1 Pension Reform in the UK: Facing the Challenges Ahead Georgina Hill British Embassy, Paris CICERO FOUNDATION SEMINAR 10 May 2007

2 Contents The UK system Today and tomorrow: the demographic challenge UK pension reforms so far Changes ahead

3 Context: the UK system State system Basic State Pension from age 65 Pension Credit: to ensure minimum income for more vulnerable pensioners - and to reward savings State Second Pension: top up income Private pensions: Defined benefit Defined contribution personal savings Voluntary system of partnership between government, individuals and business Affordable commitments

4 UK State system: foreign comparisons State pension spending remains lower than in most OECD countries Means-tested benefits remains for the least well off – more than in most other countries State system explicitly designed as foundation for private saving Long-term rise in State Pension Age similar to trend in other countries

5 The pressure for reform Demographic pressures lower birth rates + increasing longevity = ageing population 1905: 10 people of working age to support every pensioner today: only : double the current number of pensioners and each one supported by only 2 people of working age Sustainability: state funding and private provision Complex system Tackle pensioner poverty So action is needed to avoid future crisis

6 So far… step : Consultation and legislation for private pensions Restore confidence in private pensions system - Pensions Regulator - insurance system for company schemes Simplify taxation and incentives Raise awareness and understanding of financial choices Keep individuals informed of own situation Offer suitable choice of products

7 So far… step : independent Pensions Commission analysed situation and options: - accept that pensioners will become poorer - higher public expenditure, eg through taxes - save more - work longer / retire later - mix of the last 3 above? Government response and consultation - new system must: - promote personal responsibility - be fair - affordable - simple - sustainable

8 So far… step : Commission recommended action for State Pensions 1. Make state pension system into a simpler and more reliable foundation for private pension provision 2. Create new right to employer pension contributions, and low- cost pension saving scheme for all employees (Personal Accounts) 3. Increase State Pension Age in line with longevity: 68 by : Government White Paper and legislation

9 Aims of State Pension Reform A simpler and more reliable foundation for private pension provision, by uprating the Basic State Pension by earnings, rather than prices. A fairer system, with better recognition to parents and carers, by: - having a single qualifying condition: 30 years rather than 44/49 - giving weekly credit to carers A reliable safety net for the least well off, by continuing to uprate Pension Credit by earnings. An affordable and sustainable system for the long term, by increasing State Pension Age to 68 by 2046 in three steps.

10 A fairer system Many more women will get a full Basic State Pension

11 Sustainable in the long term Increase State Pension Age to 68 by 2046 in three steps Ensure people understand what is coming Keeps similar number of years in retirement Restrain growth in number of people over state pension age

12 Long term Costs (% of GDP)

13 Estimate that at least 7 million people are under-saving for retirement. Serious barriers to rational savings decisions: inertia, risk aversion and fear, myopia Financial services companies face high costs in selling pensions to those on moderate to low incomes Personal Accounts: background

14 Personal Accounts: main features All employers have to automatically enrol eligible employees (aged over 22, earning > £5,000/year) into: Either - their own workplace pensions scheme Or - personal accounts Employee can decide to opt out, but would be re-enrolled periodically Minimum employer contribution of 3% on a band of earnings, from approx £5,000 to £33,000 Run by a Non-Departmental Public Body Up and running by 2012

15 What next? Its not over yet… Implement reforms Monitor, consult, adjust Extend working life Raise awareness Reinforce 3-way partnership: government, individuals and private sector For more info: