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Theresa May: Encouraging a new culture of saving

Thank you to the ABI and the IPPR for jointly hosting this important event. I know that there are some of you in this room who have spent the last few weeks travelling to some if not all of the party conferences to attend various events so thank you for returning to the fray so early to attend yet another conference!

I hope you agree that the topic of discussion today makes this event an extremely valuable one.

The final party conference before a general election is always notable. For a party aspiring to win an election it brings home the fact that we are potentially only a matter of months away from taking on the great responsibility of government. We will go into the next election profoundly aware of the serious challenges that will face an incoming government - rising unemployment, increasing levels of poverty, and historic levels of national debt, among many others.

Families across the country have been suffering since the recession began over a year ago. People who have never experienced unemployment before have found themselves out of work and attempting to navigate the benefits system for the first time. And even as the recession ends, we know that unemployment will sadly continue to rise. At times like this people look to fall back on savings. But for too many there has been little if anything to fall back on. We are looking at a serious, long-term problem which had its roots before the recession and will still be affecting people after the recession.

There are two key issues: the first is the lack of good financial advice which, mixed with generally poor levels of financial literacy, means that people are not saving enough for the long-term, and in the short-term are getting into higher and higher levels of debt. The second is the decline of our pensions system over recent years, which has seen us go from having the best system in Europe in 1997 to the weakened position we now found ourselves in. In a variety of areas, the Government through its actions and its attitude has itself undermined savers and the culture of saving that was once strong. It is clear that in a new era of financial responsibility we now need a renewed culture of saving in the UK.

<h2>The savings gap</h2>

Addressing the savings gap will be key to ensuring the long-term financial health of our country and its citizens. We must start with the basic realisation that as a nation we are not saving enough for the future. As you will know, the UK's annual savings gap is at least £27 billion. This would require a 54% increase in levels of savings to be closed.

At the heart of this is the fact that far too few people are saving enough in a pension to give them security in retirement. 13 million working people save either too little or absolutely nothing in a pension - around half the working population. This is shown by the pension pots that are being used to buy annuities - the vast majority are worth less than £40,000 and the average size is around £25,000. These are not sufficient amounts to give most people the security that they expect in retirement. The sad truth is that millions of people are reaching retirement and finding that their pension is not worth what they thought it was. People who have worked hard all their life are discovering too late that they do not have the security they wished for. And this is particularly true for women, with women's savings worth on average 33% less than men's.1

Although the household savings ratio has recently risen2 it has done so from a historically low base: the ratio was actually in negative territory at the beginning of 2008, compared to a healthier 10% in 1997. In fact, the savings ratio has been lower in every year under Labour than it was in even the lowest year of John Major's government. So there is no doubt that we face a crisis in saving that must be addressed.

<h2>The message from government</h2>

There are many factors that have contributed to this situation. But to get to the bottom of it I think we need to start at the top. At the heart of the economic downturn in this country has been debt: government debt, corporate debt and personal debt. The Government turned a blind eye as all three rocketed, fuelling the unsustainable boom of the past decade. As a nation we have lived for too long on borrowed money and our economy on borrowed time. We need a government that lives within its means just as every responsible household should live within its means.

Labour's financial irresponsibility and their cavalier approach to debt has damaged our economy, but almost as seriously their message of unlimited spending without consequence has undermined Britain's culture of sensible saving, prudent budgeting and sound finance. You cannot blame people for getting into debt when their government takes such a casual attitude towards its own debt. You cannot blame people for failing to save when their government failed to prepare the public finances for a rainy day. Families across the country will have looked at their government over the last 12 years and thought, if you don't need to save money then why should we?

Labour created a culture of profligacy. In the public sector they viewed spending as a good in itself, regardless of the results it produced or the borrowing it required. On the high street they watched over reckless spending rather than saving; excessive expenditure rather than sensible decision-making. In the City they oversaw massive risk-taking.

Our approach will be different. We need to tackle the debt crisis and we need a strategy to do so. David Cameron has stated that the only option is to pay down the deficit and we have set out clear proposals to help us achieve this. But addressing these problems must start with the Government getting its own house in order and living within its means. If elected we will be a government of thrift, seeking to do more for less, not just because the times demand it but because it is the only responsible way to govern. In doing so we will be guided by our overarching belief in the value of saving; that Britain's savers should be rewarded not punished for their prudence; and that saving should start early and be as flexible as possible, working for people not tying them in chains.

So should we win the election we will set up an independent Office of Budget Responsibility to make sure that no future government can ever spend as irresponsibly as this one has. And we will send a clear message that we value savers.

<h2>Financial advice</h2>

An important step will be to improve the quality and availability of financial advice. Studies have demonstrated worryingly high levels of financial illiteracy in the UK and while tackling this at a young age would be beneficial, we need to accept that people need good quality, reliable financial advice as they make major decisions throughout their lives. The truth is that most people grossly underestimate the amount of money they will need to save to secure a comfortable retirement. The ABI's own research has demonstrated the direct link between the availability of advice and the level of savings. Nearly half of lower earning households who save would not have done so in the absence of financial advice. As the ABI have concluded, 'more advice means more saving'.

This is particularly relevant for people on lower incomes who need encouragement to save. For many families, rather than saving, it is too easy to fall into debt, and debt is a key driver of poverty. One report published before the recession found that up to 9 million people had a serious debt problem. The report described personal debt as 'the most serious social problem facing the UK'.3 We need to recognise that it is far easier for people to get into debt than to save for the future.

With better financial advice we can help tackle not only personal debt but, in the longer-term, the savings gap. Following the work of Otto Thoresen's review, George Osborne set out plans for a Conservative government to launch Britain's first ever free national financial advice service to provide impartial advice online, over the telephone and in face-to-face meetings. And, as you would expect, we've been honest about how we will pay for it. It will cost £50 million a year, to be paid for through a new social responsibility levy on the financial services sector. I am pleased that the Government appears to have accepted this need and has now announced similar plans of their own.

<h2>Consumer protection</h2>

We also need to address a wider issue: for some time the Conservative Party has had concerns about poor consumer protection in the financial services sector. We have seen aggressive marketing of unsuitable products and unfair bank charges contributing to crippling personal debt and undermining the ability to save. Instead of splitting responsibility for protecting consumers between the FSA and the Office of Fair Trading we will create a strong new Consumer Protection Agency taking responsibility for consumer protection and consumer credit regulation. We will expect this new agency to name firms in breach of consumer protection regulations and to ensure that firms publish more information about the complaints they receive.

But reforming the regulator won't be enough. We also need to address the root causes of personal debt and in particular issues around credit and interest rates. Firstly we will introduce new legislation requiring all credit card statements and advertisements to contain standardised information about borrowing costs, including how much the credit will cost if only minimum repayments are made and how long it will take to repay. Along with improved financial advice this will help to ensure that people are better informed than ever before about the financial decisions they are making. We also need to do more to prevent families from being forced into selling their homes so we are calling for new rules to prevent lenders from requiring people to sell their home to pay off credit card bills or other unsecured debts of less than £25,000.

<h2>Pensions</h2>

But if we are serious about renewing a culture of saving then we must be serious about renewing our pensions system. Firstly we need to acknowledge the damage that has been done over recent years. In 1991 the number of active employee members of private sector pension schemes reached a 30 year high of six and a half million. By 2007 this had fallen to 3.6 million - a 45% decline in just 16 years. Nearly 13 million jobs have no pension provision, an increase since 1997 of two and a half million. These are deeply damaging trends that must be addressed if we are to avoid calamitous outcomes in future retirement.

Gordon Brown's disastrous tax raid has undoubtedly been a major factor in the decline of our pensions regime. It is our ambition to reverse its effects. It is an ambition that we will only be able to fulfil when we have got on top of the deficit, and it might take more than one Parliament to achieve.  But we will never forget the injury done to our pensions at the hand of the Prime Minister.

We have also seen another trend over the last decade, the decline in DB provision and the increasing use of DC schemes. This is now a well-known story. Every month we hear new stories of DB schemes closing to new members or future accrual. Even so, the headline findings from the Association of Consulting Actuaries' survey on pension trends, which reported recently, were still jarring: it found that 87% of DB schemes are now closed to new entrants, of which 18% are also closed to future accrual. Now I appreciate that the most important factor is not the type of scheme but the value of the pension that it will provide, but it is unavoidable that the decline in DB provision will contribute to worsening retirement outcomes without action to support good schemes and encourage saving.

There are a number of areas that we are looking closely at. We must confront the reasons that people don't save. Sadly too many people see saving as a restriction on their financial freedom rather than a tool of financial liberation. We need to fundamentally change this perception and all of us - government, opposition and those working in the industry - need to get better at explaining the value of saving and the options that are available to people. Think about a low-earner who works hard to provide for their family and barely manages to get by each week. Or a recent graduate just starting out in the world of work and still paying off their student debt. They would quite understandably ask themselves why they should put money aside in a pension that they will not see for 40 years.

So we need better awareness of the benefits of saving for the future. But we also need to look at practical measures to ensure that pensions are working for people. Not being able to access your own money, even in an emergency, is hugely off putting. Many people worry that they or a member of their family might need additional resources for medical treatment or because they have been made redundant, and are concerned that they cannot access their own savings. That is why we are looking at models of early access to pension funds, such as those implemented in New Zealand and the USA. Any such system in the UK would need to ensure that proper safeguards were in place so that the scheme remained worthwhile. But it is clear that offering people greater flexibility could be an important means of reinvigorating long-term saving.

In some respects it might simply be a case of getting away from the label of 'pensions'. Many younger people just aren't interested in pensions. Instead it might be that we need to talk in terms of 'lifetime savings', predominantly to offer security later in life but also - perhaps - with the flexibility to provide help if things go wrong before then.

We also need to address the issue of annuities. If we want more flexibility before retirement then we must also give people more flexibility once they have retired. Conservatives naturally believe that individuals are best placed to make decisions about their life and it is right to give people more control over their incomes in retirement, so we will end the effective obligation to buy an annuity at 75.

<h2>Auto-enrolment</h2>

It is clear that the 2012 reforms will be the major area of discussion over the next few years. I think it is important to separate auto-enrolment and Personal Accounts as we consider this. The Conservative Party has advocated auto-enrolment for some time - it will be a vital step forward. I have said previously that I believe there is no reason why auto-enrolment should not be brought forward on a voluntary basis for companies. We must do all that we can to ensure that auto-enrolment is introduced smoothly - it is too important to mess up. Early, voluntary auto-enrolment could help prevent any implementation problems that might arise in 2012, would allow employers to properly plan for implementation within their own financial cycles, and of course will boost pension saving in the long run. So I again call on the Secretary of State to investigate this as a priority.

<h2>Personal Accounts</h2>

Auto-enrolment has been somewhat overshadowed by the discussion around Personal Accounts. The motives behind Personal Accounts are absolutely the right ones: ensuring that low and middle earners are saving for the future with contributions from their employer. But we have concerns about the way that things are shaping up.

The DWP's latest implementation regulations have only added to these concerns. We now find out that we will not reach 3% employer contributions until 2016, six years after Lord Turner's initial target date for Personal Accounts to begin. Far from boosting saving, we could see employers leap at the chance to level down their contributions to 1% for a few years, a considerable reduction on average DC contribution levels. Clearly there needs to be some degree of phasing-in but I do not think anybody expected to see contribution levels of 1% as late as 2015. Such a slow start could undermine the credibility of the whole project and leave millions of people facing a gap in contributions that they might never make up. Not only will this not lead to improved levels of savings it could actually reduce saving rates at the very time we need them to be increasing.

This is not an unfounded fear: 86% of smaller employers have said that they will review their pension arrangements ahead of the introduction of Personal Accounts, and 41% will consider closing their existing scheme as a result.4 There is an urgent need for the Government to address this concern, as well as our pre-existing concerns about leveling down, administrative costs and the ability of government to deliver another large-scale IT project. I can confirm that we will review Personal Accounts should we win the election.

<h2>The state pension</h2>

We must also recognise that many, particularly the poorest in our society, rely on the basic state pension. Last week David Cameron re-affirmed our commitment to restoring the link between the state pension and earnings during the next Parliament. But we have also made the tough choice to say that, in order to ensure better security in retirement for all, we need to look at bringing forward to rise in the state pension age. Lord Turner's report proposed a review on doing this, and we will hold that review with the aim of bringing forward the rise.  We have made it clear that the beginning of the rise to 66 will not take place before 2016 for men and 2020 for women. These are the kind of tough decisions that need to be taken and a Conservative government will not duck them. 

<h2>Conclusion</h2>

As we made clear at our conference last week, our ambition is for a savers society. If we are to achieve this then we must make it clear that we will encourage and reward saving, not punish those who do the right thing. We must make sure that individuals themselves understand the value of saving and the dangers of debt. And we must ensure that government sets the right example by spending wisely and managing its finances responsibly.

I want all people to have the financial security in old age and throughout life that eludes too many in our society. The times we live in are difficult ones for many people. But as we look ahead to better days we must make sure that economic recovery fosters a new sense of responsibility and a new culture of saving. If we achieve this then we will improve not only our nation's finances but the lives of millions of our fellow citizens.

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