UK Pension Reforms since 2005

Professor David BlakePensions Institute

Cass Business Schoold.blake@city.ac.uk

2

Agenda

• Pensions Commission Report 2005:– Lord Turner

• Pensions Act 2007– Reformed state pensions

• Pensions Act 2008– Reformed workplace pensions

Background to Pensions Commission Report

4

5

6

Savings gap

• 9.6m (46% of workforce) undersaving for retirement:– No private pension savings– or inadequate provision

• £57bn shortfall

• ABI study 2005 puts pension undersavers at 12.2m– Reason: £9000 non-mortgage debt

7

State pension provision: the unavoidable trade-off

Figure Ex.6 p 17

Pensions Act 2007:Reformed state pensions

9

State pension provision

• Reform of state pension system to make it simpler to understand and less means tested

10

State pension provision

• Index Basic State Pension to earnings growth:– From some date after 2012 (TBD)

• Raise state pension age gradually in proportion to increase in life expectancy:– 66 by 2026– 67 by 2036– 68 by 2046

Pensions Act 2008:Reformed workplace pensions

12

Private pension provision

• All employees above age 22 with earnings above £5,035 (in 2006 levels) to be automatically enrolled in:– a qualifying workplace pension scheme– or National Employment Savings Trust (NEST)

• With right to opt out

• Called ‘soft compulsion’

13

Private pension provision

• National Employment Savings Trust (NEST):– Funded national pension scheme with

Personal (DC) Accounts

• Aims to cover 7 million workers currently without a private pension

• To start from 2012

• Modelled in part on Swedish PPM system

14

Private pension provision

• Minimum default contributions set at 8% of earnings between £5,035 and £33,540 (2006 levels)

• Comprising:– 4% paid out of individual post-tax earnings– 1% paid for by tax relief– 3% compulsory matching employer

contribution.

15

Private pension provision

• Contributions invested in range of funds

• Default fund for those who make no selection:– Would be a target-date fund, shifting

members from equities to bonds over time

• Funds would be bought in bulk from wholesale fund management industry

16

Private pension provision

• NEST would negotiate fund management mandates covering major asset classes:– between 6 and 10

• With very low fees but large volumes:– Annual Management Charge of 0.3%– Plus 2% of contributions (until set-up costs of

NEST recovered)– Approx = 0.5%AMC

Conclusions

18

19

Conclusions

• The reforms go some way towards dealing with the problems of:– Increasing life expectancy– Inadequate pension savings and dependence on

means-tested benefits in retirement– High charges in private sector pension provision

• But is it enough?• ‘Europe is currently witnessing the slow-motion

explosion of the most predictable economic and social time-bomb in its history’ – The Economist (25/09/2003)