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Framework for future

Life expectancy has increased. Millions are not saving enough for retirement. Unless we work together to tackle these challenges, we face a pension crisis in decades to come.

People’s aspirations cannot be met through means-tested benefits. They need to take responsibility by saving or they risk becoming a live fast and retire poor generation. That is why we are reforming the system based on the recommendations of the Pensions Commission.

The state pension will be simpler and fairer, rewarding caring equally with work, and more generous by restoring the link with earnings. Many employees will be automatically enrolled in workplace pensions with an employer contribution.

Some have suggested that means-testing threatens the success of reform. In fact, the package will increase savings incentives significantly and reduce means-testing. People will have a better foundation for building pension savings than they have today.

Most people will be lifted above pension credit by the state pension alone. Someone contributing throughout their working life could build up a state pension of around £150 by 2050. Every pound an employee contributes will be at least doubled due to a mandatory employer contribution and generous tax relief.

The real gamble is not saving. You will miss out on the more comfortable lifestyle and finanial security that can only be achieved by saving and you face the uncertainty of relying on a benefit system that might change in years to come. However, people’s lives do not always work out as hoped. Accident, ill-health, bankruptcy or relationship breakdown can hit people’s finances. We need a safety net so people are not left destitute in later life.

A huge hike in the state pension would not resolve these issues. Department for Work and Pensions’ research shows that if we doubled the value of the basic state pension in 2012 and uprated it by earnings, it would still leave 25 per cent of pensioner households entitled to one or more income-related benefits by 2050. Extra costs would rise to £150bn a year by 2050 in 2008-09 price terms.

I appreciate that there are continued concerns about savings incentives and we are working with stakeholders to analyse these issues further. Results will be published at the end of the year.

Discussions should be founded on a firm evidence base, recognising the balance between cost, alleviating poverty and incentivising savings. Many criticisms levelled at the reforms are misleading. For example, an attack by Ned Cazalet grabbed headlines recently but if you examine the detail, his attack is based on a simple fact that already applies to all pension savings. The longer you survive after converting your pension pot into regular income, the more you benefit but if you die a few years after retiring, you see less of a benefit. This is not new or unique to personal accounts. Average life expectancy for men and women reaching state pension age today already exceeds Cazalet’s maximum range of 20 years.

Other commentators have suggested that anyone on benefits is losing out but the pension system is designed to reward saving and many on benefits will still be better off in retirement than if they had not saved.

We hope we can promote a more informed debate but while we are happy to examine the detail, I believe the framework we are putting in place is the right one. It makes the state pension simpler, more generous and fair to women and carers. It improves savings incentives significantly. It encourages personal responsibility and makes it easier for people to provide for themselves. It retains a lifeline for the poorest and it does not place unfair burdens on taxpayers.

Mike O’Brien is pensions minister


Danny Lovey

Danny Lovey came to mortgage broking late in his career. The sole trader of The Mortgage Practitioner spent many successful years working in the City, first as a stockbroker and latterly as a investment bank trader before circumstance and a shift in lifestyle led him to the world of mortgages.

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