14 March 2002
Speech by the Economic Secretary to the Treasury, Ruth Kelly MP, to the National Association of Pension Funds
I am very pleased to be here today.
The National Association of Pension Funds is an important organisation, the principal UK body representing the interests of the occupational pensions movement.
Taken together, your members - large and small companies, public sector and local government - provide pensions for over 7 million employees and 4 million people in retirement.
11 million customers, £650bn of assets under management, and a membership of consultants, actuaries, lawyers, trustees, administrators, information technology technicians, and investment professionals. As we take forward our pension policy, the NAPF will be a powerful partner.
Pensions are big news. Hardly a day goes by without a front-page story devoted to them. Pensions are one of the biggest financial decisions any of us will make so we welcome informed debate. What is important, in the flurry of publicity, is that we keep sight of our overarching objectives.
The reforms we have made since 1998 are based on a historic partnership between state and private pensions. It is important that people understand what the state will do for them, and what they are expected to do for themselves.
Our shared aim must be to ensure that all pensioners enjoy secure and reliable incomes throughout their old age. A fair society, a just society, recognises that the guarantee of security in old age is a right all must enjoy. It is part of a pattern of reciprocal obligation and personal responsibility that carries us from the cradle to the grave.
The government is committed to the development of policies which support the poorest pensioners, reward saving, and help all pensioners share in the rising prosperity of our nation. For today's pensioners:
The Minimum Income Guarantee targets extra support to the poorest - linked to earnings throughout this parliament;
From 2003 the Pension Credit will reward today's low and modest income pensioners, those who have put something away for their old age; and
All pensioners benefited from an above inflation increase in the basic state pension in 2001; they will do so again this April; and benefit from a further guaranteed rise in the annual basic state pension, at least £100 for a single pensioner, in 2003. Together with the £200 winter fuel payment, this is a substantial increase in support for pensioners
The proffered help, sophistries, and mumbled sympathy of the past are being replaced with a clear system of support. By April 2002 the poorest pensioner households will be over £1000 a year better off in real terms than they were in 1997 and on average all pensioner households will be £840 better off.
For today's workforce - tomorrow's pensioners - we are creating a sustainable system of support that allows us all to plan ahead and make a decent provision, in the crowded hours of youth, for the ascent towards old age. The introduction of Stakeholder Pensions and the reform of the State Earnings Related Pension Scheme with the introduction of the State Second Pension, will enable the workers of today to save for tomorrow with renewed confidence, and help employers to play an active part in their workers? plans for retirement.
In the UK, we are determined to increase the level of pension saving. In the EU, we will not allow inappropriate regulation to threaten the achievement of our objectives. The supplementary pensions directive should be about delivering the mutual recognition necessary to remove barriers to the operation of occupational schemes on a cross-border basis. It is not, and must not become, an attempt to interfere with the structure of Member States? pension systems.
In the UK a system of saving is at the heart of planning for pension provision. The issue is how we increase the level of retirement saving today, to ensure, for tomorrow, a brighter future for pensioners and for the pensions industry. When the September shadow creeps across the square we all want to feel that we are secure, that we have saved enough, and that we can have a comfortable retirement.
The debate about the respective merits of defined benefit and defined contribution schemes has been raging across the pages of the popular press.
It is true that 48 defined benefit schemes closed to new members in the year to October 2001. It is true that this is an increase on the 18 that closed the year before and that a number of big name firms are amongst those making the change.
It is also true that the spate of recent closures are part of a long term trend stretching back to the 1960s. Increased longevity, changes in the stock market, wider economic conditions, and a more flexible labour market in which employees move jobs more frequently, all contribute to an environment where direct contribution can make sense for employer and employee. Since the 1960s the life expectancy of the average retirement age man has increased by 40 per cent - this is a massive demographic shift and it is simply unreasonable to assume that the pattern of pensions provision can remain unchanged in the face of it.
Despite these changes pensions contributions are and will remain an important part of the overall remuneration package - helping companies to attract and retain staff. Employers, many of them facing skills shortages, will continue to see an advantage in offering final salary or career average schemes. Companies that are considering changes to their provision will want to take a long-term view of all the implications.
A related issue is the level of contributions employers make to the pensions pot. If the shift to defined contribution makes a difference to the level of contributions made by employers this should be clear to all parties. The overall remuneration package is a matter for firms and employees - but it is also an area for transparency and openness on all sides.
Of course the best employers already play an active part in increasing their employees awareness of pension saving. We want to see more companies moving up to the level of the best and engaging with their workforce to promote greater understanding.
Government projects already in the pipeline - for example Combined Pensions Forecasts - will play a critical role: raising awareness of the importance of making proper provision, and of the relative value of employer contributions and take home pay.
In some circumstances defined contribution will be the right result for employers and for employees. The fact is that both defined benefit and defined contribution have their advantages and their disadvantages. Defined benefit is great if you are a successful professional staying with the same company for a long time - but far less good if you move jobs frequently. Final salary schemes are all very well if you have a high final salary, but not if you earn consistently low wages and do not climb the income ladder over the course of your career.
As the debate rages on, our shared objective must be to ensure that people save enough for their retirement - regardless of the type of pension scheme they are part of. This means ensuring people understand what their situation is, and the steps they need to take to secure a better income in retirement. It also means removing unnecessary complexities and the barriers which distort choices for employers and limit choices for employees.
We recognise that over the years, for the best of reasons, successive Governments have introduced regulations that make it more onerous for companies to run pension schemes and for providers to sell pensions - often to the very people who need them most. These are the issues the Government intends to focus on because these are the key to improving retirement income for everyone.
We have already begun taking decisive action on the Minimum Funding Requirement. There are two stages to our strategy. In the short term, changes will extend the deficit correction periods and remove the current requirement for automatic annual recertification of fully funded schedules. Stricter conditions on the voluntary wind-up of schemes will also be introduced. These changes will enable pensions schemes to start to move toward a more sustainable funding position.
In the medium term we are aiming to replace the MFR. A panel of industry experts are working with the Department of Work and Pensions to address the issues. The NAPF are playing an active part. Our shared aim must be better protection without the damaging consequences for investment decisions that have accompanied the one size fits all approach of the MFR. A long-term funding standard, constructed around the characteristics of different schemes and supported by stringent requirements on transparency, will ensure an appropriate degree of protection whilst removing the damaging incentive to pursue a risk averse investment strategy.
I know the NAPF have welcomed the interim changes, and the longer term plans as ?a practical solution to some of the serious issues faced by UK pension schemes.?
In government we can do a lot, working to reform and then replace the MFR and lightening the load of regulation on pension schemes, but we cannot do it all. There is a commensurate duty on the pensions industry to reform its working practices.
The Myner's review points the way forward.
You will all be familiar with the main themes of Paul's review and with the Code of Investment Principles. We want the investment industry in general and the pension funds in particular to implement the Myners recommendations voluntarily. The review in 2003 will examine the extent to which this has in fact occurred.
So I am pleased to hear that the NAPF is producing a practical guide to help Trustees implement the proposals. Paul's report rightly puts trustees in the driving-seat - it is only if they engage with the agenda that change will come about. This is what we will be assessing in the two-year review. The Government is strongly committed to seeing through Paul's proposals, and this conference - close on the anniversary of his report - is therefore a timely one: we are now more than half-way through the two-year period for assessment that he recommended.
Today I want to touch on three areas: trustees expertise; shareholder activism and transaction costs.
First trustees expertise. One of the key themes of the Myners review was ?who takes what decisions?. I have touched already on the enormous importance of the decisions pensions funds take - over £650 billion of funds under management. And yet, too often, schemes are not able to provide the resources required to manage decisions of this importance.
That is why we are consulting on legislation to require trustees to be familiar with the issues on which they make decisions. This proposal does not mean that trustees have to be investment experts. Being familiar is not the same as being expert. And of course trustees can choose to delegate decisions.
We stand by the importance of member nominated trustees. But where they choose to make these kind of investment decisions - which not all trustees will - they should be familiar with the issues. This is in everybody's interests: scheme beneficiaries and the wider economy alike. I am sure you will take a constructive approach to the consultation and help us produce workable legislation.
Second, shareholder activism. Paul found clear evidence of a laissez faire attitude among pension funds to the companies in which they invest. Obviously it is not for shareholders to manage a company day to day - they appoint a board to do that for them. But without a clear and effective voice from shareholders the incentives on under-performing managers are skewed. Higher levels of shareholder activism amongst pension funds would improve performance and drive up returns on capital for the fund.
There are practical ways the NAPF can help. The recent initiative by the NAPF's Voting Issues Service to offer coverage of major European companies, including all those in the Eurotop 300 Index, will help institutions to become more responsible shareholders - capable of effectively supporting and challenging corporate management.
Third, I turn to transaction costs. Clearly this is an immensely complex area and I won't go into it in any detail. Suffice to say that few responses to the Government's consultation disagreed that transaction costs were 'substantial?; that they are 'subject to insufficient scrutiny?; and that ?clearer and more rigorous disciplines could be applied?. We said last year that the challenge is for the industry to develop much clearer structures: with better incentives, with vigorous competition, and without conflicts of interest. I have been following with interest the work of the NAPF and the Investment Management Association on developing stronger information flows to trustees. This is certainly crucial. But as we emphasized last year - greater disclosure on its own is unlikely to be a sufficient solution to these problems.
I obviously cannot prejudge the 2003 review. Nevertheless, it may be helpful to recall the criteria that we set out in last year's statement and which the review will apply. These criteria remain - challenging but clear. First, that trustees should have a much better understanding of these costs; second, that they should have more effective arrangements in place for controlling them; and third, that the market should have developed so pension funds have a fuller range of options open to them, on competitive terms and a level playing-field, for purchasing these services. Finally, we specifically proposed, for the final Myners principles, that pension funds should not - without good reason - allow soft commissions to be paid.
The Myners review is part of a wider survey of the investment and savings landscape, an honest attempt to improve outcomes for investors and for the investment industry. Alongside it sits:
- The Modernising Annuities consultation;
- The Sandler review;
- The Pickering review; and
- The Inland Revenue's review.
Annuities are going to play an ever more important role in delivering income in retirement. Yet at the moment many people do not get as good a deal as they might when they convert their pension pot. They don't shop around, or they buy the wrong type of annuity - yet they are making an absolutely critical choice that will cast a shadow over the rest of their lives. The minority who want more flexibility in the use of large funds has so far dominated the debate. Our consultation on annuities shifts the focus to the real issues: how to make the market work better for the increasing number of people who will retire with more modest pensions.
It offers an excellent opportunity to think creatively about annuities. We want to make it easier to innovate and to develop products that meet people's particular needs better. And we want to encourage people to think creatively about the way they are bought and sold - how do we make it easier for people to understand and make use of the options available to get the very best out of their retirement savings? I hope that everyone with an interest - employers, trades unions, pensioners and the pensions industry - will rise to the challenge and respond.
Ron Sandler's Review was established on the basis of one of Paul Myner's recommendations. The aim is to identify the competitive forces that drive the long-term retail investment industry - including personal pensions - and examine the incentives created by regulation and the structure of the market.
The intention is to ensure that the structure of the UK market, with its products and government and regulatory infrastructure, leads to efficient investment decision-making and to optimal outcomes for consumer interests more broadly. The report is due in the summer.
Alan Pickering was commissioned to carry out a comprehensive review of the rules and regulations governing pensions. He will be reporting to Alistair Darling in June with recommendations for simplifying the structure. The aim is to make sure as much money as possible goes into the pension pot and not on red tape, as well as making it easier for employers to offer good pensions to their workforce.
Finally, the Inland Revenue, working in partnership with experts from the pensions industry, are examining whether a package of practical options can be developed to simplify the administration of defined benefit schemes.
Their objective is to ease the complexity of scheme administration; to improve both the existing tax rules governing scheme administration and communications between the Inland Revenue and pension schemes.
These reviews will produce proposals that encourage pension saving: - reducing bureaucratic burdens on employers and providers, and reforming the market for personal pensions. They are important steps towards the achievement of our overarching objective - securing a decent standard of living in retirement for an aging population by increasing the level of pension saving.
I would like to take this opportunity to encourage all of you to participate in the reviews. You are the experts. Your views matter. I know it can seem like a distraction from day to day work but I think we have a golden opportunity here to bring real benefits to everyone by making it easier for people to save, easier for employers to provide pensions, and easier for providers to sell them.
Our shared goal must be to ensure that all pensioners enjoy secure and reliable incomes throughout their old age. Working together, it is a goal we can achieve.
Thank you.