Speech to the Resolution Foundation, 29 May 2014
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Thank you all for coming and my thanks also to Vidhya and the Resolution Foundation for hosting us today.
In a speech gave earlier this year on the Labour Party’s approach to social security reform, I said that our starting point was Labour’s history as the party of work and our founding belief in the dignity of labour.
These are the values that inform our emphasis on enabling and rewarding contribution in our economy and our social security system.
Ensuring that those who can work are in work, ensuring that work always pays, and ensuring our social security system rewards responsibility and contribution.
These are essential elements in our ambition to rebuild Britain as One Nation - a country in which everyone plays their part, and everyone has a stake.
Nowhere are these values more important than in the area of retirement and pension provision.
We want to build a Britain where those who work hard and play their part can do so in the knowledge that they have a secure and comfortable retirement ahead of them. Where they have a realistic opportunity to set money aside and save for the future.
And a realistic hope that if they do so their responsibility will be rewarded with the dignity that comes with having financial assets of your own and being able to secure a decent income in retirement
That’s the goal I think we should be moving towards but under this government, unfortunately, it seems to be receding.
The challenge faced by many today in making adequate provision for their future retirement is one of the less noticed but most far reaching dimensions of today’s cost of living crisis and a deep source of that sense of insecurity and fear for the future that so many people now feel.
Despite George Osborne billing his latest Budget as a “budget for savers” the small print of his statement revealed that the savings ratio is falling and set to fall further from just under 5 per cent in 2013 to 4 per cent in 2014 and a further fall to around 3 per cent by the end of the decade.
Working people - squeezed between the soaring cost of living, and wages that have fallen an average £1,600 in real terms since David Cameron became Prime Minister are finding it harder to put money aside.
Take a couple I met in Leeds last week.
The mum had gone part time so she could do more to help her elderly parents while the father ran his own business.
Neither were saving for a pension and didn’t know how they could afford to at the moment.
They hoped their house would be their pension. They worried for their own children too.
They hoped they would both go to university but wondered how they’d ever pay back the fees, buy a house and build up a pension themselves.
Today worries like these are more and more widespread but I don’t believe we need to accept this as inevitable.
Britain can do better than this
But turning it around means taking seriously a number of key tasks.
It means doing more to help working people currently stuck in low paid or irregular work, who struggle to pay the monthly rent and bills, let alone set money aside for a pension.
It means finding ways of including women who find it particularly hard to build up savings over their working lifetime, because of lower earnings and broken employment records.
And it means answering the fears of people in what would traditionally be seen as middle class occupations who nevertheless feel that the system is increasingly rigged against them, and that decent, reliable pensions are becoming a thing of the past.
Retirement should be something to look forward to, not something to fear.
And helping more people to save for their future, while giving them confidence that they will get a decent return on those savings, is a critical part of how we restore the link between working hard and doing well and build a Britain in which everyone feels they have a stake in the country’s wealth and prosperity.
The Labour Party has been setting out practical policies that can turn this vision into reality in the twenty-first century and today I am going to talk about the important part that pension reform has to play in that.
We should be proud in the Labour Party that we have been at the forefront of responding to these challenges, and the wider challenge posed by an ageing population.
In 1997 we inherited a crisis of pensioner poverty resulting from the decline of the value of the state pension under the Tories in the 1980s and 1990s; and a crisis of trust in private pension provision following the mis-selling scandals that Tory reforms had opened the way to.
We also faced rapidly declining coverage of final salary occupational schemes
- and the shocking situation where workers could lose all their savings where company schemes went bust.
We took early action to lift over a million pensioners out of poverty.
We built a robust regulatory architecture to protect people’s savings including the Pension Protection Fund so never again could you lose your job and all your pension savings too.
And we set in motion the revolution in workplace saving that is now underway, informed by the recommendations of Lord Turner’s Pension Commission.
This resulted in a universal state pension, its value protected by the “triple lock”, made affordable by an increase in the state pension age as people live longer, combined with an innovative system of auto-enrolment into workplace pension saving, backed by an affordable public savings platform - NEST, that is now helping millions of workers on modest incomes contribute to a second tier personal pension.
But we all know there is much more to do if we want everyone, especially workers on low and modest incomes, to have a fair opportunity to achieve a secure income in retirement.
Today I want to set out what I see as the two key challenges for pensions policy now.
First, ensuring that everyone is able to save, and second, making sure that all savers can get value for money from those savings.
On the first question it is clear that if we want to give more people an opportunity to contribute and build up a stake in our country’s future, as well as reduce future reliance of retired people on means-tested benefits, then we have to make it easier for those in low paid and irregular work to save.
Of course, the most important way of addressing this is by improving wages, tackling insecurity and improving progression for those at the toughest end of our labour market.
Over the past few weeks and month’s you’ve seen the Labour Party set out our agenda to deal with this.
From strengthening the minimum wage, extending free childcare for working parents, and cracking down on the abuse of zero hours contracts, to securing the investment we need to see in our country’s skills, infrastructure and the new growth industries that can create more high quality, decently paid jobs of the future.
An important aspect of helping more people earn and save enough to provide for their retirement is securing the right opportunities and support for older workers.
That’s why we’ve said we want to improve the support that Jobcentres provide to over-50s who have been made redundant and need to retrain
It’s also why Andy Burnham and Liz Kendall have made it a priority to tackle the crisis in adult social care that has worsened under the Tories, and is a primary reason why women in particular often reduce their hours or drop out of the labour market before they reach state pension age.
But we also need to do more to help those whose earnings are low, or who work part time or in more than one job, do what they can to save for their future.
The system of auto-enrolment established by the last Labour government was a huge step forward in addressing this.
And so of course it is good news that the current government is now rolling it out.
But in a critical respect they are significantly reducing the scope and impact of auto enrolment
When the Pensions Commission made its proposals, it said that people should be automatically enrolled into a workplace pension once they were earning enough to be part of the National Insurance system.
This was a consensus position arrived at by Adair Turner as former Director General of the CBI, supported by employers, trade unions, pension providers and pensioner organisations.
But this government have been unpicking this consensus in various ways.
One way is by raising the qualifying threshold to £10,000, meaning that workers have to earn over £4,000 more in order to be automatically included.
The result is a growing gap in the coverage of auto-enrolment and a significant compromise to the system’s inclusiveness and integrity.
It means that 1.5 million workers are being left out – a fall of around 10 per cent in the number of people the scheme was intended to cover
- carving out from the system a large number of low paid and part time workers and those doing more than one job – precisely those whom the system was originally intended to help.
So at the same time as presiding over a labour market characterised by increasing insecurity, flat or falling real wages, and more and more people stuck on low pay or part time work this government withdrawing support from those who are at the sharpest end of it.
We now have over a million people working in zero hours contracts, and 1.4 million working part time who want full time jobs.
And the difficulty they face in saving for a pension is one of the reasons that the cost-of-living crisis today risks continuing into retirement.
Significantly, and unsurprisingly, the majority of those who have been cut out of the system as a result of the government’s decisions – at the latest count, 70 per cent – are women.
It’s another instance of the government failing one of the key tests that the Pensions Commission set, that our system of pensions provision should work for women as well as men.
We saw women short-changed as a result of the government’s changes to the state pension age as well with 33,000 women facing a delay in their pension age of 2 years, with just 6 years to prepare, though with our campaign on this issue when I was shadow pensions minister, we were able to ensure that no one would have to wait more than eighteen months to get their state pension
And women are also the main losers from the current rules on qualification for the full state pension that mean those with more than one job paying below the Lower Earnings Limit for National Insurance are excluded even if their total earnings exceed the limit.
So, you can qualify for the state pension if you are on unemployment benefits or taking time out to care for children but not if you are juggling multiple low paid jobs
In today’s labour market all too many people are juggling multiple “mini jobs”, most of them very low paid, which is why Labour have supported the calls from Baroness Hollis for the government to look again at this issue.
The government’s roll back of auto-enrolment’s coverage is yet another way in which they are letting low paid women a drip, drip of policies that are making life harder for women paying the highest price for their policy choices and bearing the brunt of their failure to get our economy working for everyone.
When it comes to the auto-enrolment threshold, the government say that people with low earnings would save too little for it to be worthwhile and this is the basis of Steve Webb’s argument today that joining a workplace pension scheme “would not be the right option” for people in this position.
I have to say it is quite a state of affairs when we have a pensions minister who says that 1.5 million low paid workers should not be saving for a pension.
The clear conclusion of the Turner Commission was that these workers should be included.
That view was supported by employers, unions, pensions experts and all major political parties at the time.
It is entirely disingenuous of the government to pretend that it is now breaking with that consensus out of concern for these workers’ future.
Not only will they miss out on employer contributions if they are excluded.
The government’s own acceleration of the timetable for introducing the single tier pension, and the very flexibilities at has announced for how people can access their savings, mean these workers stand to benefit even more from being part of a workplace scheme.
When he was in opposition Steve Webb used to be a strong advocate of better pensions for women. But since getting into government he has increased women’s state pension age, excluded low paid women from auto enrolment and made it harder for low paid women to get full entitlement to the basic state pension.
Frankly, if Steve Webb’s answer to the cost of living crisis and the growing number of people stuck in low paid or part time work is for these people to stop saving for a pension it only demonstrates how much we need a Labour government that is committed to tackling the root of these problems, and ensuring that more people – particularly women – can have a retirement to look forward to.
It’s hard not to see this as a sign of just how out-of-touch they are with difference that even a small amount of savings can make to those on a modest income.
Someone just below the auto-enrolment threshold with annual earnings of just under £10,000 would be missing out on £338 going into their pension every year, half of which would be contributed by employers and the government.
Over a full working life, even if they remained at that low level of earnings, that could deliver a pension pot of around £19,000- an extremely useful capital sum for those who may not have much in the way of other resources.
The situation is even more stark and anomalous for someone working more than one job. A worker earning £9,000 for doing one job and the same for another would not be auto-enrolled in any occupational scheme, missing out on around £600 of pension saving every year.
And for many more, saving into a pension while low paid will mean that they are much more likely to save when their incomes increase.
And of course the cost of not saving also falls on future taxpayers in terms of reliance on means tested benefits.
The government’s own assessment of the impact of its initial removal of the lowest paid workers from auto-enrolment acknowledged that it would result in a reduction in the total income paid out to pensioners from workplace schemes of £1bn a year by 2050, a 6 per cent increase in spending on housing and council tax benefit and 75,000 more households eligible for Pension Credit.
Since these figures were calculated the earnings threshold and number of savers excluded from auto enrolment has risen further, so we would expect the long-term cost of the government’s restriction of auto-enrolment to be greater than this.
So under this government we have seen a growing section of the workforce cut out of workplace pensions provision.
The effect has been to make it much harder for low paid workers to accumulate their own financial assets and much harder for working women to build up a pension in their own right.
So Labour wants to bring those 1.5 million workers back into workplace saving.
We will consult with employers, trade unions and pensions experts about the best way of doing it including whether any change should be phased in, and how best to minimise administrative complexity.
Any additional costs in pension tax relief resulting from this move, which the House of Commons Library estimates to be in the region of £20m a year, will be covered by savings found elsewhere in the social security budget.
For example, the reduced cost of appeals that we expect to result from the reforms to the Work Capability Assessment that Kate Green and I set out last month.
If we want to build an inclusive system of pensions provision that supports saving and rewards contribution for all working people and helps to lift more people off reliance on means-tested benefits in old age
I believe we should be broadening, not narrowing, the scope of auto-enrolment enabling more people on low and modest incomes to save for their retirement.
Let me now say more about the second big challenge we face in the area of retirement and pension provision - which is helping ordinary savers get more for their money.
If we’re asking people to save more, the savings products we offer must offer value for money.
That’s why we pushed so hard for reform to the rip-off fees and charges that were eating away at pension savings.
After first dismissing our concerns, then dithering and delaying over whether and when to do anything about it I am pleased to say that we have now wrung from government a commitment to take action though we still have questions about whether their proposals go far enough to deal with the problem.
Questions remain about whether they will require the transparency needed to make the cap effective, or include the transaction costs that can play such a big part in the erosion of people’s savings.
And while the government have fixed the cap at 0.75 per cent, we will look at how to bring this down to 0.5 per cent on all fees and charges by the end of the next parliament.
And it’s why we’re continuing to push for reforms to the way pensions are managed.
Gregg McClymont has been leading the way in calling for better governance for pension schemes to ensure a legal duty to put the interests of savers first, enforced by trustees.
We also need to see more action to drive value for money in this market, with Government removing the restrictions on who NEST can offer its products to, and more action to encourage an effective scheme for when workers move jobs.
It’s also why we welcomed the increased flexibility and choice about how to access a pension scheme promised in the Budget.
Its right that people should be able to use the money they have saved in the way that suits their needs best.
But the Government has only looked at one aspect of the problem.
They have given people more choice, without doing anything to address whether the options available to them provide real value.
So these greater freedoms need to be accompanied by measures to ensure that the market for retirement income products is one that works for savers.
Not one that only offers the freedom to choose between poor value products.
In my response to the pension changes in the Budget I set out three tests for the Government’s reforms.
First, people need to get the right advice.
The decisions people take about how to use retirement savings they have built up over decades have enormous consequences for the rest of their lives, and cannot be remade.
The government has promised free guidance for all, but it is not clear what kind of quality they can guarantee.
We will continue to press the government on this critical issue.
We’ll wait for their response to the consultation they have established.
But guidance that some industry specialists warn could be as little as twenty minutes is unlikely to be enough for twenty or more years of retirement.
Second, we also said that we wanted to make sure that these plans don’t result in increased costs for tax payers.
We’ve asked for a full risk assessment of the Government’s plans.
As the Telegraph report today, there could be unintended consequences for the public finances if higher earners use the new freedoms as a means to reduce the rate of tax they pay.
The Telegraph today suggest that if everyone over 55 took their income as pension contributions it could cost the Treasury 24 billion pounds a year.
Even if just ten per cent did that, the cost would be 2.4 billion pounds in lost tax and national insurance contributions.
So George Osborne and Steve Webb have big questions to answer before they legislate.
We also need to be clear about what the government’s plans mean for social care – whether more people will find they are landed with a big bill or if the taxpayer is.
So it’s vital we see that assessment before the Government proceeds with legislation
Third, we have also set a fairness test, with the reforms needing to work for low and middle income savers.
We need a pensions market that works for everyone, not just a privileged few.
We called for reform of the annuities market in February, as it’s clear that it isn’t delivering the returns that savers rightly expect.
But while the Government have removed the requirement to buy an annuity, they’ve done nothing to improve the market for the many savers who still want the security that an annuity can offer.
The main alternative product on the market for most savers is income drawdown. But at the moment, these schemes just aren’t designed for ordinary savers.
Figures from the House of Commons Library show that on current models, fees and charges could absorb nearly 27 per cent of an average pension pot invested into one of these products.
Add to this the risk that, as with past pension reforms, deregulation could result in too many savers losing out to mis-selling and rip-off fees charged by some parties.
Experts are already warning that the new pensions landscape will lead to “marketing wheezes” and “inappropriate and expensive products” being pushed to people approaching retirement.
And while the Government points to Australia as the basis for its new model, experts there are warning of a lack of suitable products for ordinary savers, and looking at what Government can do to support a better market.
We want people to have the freedom to choose a retirement product that works for them. But we want them to have good products to choose from.
So we will appoint a taskforce to look at how we can prevent the risk of retirement rip offs, and ensure that everyone can have access to retirement products that helps them secure a stable income throughout their retirement.
I am pleased to confirm today that Dr David Blake Professor of Pensions Economics at the Cass Business School, Director of the Pensions Institute and a widely respected expert on the workings of the market in retirement provision has agreed to chair this taskforce.
And we have asked the CBI to nominate a representative to the taskforce, to ensure we have the full engagement of employers and the business community as we develop our plans in this area.
I’m glad to say that the CBI have agreed to work with us.
We’ll ask the taskforce to look at:
• The support savers need to make the right choice at retirement for them and their family and how to build on the lessons of auto-enrolment.
• The role of the National Employment Savings Trust in helping savers to access good quality retirement products.
• How savers can be helped to manage longevity risk.
We also want to go further to examine the best options for pensions saving in the UK.
For example, one area where I believe there is now a compelling case for action is to open the way for employees to choose to save into what are known as “target” or “collective defined contribution” pensions.
I welcome today’s letter in The Times from David Pitt Watson of the Royal Society of Arts along with respected figures from the business, trade union and pensions worlds and agree that the government should be legislating now to enable these schemes to develop.
A collective scheme means that, instead of your income in retirement being determined by the position of your investments and the wider economy on the day you retire, the risks of unpredictable investment returns are shared and smoothed among all active and retired members of the scheme.
It offers one way of achieving what is sometimes termed a “defined ambition” pension that some see as offering a middle way between “defined benefit” and “defined contribution” schemes.
These models, already well-established in some other countries including the Netherlands and Canada, have the potential to offer workers 30 per cent better returns than those seen with individual Defined Contribution schemes.
And research conducted by the Institute for Public Policy Research last year shows that they have the potential to be popular with many ordinary savers.
By enabling risks and rewards to be shared among individual savers and across generations they appeal to the principles of fairness and solidarity that run deep in this country.
However we need to be clear that such schemes do expose people to a different set of risks and this makes it all the more important that they are subject to robust governance mechanisms.
So opening the way to Collective DC schemes makes it all the more important that the government takes up our call to impose a legal requirement on all pension scheme providers to prioritise the interests of savers above those of shareholders – policed, where possible, by independent trustees.
Before I conclude let me stress again that the reform agenda I have been setting out matters for individuals and their families.
But they are also about our future as a country.
For one thing, if people can’t make their own provisions for their retirement today there will be additional pressure on public spending and the taxpayers of tomorrow.
The IFS estimates that more than 1 in 10 of those currently aged between 50 and the State Pension Age are on course for a pension income at retirement of less than the level of Pension Credit, so likely to be reliant on means-tested benefits to avoid poverty.
And taking into account other means-tested payments like housing benefit and council tax benefit, the IFS estimate that on current trends around 45 per cent of pensioners will still be eligible for means-tested support in 2030, falling to just below 30 per cent by 2060.
Our objective must be to reduce pensioners’ reliance on means tested support
- not risk increasing it.
And we know that one of the main factors now feeding social resentment and political disaffection is the sense that the link between what people put in over their working lives and what they get back has been broken.
After a life of working hard and trying to do the right thing, too many people feel let down by the system and left out of our political debate.
So the today’s cost-of-living crisis risks turning into the fiscal, social and political crisis of tomorrow.
We cannot afford to be two nations in retirement where the benefits of growth accrue to only a few while the majority of working people feel left behind.
That is why we need to do more to build a system of pension provision that gives everyone a real stake in our future prosperity bringing us together as a country on the basis of the values we share: rewarding responsibility, restoring that sense of “something for something”, making work pay over a lifetime as well as week-to-week, rebuilding that bargain across generations, and between individual working people and the wider community.
I’m proud of what the Labour Party has already done to move us toward that goal in government and from opposition.
I’m looking forward to working with you all as we look to take that further forward.