UK Pension Reforms since 2005 Professor David Blake Pensions Institute Cass Business School

2 Agenda Pensions Commission Report 2005: –Lord Turner Pensions Act 2007 –Reformed state pensions Pensions Act 2008 –Reformed workplace pensions

Background to Pensions Commission Report

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6 Savings gap 9.6m (46% of workforce) undersaving for retirement: –No private pension savings –or inadequate provision £57bn shortfall ABI study 2005 puts pension undersavers at 12.2m –Reason: £9000 non-mortgage debt

7 State pension provision: the unavoidable trade-off Figure Ex.6 p 17

Pensions Act 2007: Reformed state pensions

9 State pension provision Reform of state pension system to make it simpler to understand and less means tested

10 State pension provision Index Basic State Pension to earnings growth: –From some date after 2012 (TBD) Raise state pension age gradually in proportion to increase in life expectancy: –66 by 2026 –67 by 2036 –68 by 2046

Pensions Act 2008: Reformed workplace pensions

12 Private pension provision All employees above age 22 with earnings above £5,035 (in 2006 levels) to be automatically enrolled in: –a qualifying workplace pension scheme –or National Employment Savings Trust (NEST) With right to opt out Called ‘soft compulsion’

13 Private pension provision National Employment Savings Trust (NEST): –Funded national pension scheme with Personal (DC) Accounts Aims to cover 7 million workers currently without a private pension To start from 2012 Modelled in part on Swedish PPM system

14 Private pension provision Minimum default contributions set at 8% of earnings between £5,035 and £33,540 (2006 levels) Comprising: –4% paid out of individual post-tax earnings –1% paid for by tax relief –3% compulsory matching employer contribution.

15 Private pension provision Contributions invested in range of funds Default fund for those who make no selection: –Would be a target-date fund, shifting members from equities to bonds over time Funds would be bought in bulk from wholesale fund management industry

16 Private pension provision NEST would negotiate fund management mandates covering major asset classes: –between 6 and 10 With very low fees but large volumes: –Annual Management Charge of 0.3% –Plus 2% of contributions (until set-up costs of NEST recovered) –Approx = 0.5%AMC

Conclusions

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19 Conclusions The reforms go some way towards dealing with the problems of: –Increasing life expectancy –Inadequate pension savings and dependence on means-tested benefits in retirement –High charges in private sector pension provision But is it enough? ‘Europe is currently witnessing the slow-motion explosion of the most predictable economic and social time-bomb in its history’ –The Economist (25/09/2003)