UK Pension Reforms since 2005

1. UK Pension Reforms since 2005 Professor David Blake Pensions Institute Cass Business School d.blake@city.ac.uk

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

3. Background to Pensions Commission Report

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

8. 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

11. 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

17. Conclusions

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)