Pension reform in the UK: Challenges, choices and progress

Transcription

1 Pension reform in the UK: Challenges, choices and progress John Hills Centre for Analysis of Social Exclusion, London School of Economics and UK Pensions Commission European Centre for Social Welfare Policy and Research, Vienna, 2 March 2007

2 Increasing life expectancy: Cohort Life Expectancy at age 65: Women

3 Past fertility declines: The baby boom and the old-age dependency ratio

4 The inescapable trade-off Faced with ageing population result in any country must be some combination of: Poorer pensioners relative to rest of population Greater savings for retirement Later retirement ages Higher taxes/nics devoted to pensions

5 Poorer pensioners? Median income of 65+ as % of those under 65, Percentage IRL GR FI BE UK PT AT SP SW EU15 FR GE IT LU NL

6 Greater savings? Impact of DB-DC shift on pension saving as % of GDP

7 Later retirement? Trends in mean age of retirement in UK

8 Statutory pension and effective retirement ages, (OECD data) Japan Iceland USA Sweden UK Italy Germany Austria France Hungary Men Statutory Effective Women Statutory Effective

9 Higher taxes? Public spending on pensioners as % of GDP: previous plans

10 EU projections of public pensions spending, (% GDP) Change UK Spain Sweden Germany France Austria Italy EU Source: European Union (2006: Table 3-4)

11 Pensions Commission proposed role for state in the UK Ensure that all people are kept out of poverty in retirement Encourage people to achieve at least a base load of earnings-related pension provision Enable all people to save for a pension at low cost

12 Pensions Commission Proposals Low cost National Pension Savings Scheme, with employees automatically enrolled into this or good quality existing employer schemes. Right to opt out and to make additional contributions Under-pinned by less means-tested, more universal, flat-rate state pension, facing reality of need for pension ages to rise with life expectancy Facilitate later/ more flexible retirement

13 Proposals for state system Accelerate evolution of the current two-tier state system so both parts are flat-rate, with values indexed to average earnings (at present basic pension only increases with prices). Limit spread of means-testing, so that savings are clearly worthwhile (especially with matching from employers). If nothing changes: 75% of pensioners end up on means test; under Commission s proposals this falls to 35% (from 40% now). Trade-off between State Pension Age and longterm level of public spending depending on how fast state pension age rises from 65 after 2020.

14 Cost of Commission s option with different pension ages 8.5% Preferred option (SPA 67 by 2050) 8.0% 7.5% 7.0% Preferred option (SPA 69 by 2050) 6.5% 6.0% 5.5% Pensions Commission preferred option (if SPA 68 by 2050) Proposed range for debate Current indexation continues indefinitely (SPA 65 after 2020)

15 National Pension Savings Scheme Minimum default contributions set at about 8% of earnings between tax threshold and upper limit 4% from employee s net pay 1% from tax relief 3% compulsory employer matching contribution (overall net cost about 0.6% of labour costs) Additional contributions allowed up to twice this amount for median earner Funds invested on individual s instructions, generally in funds bulk-bought at low cost, including default and low-risk gilt funds.

16 Potential pension income as % of earnings for median earner: at point of retirement in 2053

17 From report to legislation Commission recommendations published in November Treasury leaks question affordability, but PM and Pensions Secretary say basic framework right. National Pensions Day consultation in March 2006 shows strong public support for basic proposals and principles Opposition parties back most of main ideas Pensions and insurance bodies propose alternatives to NPSS involving enrolment into competing private schemes. Debate between risk of creating a large new institution versus problems with competing providers of potential cost escalation Press reports tense negotiations between Prime Minister Blair and Chancellor (Finance Minister), Brown, April- May 2006, but May White Paper accepts main recommendations

18 National Pensions Day: Support for the four options (points from 10) Pensioners becoming relatively poorer Greater share of tax spent on pensions Saving more Increase in average retirement age 2.1

19 The 2006 White Papers and current Pensions Bill Based on basic framework of Commission proposals Value of basic pension to rise with earnings from 2012 (not 2010), subject to affordability State second pension to become flat rate as proposed by Commission Reforms to improve women s state pension entitlement from 2010 (but still contributory ) State pension age to rise to 66 by 2026 and 68 by 2046 (top end of Commission s range) System of personal accounts with automatic enrolment from 2012, using NPSS model. Pensions Bill going through Parliament with all-party support on key issues.

20 Is the UK debate over? Idea of increased state pension ages after 2024 accepted but does consensus and lack of controversy mean that public memory of this will fade? UK system will still involve significant means-testing will it be safe to automatically enrol people? Will funded provision fall back to the minimum default level which generates relatively low replacement rates? While reforms are put in place, funded occupational pension provision is rapidly declining. Can the gap be filled? Will it be possible to persuade people that it is safe to save following events that have eroded public trust in pensions? Is UK experience relevant elsewhere, given peculiarities of UK starting point?