Pensions Reform

I congratulate my right hon. Friend on the Treasury Committee’s excellent report, which has helped our thinking greatly. He is right to say that at the heart of making personal accounts a success will be our ability to keep the costs and charges associated with them as low as possible. I recently returned from a trip to Washington, where a similar scheme has been in operation for about 20 years for federal employees. It operates not at 30 basis points, not at 20, but at five. I am not saying that we can get down to five as a starting point for personal accounts, but I think that the scale of the potential investment in personal accounts, along with automatic enrolment, present a prospect of considerable advances in scheme administration costs. The proposals in the White Paper will address the principal challenges identified by the Pensions Commission, and that is particularly true in relation to personal accounts. As a result of the changes we propose, up to 10 million people could be saving in a new low-cost personal account. By retirement, their pension funds could be worth up to around 25 per cent. more because of the lower charges, to which my right hon. Friend alluded. It is estimated that personal accounts will generate an additional £4 billion to £5 billion of saving every year, equivalent to around 0.5 per cent. of gross domestic product. We are consulting on the best administration model for the accounts, and particularly on whether there is value in offering consumers a choice of branded provider. It is perfectly proper for the Opposition motion to refer to that ongoing work and we will host a stakeholder summit as part of the consultation later in July, to which the main Opposition parties have been invited. We will publish a further document later this year setting out the detail of the approach that we intend to take. I hope that that approach will have the support of the spokesmen for both main Opposition parties. Personal accounts are the key to empowering personal responsibility. We estimate that by 2050 a regular saver, who saved from age 25 into a personal account with total contributions of 8 per cent. and on median earnings, could be up to £50 a week better off than if the system continues as it is today. That is, in part, the power of compound interest. So while there will always be specific individual circumstances, such as debt or stock market performance, that will affect people’s savings, fundamentally the package of reforms in the White Paper will mean that people should be better off in retirement from having saved themselves. However, to achieve that result and enable people to save in personal accounts with confidence, it will also be necessary to make reforms to the state pension. Our reforms to modernise the contributory principle and enable more women and carers to qualify for the state pension will deliver much fairer outcomes. And by restoring the earnings link and simplifying the state second pension so that it gradually becomes a flat-rate weekly top-up to the basic state pension—an already existing trend and a change recommended by the Pensions Commission—we will make the state pension simpler and more generous, while reducing the spread of means-testing and providing a solid foundation on which to build a sustained expansion of private savings. A person retiring in around 2050 who has been in employment or caring throughout their working life could receive a contributory state pension worth £135 a week in today’s earnings terms, which is £20 a week above the guaranteed income level. Without those reforms, people retiring in 2050 would receive a total contributory state pension—including the basic state pension and the state second pension—worth between £90 and £100 a week, well below the current means-tested threshold. That would not be an acceptable outcome. The White Paper announced our commitment to continue to uprate pension credit in line with earnings, locking in our progress on pensioner poverty and preventing half a million pensioners from falling into poverty between now and 2012. But we will also be able to limit the spread of means-testing. We will make an immediate start on that by modifying the calculation of the savings credit from 2008. That gives a clear indication from the outset of our determination to make clear people’s incentives to save. As a result of that change and our restoration of the earnings link, by 2050 only about a third of pensioners, or fewer, will be eligible for pension credit, instead of some 70 per cent. if current uprating policies continued. I wish to make one very important point. Of the third of pensioners who will continue to be eligible for pension credit, only about 6 per cent. will receive the guarantee credit alone, which means that in the vast majority of cases, those receiving pension credit will be rewarded because they have saved for their retirement, and that has got to be the right policy. So when people criticise the level of means-testing in our proposals, they need to reflect on that very important feature.