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Pension Reform in the UK: Facing the Challenges Ahead

Pension Reform in the UK: Facing the Challenges Ahead. Georgina Hill British Embassy, Paris CICERO FOUNDATION SEMINAR 10 May 2007. Contents. The UK system Today and tomorrow: the demographic challenge UK pension reforms so far Changes ahead. Context: the UK system. State system

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Pension Reform in the UK: Facing the Challenges Ahead

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  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 4 • 2050: 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 1 2004: 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 2 • 2004: 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 3 • 2005: 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 2046 • 2006: 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. Personal Accounts: background • 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

  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? • It’s 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: www.dwp.gov.uk www.pensionscommission.org.uk

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