PPIPENSIONS POLICY INSTITUTE

Pensions Forum, Dublin 5 May 2006

Alison O’Connell

www.pensionspolicyinstitute.org.uk

The way forward for UK pensions after the Pensions Commission report

PPIPENSIONS POLICY INSTITUTE

The UK pension system

Tier 1State

Tier 2State

Unfunded

Contributory or

(different) credits

Compulsory for most employees

Tier 3Private, tax incentivised

Funded

Contributory

Voluntary

BSP: Basic State

Pension

S2P: State Second Pension Previously

SERPS

Occupational and

personal pensions

Pension Credit = Guarantee Credit + Savings

CreditState

Means-tested

Contracting

-out

Unfunded

Contributory

or credits

Compulsory for most

workers

PPIPENSIONS POLICY INSTITUTE

Consensus principles on pension reform

1. Unequal outcomes More equal coverage

2. Complexity a barrier to action Simplify so easy to understand

3. Too high expectations of saving Clarify role of the state vs. private saving vs. working longer

4. State pensions unsustainable Higher state pension, less Pension Credit

PPIPENSIONS POLICY INSTITUTE

The shape of the consensus solution

Tier 1State

Tier 3Private, tax incentivised

Funded

Contributory

VoluntaryBSP: Basic State

Pension

Occupational and

personal pensions

StateMeans-tested Smaller

Bigger and wider

PPIPENSIONS POLICY INSTITUTEThe Pensions

Commission preferred approach

Tier 1State

Tier 2State

Unfunded

Contributory or (revised)

credits

Compulsory for most

employees and self

employed

Tier 3Private, tax incentivised

Funded

Contributory

Voluntary

BSP: Basic State

PensionIndexed to earnings; higher SPA

S2P: State Second Pension

Flatter benefit

Occupational and personal

pensions

Pension Credit = Guarantee Credit + Savings Credit

(capped)

StateMeans-tested

DB only

Unfunded

Future accruals:

residency-based

Universal over age 75

Compulsory for most workers

Tier 2½State/Private partnership

Funded

Contributory

Compulsory for employer if employee does not opt

outNPSS:

National Pension Savings Scheme

PPIPENSIONS POLICY INSTITUTE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2010 2020 2030 2040 2050

02468101214161820

Long-term cost is ‘realistic’ but are short-term costs affordable?

People over current SPA RHS, millions

Cost of state pension system, LHS, % GDP

Cost of Pensions Commission option, LHS, % GDP

PPIPENSIONS POLICY INSTITUTE

Raising State Pension Age • An obvious way to mitigate long-term

costs of improving Basic State Pension• Need more research on future health

prospects• 15-20 year notice period• Socio-economic gap exaggerated by

poor data. Keeping Guarantee Credit available below SPA should help.

• Key is labour market policy to extend working lives

PPIPENSIONS POLICY INSTITUTE

Later retirement has the biggest impact of the Commission’s proposals

14.2%2.6%

1.6%0.6%9.4%

Transferundercurrentpolicy

New savingin NPSS

Improvedstate

pensions

Laterretirement

Transfer in2050

Change in the percentage of GDP transferred to people aged above SPA, due to each element of reform proposal

PPIPENSIONS POLICY INSTITUTEThe NPSS is

planned as a package with a low state pension

Australia Chile Sweden KiwiSaverin NZ

NPSS inUK

~41-50%

Max. 42%

~60%

~40%

~60%

~8% 15%

Min. 33%

Max.27%

Target income for an average earner as a percentage of NAE

Compulsory

Auto-enrolment

PPIPENSIONS POLICY INSTITUTE

Means-testing through Pension Credit could still be high after the impact of the Pensions Commission’s proposals

2005 2030 2050

Proportion of ‘pensioner benefit units’ entitled to Pension Credit

50%39%

75%

34%

85%

33%

Current system, PPI estimatesAfter Pensions Commission proposals (Pension Commission estimates)After Pensions Commission proposals (PPI estimates)

45% 45%

PPIPENSIONS POLICY INSTITUTE

Some questions remaining • Equality: What is the best way to widen coverage

for women and carers?• Complexity: Can we not transition to a simpler,

single-tier system?• Saving: Is compulsion on employers fair or

workable? Can we really not make tax incentives fairer? How can the NPSS be made less risky?

• Working longer : Even if the changes to pensions are successful, can the labour market adapt?

• State pensions: Will state pensions be improved ‘enough’? How much means-testing is ‘acceptable’ – for the success of both state and NPSS reforms?