Mike O'Brien QC, MP

IT PAYS TO SAVE

Minister for Pensions Reform Mike O’Brien explains why the pensions system is being overhauled and outlines future proposals.

When people ask me why this government is overhauling the pensions system, I have a simple answer: because people aren’t saving enough and they’re in for a rude shock when they come to retire.

It’s a brutal truth, but with life expectancy growing expectations for retirement are growing with it. People are no longer content with the quiet retirements enjoyed by their grandparents. They aspire to foreign holidays, active social lives, shopping sprees and meals out. But such aspirations can only be met if people make private provision for their pension.

So it’s an uncomfortable fact that, despite the unprecedented economic growth and stability this country has enjoyed for the past 10 years, about seven million people aren’t saving enough for their retirement.

There are a number of reasons for this inertia, not least the tendency for people to switch off and do nothing in the face of an overtly complex pensions system.

We had to tackle this problem of under-saving and that’s why, from 2012, millions of people will be automatically enrolled into a system of personal accounts or a qualifying workplace pension scheme.

Legislation to achieve this will be introduced in the next parliamentary session, marking one of the biggest leaps forward for pension provision since national insurance was introduced in the 1940s.

For the first time, employees will have a guaranteed contribution from their employer towards their pension. The employee will put in a minimum of 4 per cent of their salary, the employer a minimum of 3 per cent and around 1 per cent comes from the government in tax relief. This means individuals’ own pension contributions will be doubled.

Reforms to make the State pension simpler, more generous and more widely available will ensure future pensioners have a solid platform on which to build.

Automatic enrolment into a qualifying scheme or personal accounts will give those who want to the opportunity to provide extra for when they retire.

To ensure those personal accounts complement, rather than compete with, good existing pension provision a number of measures will focus the scheme on those moderate to low earners without access to good quality pension provision, including prohibiting transfers and proposing a simple and straightforward scheme qualifying test.

We have consulted widely and listened to the concerns of the pensions industry in this area, as our recent decision to opt for a £3,600 annual cap on contributions demonstrates.

We believe these measures will encourage existing provision and guard against 'levelling down'. In fact, as a result of personal accounts, we expect to see more employers ‘levelling up’ as around one million of them currently provide no pension or make contributions of less than 3 per cent. And don’t forget that for many employers offering a decent workplace pension is a good way to attract and keep staff, so it makes no sense for them to level down.

There’s no doubt automatic enrolment and a wider public awareness of the importance of pensions will see the number of people in a pension scheme rise dramatically.

Of course, precise returns on long-term investment cannot be predicted, but most people who save into a personal account during their working life can expect to benefit substantially from their saving.

For the minority of people who experience unfortunate, and unexpected, circumstances there is a State-provided safety net in the form of the benefits system, guaranteeing a minimum level of income.

However, this £119-a-week guarantee is the minimum needed to keep pensioners out of poverty — it is not a substitute for saving and does not meet today’s aspirations.

So it’s bizarre that some people want to turn this argument on its head and advise people not to save in case they find themselves on means-tested benefits. It can only mean people missing out on years of employer contributions and investment returns, a decision exposing them to risk and uncertainty.

Since we embarked on this journey, we have consulted widely in a bid to reach a consensus on the way forward. Through a series of events designed to engage debate, I believe we have achieved that.

So while we may debate the detail, we are pressing ahead with the introduction of personal accounts.

We’ve already set up the personal accounts delivery authority to offer independent advice to the government. It will be responsible for getting the scheme up and running.

The pensions industry will continue to play a vital role in the development of our overall proposals and help us to create a vibrant savings market in which it pays to save.

Biography of Mike O'Brien QC, MP, Minister of State for Pension Reform

Mike O'Brien was appointed Minister of State for Pension Reform on 29 June 2007, having formerly been Solicitor General.

Originally from the West Midlands, Mike was a lawyer and a lecturer before he was elected as the member for North Warwickshire on 9 April 1992. Since then Mike has held a series of posts in the opposition and in the current government, which include Minister of State for Energy and E-Commerce at the Department of Trade and Industry (2004–5); and Minister of State for Trade, Investment and Foreign Affairs (2003–04).

Mike has worked as a Minister on the Crime and Disorder Act, the Immigration and Asylum Act, the Human Rights Act, the Representation of the People Act 1999, the Political Parties and Referendum Bill, and the Race Relations Amendment Bill. He was closely involved in developments in the Middle East and Afghanistan and was the first minister to go to Baghdad after the fall of Saddam. He was Parliamentary Adviser to the Staff Association of Chief Police Officers in 2001 and is a member of the Appeals Committee of the Police Dependents' Trust, a charity which assists the families of police officers who have died on duty.