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

2. PPI PENSIONS POLICY INSTITUTE The UK pension system Tier 1 State Tier 2 State Unfunded Contributory or (different) credits Compulsory for most employees Tier 3 Private, tax incentivised Funded Contributory Voluntary BSP: Basic State Pension S2P: State Second Pension Previously SERPS Occupational and personal pensions Pension Credit = Guarantee Credit + Savings Credit State Means-tested Contracting -out Unfunded Contributory or credits Compulsory for most workers

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

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

5. PPI PENSIONS POLICY INSTITUTE The Pensions Commission preferred approach Tier 1 State Tier 2 State Unfunded Contributory or (revised) credits Compulsory for most employees and self employed Tier 3 Private, tax incentivised Funded Contributory Voluntary BSP: Basic State Pension Indexed to earnings; higher SPA S2P: State Second Pension Flatter benefit Occupational and personal pensions Pension Credit = Guarantee Credit + Savings Credit (capped) State Means-tested DB only Unfunded Future accruals: residency-based Universal over age 75 Compulsory for most workers Tier 2½ State/Private partnership Funded Contributory Compulsory for employer if employee does not opt out NPSS: National Pension Savings Scheme

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

7. 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

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

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

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

11. 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?