foundation for people to build up their own provisions in the future.

2) Reviews

And that takes me on to my next point.

To reinvigorate saving, we will also work toward a simpler, fairer and more efficient private pension system.

As part of that, we will review how to make auto-enrolment work as Steve Webb will explain in a moment.

At the same time, we are already on the path to equalising the State Pension Age for men and women.

And we are also planning to review the date at which the state pension age starts to rise to 66.

This reflects a more general trend across the world, where countries such as The Netherlands, Germany, Denmark and Australia are all taking similar action.

But we also have to think about the pace of change as we move beyond 66.

At present, there are plans in place to raise the age to 68 by 2046. But if we want to be fair to next generation of taxpayers - and be realistic about increasing longevity - then we need to have a serious debate about how far and how fast we move forward.

Conclusion

This is the start, but it underlines our commitment to radical reform.

This is the only responsible course of action:

  • putting in the building blocks for a more generous Basic State Pension
  • reinvigorating the private pension landscape through auto-enrolment to help people save for a decent retirement salary
  • and taking a pragmatic approach to a pensions system that matches simplicity and risk with cost-effectiveness and value for money for the taxpayer.

The mission of this government is to reform the pension system to better balance work and retirement so that we as a society benefit both young and old.

As we save more and retire later government will be able to ensure a more stable and improved retirement income. It is a deal to deliver fairness and encourage people to take responsibility for themselves and their families.