Personal Accounts: DWP Executive Summary
Section 2: Our approach – fairness and empowerment

20. Since 1997, the Government’s goal has been to provide security in retirement for all pensioners. On coming to office the priority was to tackle the legacy of pensioner poverty. Thirty per cent of pensioners were below the poverty line and those on means-tested benefits were expected to live on only £69 a week.
21. The Government introduced the Minimum Income Guarantee for pensioners, now part of Pension Credit. This has raised the minimum income that pensioners are expected to live on from £69 a week in 1997 to over £114 a week today. Pensioners have also benefited from the Winter Fuel Payments, basic State Pension rising 9 per cent faster than inflation, higher age-related tax allowances and free TV licences for the over 75s.
22. We now spend over £10 billion a year (nearly 1 per cent of national income) more on pensioners than we would have done if we had simply continued the policies inherited in 1997. The amount spent on pensioners has gone up faster than earnings. As a result, pensioners are, on average, £26 a week better off, with the figure for the poorest pensioners being £38 a week in real terms. More than 2 million pensioners have been lifted out of absolute poverty and 1 million out of relative poverty. A pensioner in Britain today is no more likely to be in poverty than anyone else.
23. In addition to tackling the immediate priority of pensioner poverty, the Government has started to reform the pensions system to meet the pressures of an ageing society.

    Helping more people to save

24. The State Second Pension was introduced in 2002, providing greater support for lower earners and some carers who did not qualify for its predecessor, the State Earnings Related Pension Scheme (SERPS). As a result, some 4 million people now have the chance to build up a decent second pension for the first time.
25. The Government introduced stakeholder pensions in April 2001 to provide access to good value and flexible personal pensions. Employers with five or more employees are required to provide access to a stakeholder pension scheme unless they already offer an occupational scheme to all staff, or make employer contributions of at least 3 per cent of basic earnings into personal pensions. The regulation of charges has led to a significant reduction in average charges, increasing the pension fund for an average earner by approximately 20 per cent.²² Stakeholder pensions were a first step to extending access to private pensions - but coverage is still not universal.
26. The Government has also acted to increase the security of private pension saving, in the light of failed company pension schemes. Whilst we cannot change the past, we can learn lessons for the future, and help those who are in greatest need. The Financial Assistance Scheme will provide over £2 billion in cash terms to help those up to 15 years from retirement who lost out before the Pensions Protection Fund (PPF) was established. For the future, the PPF creates a safety net for employees saving today in company pensions. Over 14 million²³ members of salary-related pension schemes now know that they will receive compensation if their employer becomes insolvent and the pension scheme is under-funded.
27. The new Pensions Regulator is also helping to protect members’ benefits and promote good administration of work-based pension schemes. The Regulator has wide powers to investigate schemes and take action where necessary, and takes a proactive, risk-focused approach to regulation.
28. In April 2006, the many sets of rules governing the taxation of pensions were replaced by a single universal regime for tax-advantaged pension saving. There are now no limits on the amount of money people can save in a pension scheme, although there are some limits on the amount of tax relief. Savers have the opportunity to build up a tax-free pension fund of up to £1.5 million, rising to £1.8 million in 2010. 
     
29. In the past the system assumed that everyone was the same and retired at either 60 or 65. But we know that people want the freedom to choose how and when to stop work. Rather than forcing everyone into the same mould, we recognise people’s different aspirations and needs.
30. Now, those who choose to claim the basic State Pension at 70 will receive £130 a week basic State Pension – over 50 per cent more than the amount at 65. The Government has taken steps to outlaw age discrimination and promote older working. Already, 1 million people above the State Pension age are in work. The employment rate of those over 50 is closing the gap with those below 50.

    Building a long-term consensus

31. Whilst these and other significant reforms to the pension system have been introduced since 1997, further reform is needed given the scale of change in society. This is why, in 2002, the Government established the independent Pensions Commission to review the regime for UK private pensions and long-term saving. It was asked to consider the longer-term pressures faced by the pension system and whether the existing voluntary pensions regime was an adequate response. The Commission concluded that there was no immediate crisis, but set out the longer-term challenge and the need for early reform.
32. If reform is to be successful it needs to be built on the foundations of a strong national consensus. That is why the National Pensions Debate was launched, culminating in a National Pensions Day involving over 1,000 people in March 2006. We invited a representative cross-section of the working age population to take part in simultaneous, interactive, discussion events in six different cities across the UK. After a day debating the issues, 88 per cent of participants agreed that people would have to save more for their retirement and almost three-quarters agreed that employees should be automatically enrolled into a personal account.²⁴
33. Security in retirement: towards a new pensions system set out the Government’s response to the Pensions Commission’s second report. The Government committed to:

    • improving the foundation for all in retirement whilst continuing to tackle pensioner poverty. Both the basic State Pension and the standard minimum guarantee element of the Pension Credit will be uprated in line with average earnings, rather than prices. The State Pension will be made fairer and more widely available and the State Pension age will be raised in line with increasing longevity; and

    • introducing low-cost personal accounts to give those without access to employer-sponsored pension schemes the opportunity to save. People will be automatically enrolled into either their employer’s scheme or a personal account, with the freedom to opt out. Employers will make minimum matching contributions.

34. Since the publication of the May 2006 White Paper, the Government has consulted widely and worked with the main opposition parties, pension experts, lobby groups and the public. This consultation was summarised in the consultation response published last month.

    Conclusion: empowering savers, enabling markets, ensuring fairness

35. The Pensions Commission made clear, and the Government accepted, the need to act now. Without action, tomorrow’s pensioners could end up poorer than they expect to be. Our approach will reform the system to:

    • empower savers: it is difficult for those without access to good occupational pension schemes to provide for their own retirement. Personal accounts, together with reforms to State Pensions, will enable far more people to make clearer choices about how best to plan for their retirement;
    • enable markets: a combination of customer inertia and high costs means that the market has not delivered for those on low and moderate incomes. Automatic enrolment into personal accounts opens up a new market for the UK pensions industry; and
    • ensure fairness: women have traditionally done less well from the pensions system. Reforms to State Pensions will reflect the different ways in which people contribute to society and will ensure that carers are able to build up entitlement to the State Pension. And our analysis shows that 2 to 3 million women in employment could begin saving in a personal account, or into their employer’s scheme, as a result of the private pension reforms.

36. This White Paper focuses on reforming private pensions by empowering savers and enabling markets. In this summary we show how we will tackle high costs and low portability through personal accounts (Section 3), inertia and short-termism through automatic enrolment (Section 4), and incentives to save through minimum contributions matched by compulsory employer contributions and tax relief (Section 5). Together, these reforms will give everyone the chance to build up a private pension through a simple, good value, new way of saving.

22. point 22
23. point 23
24. Opinion Leader Research, 2006, National Pensions Debate Final Report, Research carried out for DWP.