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PPI PENSIONS POLICY INSTITUTE Pension reform in the UK Alison - PowerPoint PPT Presentation

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PPI PENSIONS POLICY INSTITUTE Pension reform in the UK Alison OConnell Pensions Policy Institute Retirement Commission, Wellington 2 February 2006 www.pensionspolicyinstitute.org.uk PPI PENSIONS POLICY INSTITUTE Pension reform in the

  1. PPI PENSIONS POLICY INSTITUTE Pension reform in the UK Alison O’Connell Pensions Policy Institute Retirement Commission, Wellington 2 February 2006 www.pensionspolicyinstitute.org.uk

  2. PPI PENSIONS POLICY INSTITUTE Pension reform in the UK • Why is reform needed? • What reforms are being considered? • Some key points that may be relevant to New Zealand

  3. PPI PENSIONS POLICY INSTITUTE The backdrop •People are living longer •The state pension is declining •Savings are flat “ If nothing else changes , tomorrow’s pensioners will be relatively poorer, on average, than today’s pensioners”

  4. PPI PENSIONS POLICY INSTITUTE The structural arguments for reform 1. Complexity 2. Unequal outcomes 3. Too high expectations of saving 4. State pensions unsustainable

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

  6. Complexity of state pensions means PPI PENSIONS POLICY INSTITUTE uncertainty in future benefit • Over 100 parameters define an individual’s future state pension income • Over a lifetime, parameters may change: • Individual circumstances • Government policy • Annual Budget decisions

  7. PPI More older people PENSIONS POLICY INSTITUTE will be means tested Estimated proportion of older people eligible for Pension Credit 82% 71% 64% 63% 46% Pension 40% Credit take up: 50% - 80% Today 2025 2050 IFS estimate PPI estimate

  8. Retirement income PPI varies greatly PENSIONS POLICY INSTITUTE Pre-tax income of single pensioners by quintile 2003/4, £ per week £405 Personal Other pension Earnings Investments £217 Occupational pension £175 £145 £102 State pension & benefits Bottom Next fifth Middle Next fifth Top fifth fifth fifth

  9. Many reasons for PPI PENSIONS POLICY INSTITUTE unequal outcomes State BSP & S2P: gaps and unequal pension & entitlement for women and carers benefits Legacy of SERPS: higher pensions for higher earners Some benefits not taken up Occupational More £s saved and more tax relief & personal per £ pension 55% of tax relief goes to 2.5m higher rate taxpayers

  10. Why is private PPI pensions saving not PENSIONS POLICY INSTITUTE growing? • Some employers limiting expenditure on employee pensions; increasing regulation cited as an influence • Means-tested state benefits a barrier to selling and buying pensions • High living costs, especially at young ages • Low trust in pension products • Low interest in savings and pensions; people prefer to spend money now

  11. State spend on pensions PPI planned not to keep pace PENSIONS POLICY INSTITUTE with pensioner population Cost of state pension 9% 20 system, LHS, % GDP 18 (as at November 2005) 8% People over state pension 16 7% age, RHS, millions 14 6% 12 5% 10 4% 8 3% 6 2% 4 1% 2 0% 0 2010 2020 2030 2040 2050

  12. UK’s spending on state PPI pensions looked PENSIONS POLICY INSTITUTE out of line Illustrative government spending on state pensions as a percentage of GDP, as at November 2005 15% 2005 2050 10% 5% 0% Aus US NZ Spain Sweden UK

  13. PPI PENSIONS POLICY INSTITUTE Pension reform in the UK • Why is reform needed? • What reforms are being considered? • Some key points that may be relevant to New Zealand

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

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

  16. The Pensions PPI PENSIONS POLICY INSTITUTE Commission’s options for reform 1. Unify BSP and S2P into a flat-rate Citizen’s Pension: immediately or by 2045 2. Let the gradual flattening of S2P play out to 2055 Pension Commission’s 3. Accelerate the gradual preferred approach flattening of S2P to 2030

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

  18. PPI PENSIONS POLICY INSTITUTE Hutton’s 5 key tests of pension reform 1. Affordable? ...long-term stability of public finances… 2. Fair? ...never again see pension poverty...fair to women and carers, correcting past inequalities…fair to those who have saved… 3. Promotes personal responsibility? ...welfare state provides a floor…but its primary role must be to enable people to provide for themselves… 4. Simple? …people need to know what Government will do for them… 5. Sustainable? ...people can make decisions about their retirement planning with confidence that it won’t be pulled apart by successive Governments fiddling with the system…

  19. How does the Pensions PPI PENSIONS POLICY INSTITUTE Commission’s preferred approach measure up? 1. Affordable? Probably…but need for increase in spending not fully appreciated 2. Fair? Better but not as good as it could be? 3. Promotes personal responsibility? To some extent, as means- testing restrained, but NPSS too prescriptive? 4. Simple? No 5. Sustainable? Unlikely

  20. PPI PENSIONS POLICY INSTITUTE Pension reform in the UK • Why is reform needed? • What reforms are being considered? • Some key points that may be relevant to New Zealand

  21. PPI PENSIONS POLICY INSTITUTE Some key points for NZ 1. NZS is a world-class model 2. Is KiwiSaver a better design for the UK than NPSS? 3. Expenditure on state pensions has to increase as the population ages 4. Working at later ages has to be a key part of policy

  22. PPI PENSIONS POLICY INSTITUTE KiwiSaver vs. NPSS (1) NPSS KiwiSaver Scope Auto-enrol employees, Auto-enrol new job employer must starters contribute if employee stays in Contri- As a % of pre-tax 4% of all earnings, butions earnings between employee only, plus £4,888 to £32,760: $1,000 one-off incentive 4% employee 3% employer 1% tax relief

  23. PPI PENSIONS POLICY INSTITUTE KiwiSaver vs. NPSS (2) NPSS KiwiSaver Invest- 6-10 funds Few default providers ment 0.5% AUM max charge Fee subsidy from Government One lifestyle default fund Other providers allowed Other funds allowed Benefit Available at age 65 Early withdrawal only; have to annuitise available and partial or drawdown by age withdrawal allowed for 75 (incentivised) first house purchase

  24. PPI PENSIONS POLICY INSTITUTE KiwiSaver vs. NPSS NPSS KiwiSaver Policy It is a reasonable aim …help New Zealanders of public policy to to save, giving them aim seek to ensure that greater security and the median earner choice and achieves an income strengthening the replacement rate [in economy. retirement] of at least 45%. Pensions Minister of Finance Commission

  25. Planned state spend on PPI PENSIONS POLICY INSTITUTE pensions has increased December 2005 revision Cost of state 9% 20 pension system, People over state pension LHS, % GDP 18 8% age, RHS, millions 16 7% Previous plans 14 6% 12 5% 10 4% 8 3% 6 2% 4 1% 2 0% 0 2010 2020 2030 2040 2050

  26. PPI The impact of the PENSIONS POLICY INSTITUTE Commission’s proposals Increase in the percentage of GDP transferred to people aged above SPA, due to each element of reform proposal by 2050 4.8% 2.6% 1.6% 0.6% New Improved Later Total saving in state retirement NPSS pensions

  27. PPI PENSIONS POLICY INSTITUTE Further information

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