Heather Dale talks to Mike O'Brien, the UK's Minister of State for Pension Reform
Heather Dale: The Pensions Bill 2007 has been met with criticism from some commentators. The proposal to remove the requirement for employers to designate a stakeholder pension scheme has been described as "marking the final nail in the coffin for stakeholder schemes". Is this criticism fair?
Mike O'Brien: No, this is unfair criticism. Stakeholder pensions are an established pension product, with over 3.9 million bought since they were introduced in 2001, and they will continue to provide people with a further pension option. It is clearly not appropriate to retain the employer-designation requirement given the new obligations our proposed pension reforms could place on employers.
Heather Dale: The government has decided both the operational collection and investment of money following the introduction of the NPSS (Personal Accounts) in the UK in 2012 will be carried out by the private sector. This is in contrast to similar successful systems in Sweden and New Zealand where these functions remain in the public sector. How will the government ensure members are getting the highest level of service?
Mike O'Brien: Running personal accounts is not a job for government. We have already announced the scheme will be run by trustees - in the same way as any other occupational scheme is run. A trust-based occupational pension scheme offers the best security for members because trustees may only act in the best interests of scheme members and beneficiaries. Members will be fully represented by a members' panel, enshrined in primary legislation. The panel will act as a conduit between members and the trustees and the panel will be able to nominate one third of the trustee body. The Personal Accounts Delivery Authority has already been set up and the intention is it will design and build the scheme, bringing in private sector expertise from the start.
Heather Dale: The National Association of Pension Funds (NAPF) has warned there is a danger personal accounts will replace the existing pension system, as happened in the US with the introduction of the 401(K) system. What measures will be put in place to prevent this?
Mike O'Brien: The new system of work-based pension saving has been designed to complement rather than replace existing provision. It is aimed at moderate to low earners who are currently not catered for by the pensions industry because it is not profitable. Measures like the annual contribution limit, set at £3, 600, will help to ensure we reach our target market and do not replace the existing pension system. Our pension reforms present a massive opportunity for the pensions industry. PPI evidence suggests £10bn more a year will be saved in workplace pension schemes as a result.
Heather Dale: How do you think the Pensions Regulator has performed so far and how could its performance be improved?
Mike O'Brien: The Pensions Regulator is doing a great job. The National Audit Office's (NAO) recent report on the Regulator, "tPR: Progress in establishing its new regulatory approach", recognised the progress it has made in establishing a riskbased approach to regulation and it is clear this is making itself felt in the industry. The challenges for the Pensions Regulator in the coming years will be to continue to protect members' pension benefits, and to work towards the introduction of the government's pension reform plans, when it will take on a new and important role monitoring employer compliance. David Norgrove, who has been so instrumental in establishing the Regulator as a respected industry body, has agreed to continue as Chair. I have no doubt he will successfully lead the organisation in meeting these important challenges.
Heather Dale: The Regulator has intervened recently in M&A activity, including the telent and Boots buyouts and the attempted buyout of Sainsburys. Some people are saying the Regulator has too much power and is in danger of stifling M&A activity. Would you agree?
Mike O'Brien: No I don't. The Regulator has a statutory objective to protect the benefits of scheme members and has a number of powers available to it, including, for example, in leveraged buyouts. I have supported its decisions.
Heather Dale: In December the government finally pledged to help the people who lost their pensions prior to the establishment of the Pension Protection Fund (PPF), after a sustained campaign by the Pensions Action Group. What is the package that has been agreed?
Mike O'Brien: All those who lost their pensions had done the right thing by saving for later life. They played by the rules, only to see their pension savings disappear through no fault of their own. We have announced a substantial package of help for up to 140,000 people who lost savings when their employer-sponsored pension schemes collapsed. We have pledged an extra £3.9bn in cash terms, or £935m in net present value. This is on top of the £8.6bn in cash terms, or £2bn in net present value already committed. The government directing actuary Andrew Young found that, if the residual assets in failed pension schemes totalling over £1.7bn were brought into government, then it would be possible - with an additional top up by government - to meet the demands made by trade unions and campaigners for the workers who lost their pensions. We decided that, as well as increasing assistance for those affected to 90% of their accrued pension, the settlement will extend cover to 11,000 people in schemes wound up by qualifying solvent employers. We believe this represents a just and final settlement - bringing the total commitment to £12.5bn in cash terms, or £2.9bn in net present value terms.
Heather Dale: Defined benefit (DB) pension schemes seem to be a dying breed in the UK, to the regret of many in the industry. Do you share that regret or do you view it as a natural progression to a more sustainable system?
Mike O'Brien: The decline in membership of private sector DB schemes is a long term trend. Our proposed reforms to the pension system are designed to tackle the problem of people not saving enough and the longer term demographic trends, as well as doing all we can to support existing pension provision. We have proposed a number of measures which aim to make the private pensions regulatory framework simpler, easing the burden upon employers. We want to encourage employers who provide DB pension schemes, while ensuring that members' benefits are protected. There is no magic bullet solution, but we believe that the reduction of the revaluation cap achieves a balance, saving employers around £250m a year on average in the longer term and helping to keep DB schemes open for the benefit of workers. I want to send a clear message to employers with good DB schemes - we want you to continue.
Heather Dale: Public service pensions - and benefits in general - are still generally much better than private sector pensions, with many sectors still offering DB schemes. How is this gap in benefits justifiable?
Mike O'Brien: The government says it wants to see good pensions, so we should not apologise for making high quality pension provision a key part of the remuneration package of public servants. This is important in recruiting and retaining staff who provide vital services to the public, but that is not to say we don't recognise the costs of increasing longevity. We have already started to make substantial changes to public service schemes to secure their long term sustainability. The Teachers, NHS and the Civil Service pension schemes have been undergoing reforms which include not only an increase in the normal pension age to 65 for new entrants, but also cost sharing between employers and members and capping of employer contributions if costs increase in future. Rising state pension age will affect public sector workers in the same way as everyone else.
Heather Dale: The PPF has apologised to 41 pension schemes which face higher levies due to a mistake in the organisation's advice over insolvency risk calculations. Do you think the Fund is operating to its full potential?
Mike O'Brien: I am pleased with the work of the PPF so far, obviously it is still a new organisation but it has already started to restore trust and confidence in pension savings. The PPF is safeguarding 12.5 million members of eligible DB occupational pension schemes throughout the UK. Already it has paid - or will be paying - compensation to around 7,700 people. The PPF currently administers the levy on around 7, 800 schemes; there have been mistakes but these have affected a minority of schemes and have been rectified quickly and efficiently.
Heather Dale: Are there any pension systems around the world you think the UK pensions industry could learn from?
Mike O'Brien: I am sure the pensions industry has a global view and does not need me to direct it to good practice. The government also has a global view and we looked closely at schemes around the world when thinking about reforming the system to tackle the massive undersaving in the UK. Sweden, New Zealand, and the US all run similar national savings schemes, and we studied their schemes closely.
Heather Dale: In your time as Minister for Pension Reform, what do you see as being your biggest challenges?
Mike O'Brien: The biggest challenges facing the country in pensions terms are increasing longevity and lack of saving. We have already passed legislation to increase the state pension age - making the state system more affordable. And we have pledged to re-link the state pension with earnings - making it more generous. Now we must tackle the lack of saving - we know 7 million people are not saving enough for their retirement. During 2008, the Pensions Bill 2007 will be making its way through parliament. This will be one of the biggest challenges, maintaining consensus and steering the bill through parliament. We must keep our eyes on the prize: millions more saving, billions more saved.
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