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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 Unfunded Contributory Contributory Compulsory Compulsory Voluntary BSP: Basic State Pension S2P: State Second Pension or credits for most workers State Means-tested or (different) credits for most employees Previously SERPS 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 vs. working longer State pensions unsustainable Higher state pension, less Pension Credit The shape of the consensus solution Tier 1 State Bigger and wider Tier 3 Private, tax incentivised Funded Contributory Voluntary BSP: Basic State Pension State Means-tested PPI PENSIONS POLICY INSTITUTE Occupational and personal pensions Smaller The Pensions Commission preferred approach Tier 1 State Tier 2 State Unfunded Unfunded Tier 2½ State/Private partnership Funded Future accruals: Contributory or residency-based (revised) credits Contributory Universal over age 75 Compulsory for Compulsory for employer if most employees employee does Compulsory for and self not opt out most workers employed BSP: Basic State Pension Indexed to earnings; higher SPA State Means-tested S2P: State Second Pension Flatter benefit NPSS: National Pension Savings Scheme PPI PENSIONS POLICY INSTITUTE Tier 3 Private, tax incentivised Funded Contributory Voluntary Occupational and personal pensions DB only Pension Credit = Guarantee Credit + Savings Credit (capped) Long-term cost is ‘realistic’ but are short-term costs affordable? 9% 8% 7% PPI PENSIONS POLICY INSTITUTE of Pensions Cost of state pension Cost option, LHS, system, LHS, % GDP Commission % GDP People over current SPA RHS, millions 6% 5% 4% 3% 2% 1% 0% 2010 2020 2030 2040 2050 20 18 16 14 12 10 8 6 4 2 0 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 9.4% 0.6% Transfer under current policy New saving in NPSS 2.6% 14.2% Later retirement Transfer in 2050 1.6% Improved state pensions 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% ~60% ~41-50% ~40% Australia Chile Compulsory Sweden Max. 42% ~8% 15% Min. 33% Max. 27% KiwiSaver in NZ NPSS in UK 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% 45% 34% 33% After Pensions Commission proposals (Pension Commission estimates) After Pensions Commission proposals (PPI estimates) 2005 2030 2050 Some questions remaining • • • • • PPI PENSIONS POLICY INSTITUTE 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?