pension reform in the uk - university of...
TRANSCRIPT
Alison O’ConnellPensions Policy InstituteRetirement Commission, Wellington2 February 2006
PPIPENSIONS POLICY INSTITUTE
www.pensionspolicyinstitute.org.uk
Pension reform in the UK
PPIPENSIONS POLICY INSTITUTE
Pension reform in the UK
• Why is reform needed?• What reforms are being
considered?• Some key points that may be
relevant to New Zealand
PPIPENSIONS POLICY INSTITUTE
The backdrop
•People are living longer•The state pension is declining•Savings are flat
“If nothing else changes, tomorrow’s pensioners will be relatively poorer, on average, than today’s pensioners”
PPIPENSIONS POLICY INSTITUTE
The structural arguments for reform
1. Complexity2. Unequal outcomes3. Too high expectations of
saving4. State pensions unsustainable
PPIPENSIONS POLICY INSTITUTE
The UK pension systemTier 1State
Tier 2State
UnfundedContributory
or (different) credits
Compulsory for most
employees
Tier 3Private, tax incentivised
FundedContributory
Voluntary
BSP: Basic State
PensionS2P: State
Second Pension Previously
SERPS
Occupational and personal
pensions
Pension Credit = Guarantee Credit + Savings Credit
StateMeans-tested
Contracting-out
UnfundedContributory
or credits
Compulsory for most workers
PPIPENSIONS POLICY INSTITUTE
Complexity of state pensions means uncertainty in future benefit
• Over 100 parameters define an individual’s future state pension income
• Over a lifetime, parameters may change:• Individual circumstances • Government policy• Annual Budget decisions
PPIPENSIONS POLICY INSTITUTEMore older people
will be means tested
63%46%
64% 71%82%
40%
Today 2025 2050
IFS estimate PPI estimate
Estimated proportion of older people eligible for Pension Credit
Pension Credit take up:50% - 80%
PPIPENSIONS POLICY INSTITUTERetirement income
varies greatlyPre-tax income of single pensionersby quintile2003/4, £ per week
Bottomfifth
Next fifth Middlefifth
Next fifth Top fifth
£102£145
£175£217
£405
State pension & benefits
Occupational pension
InvestmentsEarnings
Personal pensionOther
PPIPENSIONS POLICY INSTITUTEMany reasons for
unequal outcomes
State pension & benefits
BSP & S2P: gaps and unequal entitlement for women and carersLegacy of SERPS: higher pensions for higher earnersSome benefits not taken upMore £s saved and more tax relief per £55% of tax relief goes to 2.5m higher rate taxpayers
Occupational & personal pension
PPIPENSIONS POLICY INSTITUTEWhy is private
pensions saving not growing?• Some employers limiting expenditure on
employee pensions; increasing regulation cited as an influence
• Means-tested state benefits a barrier to selling and buying pensions
• High living costs, especially at young ages• Low trust in pension products• Low interest in savings and pensions;
people prefer to spend money now
PPIPENSIONS POLICY INSTITUTE
0%1%2%3%4%5%6%7%8%9%
2010 2020 2030 2040 205002468101214161820
State spend on pensions planned not to keep pace with pensioner population
People over state pension age, RHS, millions
Cost of state pension system, LHS, % GDP (as at November 2005)
PPIPENSIONS POLICY INSTITUTE
UK’s spending on state
0%
5%
10%
15%
Aus US NZ Spain Sweden UK
2005
2050
Illustrative government spending on state pensions as a percentage of GDP, as at November 2005
pensions looked out of line
PPIPENSIONS POLICY INSTITUTE
Pension reform in the UK
• Why is reform needed?• What reforms are being
considered?• Some key points that may be
relevant to New Zealand
PPIPENSIONS POLICY INSTITUTE
The UK pension systemTier 1State
Tier 2State
UnfundedContributory
or (different) credits
Compulsory for most
employees
Tier 3Private, tax incentivised
FundedContributory
Voluntary
BSP: Basic State
PensionS2P: State
Second Pension Previously
SERPS
Occupational and personal
pensions
Pension Credit = Guarantee Credit + Savings Credit
StateMeans-tested
Contracting-out
UnfundedContributory
or credits
Compulsory for most workers
PPIPENSIONS POLICY INSTITUTEThe shape of the
consensus solutionTier 1State
Tier 3Private, tax incentivised
FundedContributory
VoluntaryBSP: Basic
State Pension
Occupational and personal
pensions
StateMeans-tested Smaller
Bigger and wider
PPIPENSIONS POLICY INSTITUTEThe Pensions
Commission’s options for reform1. Unify BSP and S2P into a
flat-rate Citizen’s Pension: immediately or by 2045
2. Let the gradual flattening of S2P play out to 2055
3. Accelerate the gradual flattening of S2P to 2030
Pension Commission’s preferred approach
PPIPENSIONS POLICY INSTITUTEThe Pensions Commission
preferred approachTier 1State
Tier 2State
UnfundedContributory or (revised) creditsCompulsory for most employees
and self employed
Tier 3Private, tax incentivised
FundedContributory
Voluntary
BSP: Basic State Pension
S2P: State Second Pension
Occupational and personal
pensions
Pension Credit = Guarantee Credit + Savings Credit
StateMeans-tested
DB only
UnfundedFuture accruals: residency-basedUniversal over
age 75Compulsory for
most workers
Tier 2½State/Private partnership
FundedContributory
Compulsory for employer if
employee does not opt out
NPSS: National Pension Savings Scheme
PPIPENSIONS POLICY INSTITUTE
Hutton’s 5 key tests of pension reform1. Affordable? ...long-term stability of public finances…
2. Fair? ...never again see pension poverty...fair to women and carers, correcting past inequalities…fair to those who have saved…
3. Promotes personal responsibility?...welfare state provides a floor…but its primary role must be to enable people to provide for themselves…
4. Simple? …people need to know what Government will do for them…
5. Sustainable? ...people can make decisions about their retirement planning with confidence that it won’t be pulled apart by successive Governments fiddling with the system…
PPIPENSIONS POLICY INSTITUTEHow does the Pensions
Commission’s preferred approach measure up?1. Affordable? Probably…but need for
increase in spending not fully appreciated
2. Fair? Better but not as good as it could be?
3. Promotes personal responsibility? To some extent, as means-testing restrained, but NPSS too prescriptive?
4. Simple? No
5. Sustainable? Unlikely
PPIPENSIONS POLICY INSTITUTE
Pension reform in the UK
• Why is reform needed?• What reforms are being
considered?• Some key points that may be
relevant to New Zealand
PPIPENSIONS POLICY INSTITUTE
Some key points for NZ
1. NZS is a world-class model2. Is KiwiSaver a better design for
the UK than NPSS?3. Expenditure on state pensions has
to increase as the population ages4. Working at later ages has to be a
key part of policy
PPIPENSIONS POLICY INSTITUTE
KiwiSaver vs. NPSS (1)
NPSS KiwiSaverScope Auto-enrol employees,
employer must contribute if employee stays in
Auto-enrol new job starters
Contri-butions
As a % of pre-tax earnings between £4,888 to £32,760:4% employee 3% employer1% tax relief
4% of all earnings, employee only, plus $1,000 one-off incentive
PPIPENSIONS POLICY INSTITUTE
KiwiSaver vs. NPSS (2)
NPSS KiwiSaverInvest-ment
6-10 funds0.5% AUM max chargeOne lifestyle default fundOther funds allowed
Few default providersFee subsidy from GovernmentOther providers allowed
Benefit Available at age 65 only; have to annuitiseor drawdown by age 75
Early withdrawal available and partial withdrawal allowed for (incentivised) first house purchase
PPIPENSIONS POLICY INSTITUTE
KiwiSaver vs. NPSSNPSS KiwiSaver
Policy aim
It is a reasonable aim of public policy to seek to ensure that the median earner achieves an income replacement rate [in retirement] of at least 45%.Pensions Commission
…help New Zealanders to save, giving them greater security and choice and strengthening the economy.
Minister of Finance
PPIPENSIONS POLICY INSTITUTE
0%1%2%3%4%5%6%7%8%9%
2010 2020 2030 2040 205002468101214161820
Planned state spend on pensions has increasedDecember 2005 revision
People over state pension age, RHS, millions
Cost of state pension system, LHS, % GDP
Previous plans
PPIPENSIONS POLICY INSTITUTEThe impact of the
Commission’s proposals
4.8%2.6%
1.6%
0.6%
Newsaving in
NPSS
Improvedstate
pensions
Laterretirement
Total
Increase in the percentage of GDP transferred to people aged above SPA, due to each element of reform proposal by 2050
PPIPENSIONS POLICY INSTITUTE
Further information
PPIPENSIONS POLICY INSTITUTE
Pension reform in the UK: Timeline• 1998: Government adopts “40:60” state:private policy, proposes
stakeholder pensions, S2P and Pension Credit
• To 2005: Concern grows among pensions stakeholders about statepensions…consensus on the objective of reform and shape of the solution emerges, but important differences in how to get there (see PPI publications)
• End 2002: Government tasks Pension Commission to look at the future of long-term private savings (compulsory?)
• 2003/4: Legislation for new Pension Regulator and Pensions Protection Fund developed
• October 2004: Analysis in Pensions Commission First Report confirms stakeholder concerns
• February 2005: Government commits to reform of state pensions• November 2005: Pensions Commission Second Report with 3
options for reform• Spring 2006: Government proposals expected in White Paper