This is the first speech I have given to the CBI since being appointed to the Shadow Work and Pensions brief in January although on my first day in the job I spoke at your pensions panel dinner which was certainly a challenging way to kick off a new job!
I was delighted to be asked to speak today because pensions provision is an area that I have been interested in for many years. I have a background in the City and so have perhaps looked at some of the problems we face from a different perspective.
The issue you have chosen to explore today - handling defined benefit schemes in the recession - is one that is enormously relevant. But I would also like to touch on some broader issues in the pensions debate and so take this opportunity to put forward some of my thoughts around various subjects. Issues like the future of DB and other savings options, auto-enrolment, Personal Accounts and coping with an ageing population are closely inter-linked. I think it would be foolish to attempt to fix one without bearing in mind the affect on the others so I would like to touch on these matters a little later.
One issue that I am not going to discuss in detail is that of public sector pensions as I think it is beyond the remit of today's debate. But I thought it would be helpful just to make our position clear. Conservatives believe that public sector workers do extremely important work and are entitled to security in retirement. However, it would be irresponsible to ignore the rising cost of public sector pensions, particularly given the current state of the economy and the public finances, the closure of defined benefit schemes in the private sector, and growing disparity between pension expectations in the public and private sectors.
However, this is not an issue that can easily be addressed in opposition. We will outline our policies in more detail in due course, and any proposed changes will involve extensive discussions with interested parties. And one thing on which we are absolutely clear is that accrued benefits would be protected.
We also recognise the concern about the level of MPs pensions and have always said that moving new MPs onto a defined contribution scheme is a crucial first step in any wider reform of public sector pensions.
We will also establish an independent Office for Budget Responsibility, which will carry out a comprehensive audit of all off-balance sheet liabilities, including public sector pensions.
Looking at the wider picture, we must acknowledge the serious situation in which we find ourselves. Our pensions regime has taken a battering over the past 12 years - Gordon Brown's stealth tax raid, which has done so much long-term damage; the regulations that have hindered flexibility and stability; and of course the stock market fluctuations that have created such volatility. In short, as even a former Labour Minister has said, Britain's occupational pensions were the envy of the world in 1997. That is no longer the case, to say the least. We have a lot of work to do if we are to be the envy of the world once again.
Whilst I think the subject for your conference today is timely I also think it might be helpful to look at defined benefit schemes beyond the recession. We need to face up to the reality that DB schemes could simply become a thing of the past without action to save them. Whilst there are some companies that will endeavour to keep their DB schemes alive for as long as they can, it is no exaggeration to say that this Government has presided over the near-destruction of defined benefit provision, with a massive fall in the number of schemes open to new members or even existing members over recent years. And this trend is continuing. The recent closure of the Barclays scheme to existing members brought home the seriousness of the situation we face.
A lot of people say to me we should just give up on DB schemes. They have had their day, they are finished, let's move on.
Let's be clear. It may be impossible to save DB schemes, but I don't believe we should just give up on the whole concept. My concern is that the alternative - defined contribution schemes - pass all the risk to the employee. This change is worrying and we should instead be asking is there more we can do to maintain some aspects of DB schemes.
I know that the CBI and others have not been shy in setting out proposals to protect schemes, particularly your recent eight point action plan for pensions. I will not rush into making promises that I cannot keep in government, but I assure you that we are looking very seriously at a number of areas.
One such area is hybrid schemes which do offer a means of salvaging some element of defined benefit provision. Combining elements of both DB and DC to share risk is a possible solution to some of these problems. So I think it's important to consider whether the regulatory system is one that enables and encourages hybrid schemes. I would also like to investigate the development of industry-wide schemes as another alternative. I know these have been effective overseas.
On the issue of regulation generally, I want to mention two particular issues that have caused concern - FRS17 or IAS19, and Section 75 of the Pensions Act 1995. Both of these are ongoing issues and I don't need to remind you of the arguments on both sides. Although the first is really an accountancy standard, the CBI has made a strong case for change. But it is clear than any measures that increase volatility on a balance sheet, or restrict a company's ability to adapt to changing conditions need to be looked at very closely.
We also need to look again at indexation. The UK is unique in requiring the mandatory indexation of deferred pensions and pensions in payment, with the resulting open-ended commitment that companies are forced to subscribe to. The Government rebuffed our attempt to introduce conditional indexation as part of the 2004 Pensions Act but we said then, and I say again now, that we will return to this issue. I know that my colleague Nigel Waterson has been working with the CBI on this matter, particularly on statutory override in recent weeks.
The past few years have seen enormous changes in the pensions landscape. Under this government we've seen six Pensions Acts bringing in vast arrays of legislation - the full impact of which may not be totally understood for years to come. But behind these headline changes there have been other measures that have affected our savings culture.
The most recent of these are the changes to tax relief on pension savings announced in the Budget. The first introduced what the government likes to portray as a gradual tapering of tax relief for those on the new higher rate of income tax but is in fact a sharp withdrawal. And the second, and perhaps more significant change for this audience, makes employer contributions to pensions taxable as income for the higher rate earners.
Those proposals break the basic covenant between savers and the Government, enshrined in the Turner report, that responsible savers will be rewarded for setting aside some of their income in pensions savings for their retirement. However, instead of being rewarded, this government has now decided that they will be taxed several times over.
As George Osborne has already made clear, I am afraid that I am not able to stand here today and promise you that a Conservative government will reverse this measure.
There are a number of new tax rises we don't agree with, but this one will have to take its place in the queue. Our priority is that of all of Gordon Brown's tax rises, the most important one to avoid is the National Insurance increase for millions of people earning £20,000 or more.
This is a tax on jobs at the very time that Britain will be trying to recover from recession, when millions of unemployed want to get back into work.
But these taxes on pensions do alarm me considerably. Firstly because of the effects they will have on the pension funds, effects which I do not believe the government has fully considered. But also because of the negative impact they will have on an already ailing savings culture in this country.
Developed countries the world over are facing up to the challenge of an ageing population. It is estimated that by 2050 the UK will have 54.7 inactive people over 65 for every 100 active people. That is a sharp increase from 2000 figures of 30.8 inactive people for every 100 active people. Making sure that older people have a secure and comfortable retirement is going to be a challenge and we need people to start planning for their old age earlier.
The government should be doing more and more to encourage people to save for their retirement, not penalising those that do. As it is, people are putting less and less money aside for their retirement and are hoping that the state will provide for them instead. But unfortunately state provision is never going to be of a standard that many people would like for their later years and in fact for many the threat of pensioner poverty is real. This situation is exacerbated by the fact that most people grossly underestimate the amount of money they will need to save in their pension to secure a comfortable retirement.
One reason that has been identified as contributing to this reluctance to save is that many people, particularly those with lower incomes and less financial security, feel anxious about putting money away in a pension pot that cannot be touched until they near retirement. For many people, and particularly for women, not being able to access their own money, even in an emergency, is hugely off putting. They worry that should they or a member of their family need the money for say medical treatment or because they were made redundant, then they cannot access their own savings. Instead, they would rather save in an ISA or other savings vehicle.
I've been looking at schemes like the 401 (k) system in the United States and the KiwiSaver model in New Zealand to see if we might be able to learn from best practice there. Obviously there are drawbacks to early access, such as individuals drawing down too much and not having enough for their retirement, but this could be dealt with by regulation if the scheme was drawn up wisely. I'm interested by these ideas because they could help to bring about a more healthy savings culture in Britain. Encouraging people to invest in their retirement, and invest more, is vital if we want longer lives to also mean secure, comfortable lives.
Another proposal that might encourage a better savings attitude is auto-enrolment.
It is tempting for politicians to try to roll auto-enrolment and Personal Accounts together but as everyone in this room knows they are separate issues. We have supported auto enrolment in the past and it is a way of solving the problem of the reluctance of so many to save in a pension scheme.
Of course it is currently being considered in conjunction with the introduction of personal accounts in 2012. The advent of auto-enrolment will be a vital step forward - indeed, it is one that should not necessarily wait until 2012. Auto-enrolment would be a positive step towards ending the inertia in our savings culture and getting more people to save. Many groups have argued, notably the ABI, that there is no reason why auto-enrolment should not be brought forward on a voluntary basis for companies. Thy have identified a number of practical advantages in relation to the introduction of personal accounts for getting some companies into auto-enrolment earlier, and numerous disadvantages to waiting until 2012.
Most obviously, we should do all that we can to prevent any implementation problems that might arise from a 'big bang' launch in 2012. Remember we are talking about a major programme of reform that will inevitably experience some teething issues. By phasing in auto-enrolment on a voluntary basis this process could be a lot easier. This would also allow employers to properly plan for implementation within their financial cycles, rather than being forced to act from a common commencement date. And bringing this forward, even by a year, will of course boost pension savings in the long run.
I am aware that there is some concern about rolling out auto-enrolment earlier than 2012 but I would hope that these issues are being fully explored by the Department for Work & Pensions. And I would call upon the Secretary of State to investigate this possibility as a priority.
Now if I may, I would just like to talk briefly about Personal Accounts. As I've already mentioned, I believe that Personal Accounts and auto-enrolment need to be considered separately. They are not co-dependent and we mustn't view one as the only means to the other. I also think that compulsory employer contributions are a separate issue as well but these three measures seem to have bundled together which can be unhelpful.
I agree with the reasoning behind Personal Accounts - encouraging middle and low earners to save for their retirement by auto-enrolling them in a scheme and by introducing state and employer contributions to make saving more attractive. And my party broadly supported them when the government first set out their proposals. However, we are beginning to have concerns about what Personal Accounts will deliver which I why my predecessor in this role, Chris Grayling, confirmed that should we win the general election we will hold a review into Personal Accounts as early as possible.
Our chief concern is that Personal Accounts will not bring about the huge increase in pensions saving that was envisaged. Yes, I believe that auto-enrolment will mean that many more people will be in a pensions scheme, but it is far from certain that a Personal Account is necessarily the right vehicle for them. Firstly, the growing costs of the scheme are going to cause difficulties and means testing may well mean that in thirty years time people get to retirement age and find that their Personal Account leaves them barely better off than if they kept their money in a standard savings vehicle.
The issue of interaction with means testing was raised during the Pensions Act and I am disappointed that subsequently the government has shown every sign of trying to sweep it under the carpet.
Another concern I have with Personal Accounts is that the government's thinking when developing the proposals seems to have been driven by two issues. Firstly, the cost of management charges and secondly the cost and implications of advice to individuals. In attempting to avoid the problem of mis-selling by advisors, we may instead find ourselves in a situation when it isn't the advisors but the government that is accused of mis-selling.
At the same time, some groups have raised the possibility that the increased complication and potential cost to employers will encourage them to level down, thus giving those with existing pension provision less than they currently expect.
And on a practical note, are we really confident that government should be delivering another large scale IT project to set up personal accounts? Would it not be possible to make use of the savings vehicles we already have, and support them and breathe fresh life into them?
These are all issues that need to be explored. Let's be clear, I am not prepared to dismiss them out of hand. I have had meetings with the Personal Accounts Delivery Authority and their confidence is encouraging. And I firmly believe that we need to take decisive action to promote a better savings culture. But there are sufficient concerns about personal accounts for me to believe that we should be looking at all the possibilities. In such an important matter, it would be unwise to rule out anything.
All of these - Personal Accounts, auto-enrolment, early access to savings and the future of defined benefit schemes - are live today and need to be addressed. That is why I am inviting a number of organisations to come together to contribute to our thinking in these areas. The CBI is one of those organisations and I very much hope they will do so. Their voice has been particularly invaluable to the pensions debate so far and I am keen to engage their expertise. I don't need to tell all of you that there is an abundance of ideas and opinions out there - I am listening to as many as possible as we shape our policies in this area.
I think it is fair to say that this is a challenging area of government but also has the capacity to be a hugely rewarding one, if we can find the right way forward to offer people real security in their retirement. I hope that today I have managed to set out my views on some of these thorny issues and I look forward to working with you to finding the solutions.