PPI PENSIONS POLICY INSTITUTE The way forward for

PPI PENSIONS POLICY INSTITUTE The way forward for UK pensions after the Pensions Commission report Pensions Forum, Dublin 5 May 2006 Alison O’Connell www. pensionspolicyinstitute. org. uk

PPI PENSIONS POLICY INSTITUTE The UK pension system Tier 1 State Tier 2 State Unfunded Contributory Compulsory Voluntary BSP: Basic State Pension S 2 P: State Second Pension or credits for most workers or (different) credits for most employees Previously SERPS State Means-tested Tier 3 Private, tax incentivised Funded Occupational Contracting and personal -out pensions Pension Credit = Guarantee Credit + Savings Credit

Consensus principles on pension reform 1. 2. 3. 4. PPI PENSIONS POLICY INSTITUTE Unequal outcomes More equal coverage Complexity a barrier to action Simplify so easy to understand Too high expectations of saving Clarify role of the state vs. private saving working longer State pensions unsustainable Higher state pension, less Pension Credit vs.

PPI The shape of the consensus solution Tier 1 State Tier 3 Private, tax incentivised Funded Bigger and wider Contributory Voluntary BSP: Basic State Pension State Means-tested PENSIONS POLICY INSTITUTE Occupational and personal pensions Smaller

The Pensions Commission preferred approach PPI PENSIONS POLICY INSTITUTE Tier 1 State Tier 2 State Unfunded Future accruals: residency-based Universal over age 75 Contributory or (revised) credits Compulsory for employer if most employees Compulsory for and self employed employee does not opt out most workers Voluntary BSP: Basic State Pension Indexed to earnings; higher SPA S 2 P: State Second Pension Flatter benefit Occupational and personal pensions State Means-tested Tier 2½ State/Private partnership Funded Tier 3 Private, tax incentivised Funded Contributory NPSS: National Pension Savings Scheme DB only Pension Credit = Guarantee Credit + Savings Credit (capped)

Long-term cost is ‘realistic’ but are short-term costs affordable? PPI PENSIONS POLICY INSTITUTE Cost of Pensions Cost of state pension option, LHS, system, LHS, % GDP Commission % GDP People over current SPA RHS, millions

PPI PENSIONS POLICY INSTITUTE Raising State Pension Age • • • An obvious way to mitigate long-term costs of improving Basic State Pension Need more research on future health prospects 15 -20 year notice period Socio-economic gap exaggerated by poor data. Keeping Guarantee Credit available below SPA should help. Key is labour market policy to extend working lives

Later retirement has the biggest impact of the Commission’s proposals PPI PENSIONS POLICY INSTITUTE Change in the percentage of GDP transferred to people aged above SPA, due to each element of reform proposal

The NPSS is planned as a package with a low state pension PPI PENSIONS POLICY INSTITUTE Target income for an average earner as a percentage of NAE ~60% ~41 -50% ~40% Compulsory Max. 42% ~8% 15% Min. 33% Max. 27% Auto-enrolment

Means-testing through Pension Credit could still be high after the impact of the Pensions Commission’s proposals PPI PENSIONS POLICY INSTITUTE Proportion of ‘pensioner benefit units’ entitled to Pension Credit 85% Current system, PPI estimates 75% 50% 39% 45% 34% 33% After Pensions Commission proposals (Pension Commission estimates) After Pensions Commission proposals (PPI estimates)

PPI PENSIONS POLICY INSTITUTE Some questions remaining • • • Equality: What is the best way to widen coverage for women and carers? Complexity: Can we not transition to a simpler, single-tier system? Saving: Is compulsion on employers fair or workable? Can we really not make tax incentives fairer? How can the NPSS be made less risky? Working longer : Even if the changes to pensions are successful, can the labour market adapt? State pensions: Will state pensions be improved ‘enough’? How much means-testing is ‘acceptable’ – for the success of both state and NPSS reforms?