Sufficient income in retirement is fundamental for people in their later years. Creating a sustainable pension system to respond to demographic change is a major part of building a society for all ages, and has been our first priority in addressing the needs of an ageing society. We have reviewed the current pensions system and identified that approximately 7 million people are currently not saving enough to meet their retirement aspirations.1 We are addressing this through the implementation of widespread pension reform. We also have a number of ongoing measures to tackle pensioner poverty.
The case for change
FACT 1: Contributions to occupational pensions have fallen from above 3 per cent of GDP in the early 1980s to less than 2 per cent in 2002. The proportion of private sector employees participating in occupational schemes has fallen from around 37 per cent in 1991 to around 26 per cent in 2004.2
FACT 2: Only 45 per cent of women at State Pension age are currently receiving a full basic State Pension.3
Our strategy since 1997 has been to target help on the poorest pensioners whilst providing a solid foundation of support for all. Through measures such as Pension Credit we have lifted 900,000 pensioners out of relative poverty since 1998. A key priority remains ensuring that pensioners get the support they are entitled to. We have simplified the claims process to enable claims for Pension Credit, Housing Benefit and Council Tax Benefit to be made in one phone call without the need for a signed claim form. We also continue to work closely with external organisations including BBC Local Radio to increase the number of people claiming Pension Credit and we wrote to 230,000 Pension Credit recipients in May 2009, to encourage them to contact their local council to check if they are entitled to Council Tax Benefit or Housing Benefit.
We have taken action to help people over 50 affected by the economic downturn. We will increase ISA limits to £10,200 per year from October for people aged 50 and over, of which £5,100 can be saved in cash. From April this year we increased the basic State Pension by 5 per cent and the Pension Credit Guarantee by 4.5 per cent, the largest amount since it was introduced. Alongside this we published a document detailing the help available with pensions during the downturn. This can be downloaded from Real Help Now.4
We will raise the capital threshold in Pension Credit and pensioner-related Housing Benefit and Council Tax Benefit from £6,000 to £10,000 from November 2009. Half a million of the poorest pensioners stand to gain from this change. We are providing an additional payment alongside 2009/10's Winter Fuel Payment worth £100 to households with someone aged over 80 and £50 to households with someone aged over 60. This winter we expect to make over 12 million payments to over 8.8 million households. Around 2.4 million people aged 80 or over will benefit.
In addition to these measures we recognise there is more to do to ensure that support gets to those who are entitled to it. We are taking forward powers in the Welfare Reform Bill to pilot new approaches to streamlining the Pension Credit claims process by making better use of the information Government already has available.
We recognise that pensions are not the only issue for people with low incomes in retirement. To help people over 60 affected by cold weather we provide Cold Weather Payments and introduced the cross-government Warm Front scheme, which provides a package of insulation and heating improvements. The Keep Warm, Keep Well5 campaign helps to link different schemes, raising awareness of all the different support that is available.
In addition to this, we have taken steps to ensure people can continue to have the confidence to save for their future. We established the Pension Protection Fund, the Financial Assistance Scheme and the Pensions Regulator in the Pensions Act 2004 to improve security and confidence for occupational scheme members.
In 2002 the Government established the Pensions Commission to consider the long term challenges faced by the pensions system. The Commission identified three central long term challenges; increasing life expectancy, inequality in state pension provision and a decline in voluntary private retirement saving.
The Commission concluded that while there was no crisis today the current system would deliver increasingly inadequate outcomes in the future. It also made it clear that a new balance must be struck between the State, employers and individuals and that bold action was needed to provide security in retirement for tomorrow’s pensioners. In response to this, in 2006 we published Security in retirement: towards a new pensions system which outlined an integrated package of reforms which built on the analysis and recommendations of the Pensions Commission.
The first part of this reform package was implemented in the Pensions Act 2007. The Act will reform the State Pension so that it is fairer, more generous and more widely available. We will restore the link between the basic State Pension and earnings in 2012 or by the end of the next Parliament at the latest. It tackles the historic inequalities in entitlement, especially for women by reducing the number of years to build a full basic State Pension to 30 from 2010. It also reflects longer lives, and makes the State Pension affordable in the long term by gradually increasing State Pension age, between 2024 and 2046, to 68 for both men and women.
As a result of these reforms around three quarters of women reaching State Pension age are expected to be entitled to a full basic State Pension by 2010 compared to less than half now, and this will increase to over 90 per cent by 2025. From 2010 up to an extra 1 million people (approximately 90 per cent of them women) will build up entitlement to the State Second Pension.
From 2012 employers will be required to automatically enrol all eligible workers into a qualifying workplace pension and to contribute at least 3 per cent of the worker's qualifying earnings to that scheme. There will also be tax relief of around 1 per cent and an employee contribution of 4 per cent, taking the total minimum contribution level to 8 per cent. A new simple low-cost pension scheme – currently referred to as the personal accounts scheme - will be introduced to ensure that all employers have access to a suitable pension arrangement in order to carry out their new duties. We estimate these reforms will result in between six and nine million people newly participating or saving more in workplace pensions, transforming the savings culture in the UK.6
“[Personal accounts] saves you the hassle of trying to sort out pensions” Participant in DWP Research (2006).7
“[Personal accounts] saves you the hassle of trying to sort out pensions”
Participant in DWP Research (2006).7
The measures contained in the Pensions Act 2007 and the Pensions Act 2008 will deliver improved security in retirement for pensioners, while ensuring the system as a whole is fair, sustainable and affordable. The box below demonstrates the difference that this could make for an individual.
A median earner who works from age 25 and retires at State Pension age in 2052/55 could get a weekly income of around £240 under reform compared to around £210 under the current system (in 2009/10 earnings terms).
An individual who is self employed for a part of their career who retires at State Pension age in 2052/55 could get an income of around £221 under reform compared to around £192 under the current system (in 2009/10 earnings terms).
Pension reform is vital to helping people become financially secure in retirement, but people require other services as well. Public services need to adapt to reflect the requirements of an ageing population.
