Select Committee on Work and Pensions Fourth Report


Illuminating pension reform: the Committee's inquiry

1. Pension reform is a curious subject. Curious because while having a decent income in retirement is important for everyone, the system itself seems often to inspire only apathy and confusion. People find the issues highly complex at an individual level and can, some suggest, fail to behave in their own economic interest. Designing pensions systems involves genuinely difficult challenges - constructing institutions which are durable over decades, dealing with inherited structures which are hard to change and ensuring that savings are secure.

2. This report - which we hope will be illuminating rather than confusing - forms the Committee's response to the Government's White Paper on Pensions Reform, Security in retirement: towards a new pensions system,[1] which was published in May 2006. That White Paper, in turn, followed a Green Paper[2] on which our predecessor Committee reported in 2003,[3] and the three reports of the Pensions Commission, chaired by Lord Turner of Ecchinswell.

3. We were clear from the outset that we did not wish to duplicate the work done by Lord Turner and the other Commissioners. Where we saw our inquiry adding value was in its consideration of the Government's reaction to the Pensions Commission proposals from a political as well as an analytical point of view.

4. We have tried to explain key issues clearly and simply, to enable readers who are unfamiliar with the complexities of the pensions system to get an idea of how small policy changes could have a significant impact on pension provision. We also saw our role as a select committee to listen to those involved and affected, reproduce it here, and extract key sections for the report. We hope that this will provide a clear picture of the state of debate, for Members of the House, the Government, experts and, particularly importantly, the wider public.

5. We decided to launch our inquiry well before publication of the White Paper to ensure that we could publish our report within the consultation period, and announced the following terms of reference in February 2006: "to consider whether the proposals contained in the Pensions Commission's Second Report and the forthcoming Government White Paper provide the basis for enduring pension reform." The detailed terms of reference are set out in Appendix A.

6. We initially received written evidence from over 50 interested organisations and individuals. The Committee began its programme of oral evidence sessions in April and May, and held further hearings in June after the White Paper was published. The transcripts of these hearings are published in a separate volume. We issued a call for further written evidence on the Government's proposals, and are grateful for the 17 further memoranda received, particularly as we had to impose a tight deadline for submissions.

7. Our sister Committee, the Treasury Committee, published a report on the Design of the National Pension Savings Scheme and the role of financial services regulation in May, shortly before the White Paper was published, and we have used evidence submitted to that inquiry, and the report's analysis and conclusions, during our own work.[4]

8. As part of its process of inquiry, the Committee visited Sweden in early May to discuss the significant initiatives that have happened there over the last 20 years. We were able to meet politicians, academics, civil servants and those involved in Sweden's 'Premium Pension Authority', which is similar in some ways to the Pensions Commission's proposed National Pension Savings Scheme. We are very grateful to all those who met with us and those who helped organise the visit.

9. The Committee also had an opportunity to learn the views of a wider audience through a special "select committee session" on the Radio 4 programme 'You and Yours', held on 27 June. The calls and emails received have been reflected in this report, and a summary of the views expressed is printed in the volume of written evidence. We are grateful to all those involved in the programme, and to those members of the public who called or emailed.

10. We would like to thank our three Specialist Advisers for their assistance and expertise: Carl Emmerson, from the Institute for Fiscal Studies, Ruth Hancock, Professor of non-clinical Gerontology at Essex University and Anthony Neuberger, Professor of Finance, Warwick Business School.

11. As Members of Parliament, through our constituency work and our surgeries, we recognise and understand the problems many people have faced in connection with their pension provision. We hope that the recommendations in this report, and the Government's proposals, will mark a way forward that will enable people to maintain a decent quality of life in their retirement.

The Pensions Commission analysis and proposals

12. The Pensions Commission's First and Second Reports analysed current UK pension provision in depth. We could not, and do not intend to, replicate that analysis here. The Commission did not seek to raise alarmist headlines of a "pensions crisis" but rather to set out the trends that, without change, would cause increasing problems over time. It set out four options from which "society and individuals have to choose:[5]

  • pensioners will become poorer relative to the rest of society; or
  • taxes/National Insurance contributions devoted to pensions must rise; or
  • the savings rate must rise; or
  • average retirement ages must rise."

13. The Commission proposed two key elements of reform:[6]

  • "The creation of a low cost, national funded pension savings scheme into which individuals will be automatically enrolled, but with the right to opt out, with a modest level of compulsory matching employer contributions, and delivering the opportunity to save for a pension at a low Annual Management Charge."
  • "Reforms to make the state system less means-tested and closer to universal than it would be if current indexation arrangements were continued indefinitely. In order to achieve this while maintaining the standard of living of the poorest pensioners it will need to be more generous on average. In the long-term this implies some mix of both an increase in taxes devoted to pensions expenditure and an increase in State Pension Ages." The Commission proposed relinking the Basic State Pension to earnings ideally in "2010 or 2011 as the public expenditure benefit of the rise in women's SPA begins to flow through."[7]

14. In its Final Report in April 2006 the Commission stated that "wide-ranging debate" on its Second Report had "revealed a high degree of consensus on the direction of policy reform now required." In particular:[8]

  • "There is almost universal acceptance that the combination of the present state pension system and the present voluntary system of private pension saving is not fit for purpose and will result in pension provision which is increasingly inadequate and unequal.
  • There is a significant degree of consensus that the solution must and should entail some combination of higher private pension saving, higher average retirement ages, and an increased percentage of national income spent on state pensions. The fourth option considered in our Reports (pensioners' incomes falling relative to average earnings) is clearly seen as unattractive.
  • And there is therefore general acceptance that future policy needs to be based both on significant reforms to the state system and on a new approach to private pension saving which goes beyond a wholly voluntary approach."

15. Witnesses to our inquiry, and the Government's White Paper, broadly agreed with the Commission's analysis, although witnesses identified some gaps and did not agree with all of its recommendations.[9] Overall, that analysis has provided the basis for a robust debate on future policy. We applaud the Pensions Commission for its assessment of pension provision and recommend that it be regarded as a model of how to utilise expertise in the policy process.

The Government's proposed reforms

16. When the Secretary of State appeared before us he described the reforms proposed by the Government in its White Paper as "a radical reform and the most important since Beveridge",[10] although this analogy was hotly disputed by three historians from the group 'History and Policy'.[11] The proposals followed those made by the Pensions Commission in certain respects, but with some key differences:

  • The final choice of the model to be used for the proposed system of "personal accounts" (equivalent to the Commission's National Pension Savings Scheme, the NPSS), and whether there should be a single provider (as the Commission recommended) is left open for further consultation.[12]
  • The objective for the reintroduction of the earnings link for the Basic State Pension is set at 2012 "subject to affordability and the fiscal position … in any event by the end of the Parliament at the latest", rather than 2010-11 as the Pensions Commission had recommended.[13]
  • The White Paper does not propose introducing a residency test for future Basic State Pension accruals. Instead, it proposes reforms to the contributory system and the arrangements to credit people into the system, in order to make both the Basic State Pension (BSP) and the State Second Pension (S2P) more generous for those with interrupted work records. Neither does it adopt the recommendation that the BSP should be awarded on a universal basis for pensioners over a certain age, say 75.[14]
  • The White Paper does not specifically propose separate State Pension Ages for the BSP and the S2P, an option suggested by the Pensions Commission,[15] and
  • The White Paper does not propose a permanent 'Pensions Advisory Commission'. Instead, in the context of increases in the State Pension Age, the Government proposes "to periodically commission reviews drawing on a range of independent expert advice in the light of emerging evidence on demographic change."[16]

17. In a press release timed to coincide with publication of the White Paper, the Pensions Commissioners "welcomed" the Government's proposals and said that they "represented a major opportunity to build consensus around a new pensions settlement which could last."[17]

18. The Government has set five tests for the reforms:

  • promoting personal responsibility;
  • being fair;
  • being simple;
  • being affordable, and
  • being sustainable.[18]


19. Witnesses giving evidence to the Committee were clear about the importance of reaching consensus on a settlement both within Parliament and with the public. This was also emphasised during our visit to Sweden.

20. We were told by the Secretary of State for Work and Pensions, the Rt Hon John Hutton MP:[19]

    "Fundamentally we have to get a consensus in Parliament about these reforms because otherwise it will not stick. The main architecture will collapse if there is a sense that it is going to be revisited five years, ten years, fifteen years from now. The party consensus around pensions reform is a fundamental building block to making sure that this system does last."

21. The Public and Commercial Services Union described in its written evidence the "absolute need for the country as a whole to come to an understanding and we would encourage the Government and industry to work hard to find that consensus which will be sustainable for the next few generations."[20] Teresa Perchard from Citizens Advice took the view that a start had already been made, describing the "political and cross-sectoral consensus about the shape of reform" that had been developed in the light of the Pensions Commission report as "astonishingly important."[21]

22. No reform of the pensions system will succeed unless it is able to transform individual savings and retirement behaviour, and employer and state contributions. For this to be achieved a political and then a public consensus must be reached. A consistent political commitment will then be required to make it stick.

The timetable for reform


23. There is much work still to be done. As well as the consultation period on the White Paper itself, which ends on 11 September 2006, commitments for further reviews and work include:

  • A rolling deregulatory review of the rules governing pensions, which will feed into the DWP simplification plan to be published "later this year"[22] and a pilot Pensions Law Rewrite Project;
  • An assessment of the overall welfare impact of personal accounts;[23]
  • Further work on personal accounts, including a final decision on the choice of single- or multi-provider model;[24]
  • Legislation to enable the conversion of Guaranteed Minimum Pension Rights into scheme benefits[25] - "the Government intends to bring forward legislation to enable this change as soon as a suitable opportunity arises";
  • A review of the organisations set up by the Pensions Act 2004, including the Pension Protection Fund and the Pensions Regulator;[26]
  • A formal review of the default retirement age in 2011;[27]
  • Further consideration of "the potential gains from greater tax and benefit integration in terms of improving financial incentives to work and save and providing greater simplicity for pensioners";[28] and
  • A review of protected rights and contracting out. [29]

24. When the Secretary of State gave evidence to us he explained that there would be a "flagship Pensions Bill" in the 2006-07 Parliamentary Session but that there might also need to be a second Bill in the 2007-08 Session, adding that "the big question mark is about the personal accounts." [30]

25. We asked the Secretary of State whether he would consider submitting a pensions bill (or bills) to pre-legislative scrutiny. He replied:[31]

    "We are not planning pre-legislative scrutiny of the Bill at this stage for a number of reasons, first and foremost because of the work the Turner Commission themselves have done over several years in presenting a package of reforms to us which we have then broadly carried forward. There has been a very extensive programme of work in consultation and deliberation that preceded the White Paper, and we are very anxious to get on and do the business now".

26. It will be of considerable interest to see what balance the Government strikes between setting down policy in primary legislation to lock in consensus, and what is left to Ministers to change through statutory instruments and codes of practice, particularly on personal accounts where most of the detail is not yet available. Further careful scrutiny will therefore be required, in our view.

27. We understand the Secretary of State's argument that there may not be time for the flagship Pensions Bill to be subject to pre-legislative scrutiny. We regret that the timing would appear to preclude this. We ask for a firm commitment that any follow-up bill on personal accounts, where much of the detail has yet to be finalised, will be made available for pre-legislative scrutiny.


28. The Pensions Commission proposed the establishment of a successor body, a Pensions Advisory Commission, "charged with monitoring developments and laying before Parliament every three to four years a report "describing relevant trends and spelling out the unavoidable trade offs which result." Its Final Report noted that the key issues for the Pensions Advisory Commission to consider would be:[32]

  • Latest best estimates of future life expectancy and thus of the unavoidable future trade-off between increased public expenditure and increased State Pension Ages. Including analysis of:
      • Whether gaps in life expectancy by socio-economic group are closing, widening or staying constant;
      • Evidence on whether ageing is on average 'healthy' (more years of active life) or 'unhealthy' (more years of frail dependent life);
  • Latest trends in private pension provision, and of participation and contribution rates within the NPSS, and thus of the overall coverage and adequacy of pension provision;
  • Analysis of trends in average retirement ages, and in employment rates among older people.

29. Contributors to the inquiry supporting some form of follow-on Commission included Which?,[33] the Society of Pension Consultants,[34] the TUC,[35] EEF,[36] ABI,[37] Age Concern,[38] the NASUWT,[39] Citizens Advice[40] and the National Association of Pension Funds.[41]

30. Richard Saunders of the Investment Management Association took a different view: [42]

    "In terms of a standing Commission, I would be a little bit cautious. I think one would have to define its function very carefully. One of the dangers I see in having a standing Commission is that it might be tempted to tinker."

31. Responding to this point, Stephen Haddrill of the Association of British Insurers said:

    "I would say that there are always lots of good ideas for change on pensions; having an independent body that can resist that is just as important."

32. The White Paper stated that the Government, instead of creating a new Commission, had decided to "periodically commission reviews drawing on a range of independent expert advice in the light of emerging evidence on demographic change."[43] The Secretary of State explained to us in evidence that there was an issue of timing:[44]

    "The Pensions Review Body that he [Lord Turner] wanted to set up was going to be tasked principally with overseeing that aspect of the policy agenda [State Pension Age]. It is nearly 20 years before we actually have to make those changes, and I do not want to set up a quango that does not have much of a job to do for 20 years."

33. In response, the Pensions Commissioners said "the timings of these reviews should be set in advance."[45] When this point was put to the Secretary of State he said that this was something he was prepared to consider.[46]

34. We note the point made by the Secretary of State that with regard to the State Pension Age the task is such a long term one that a standing body might not be necessary. However, projections of life expectancy are subject to a great deal of uncertainty, and in some circumstances can go down.[47]

35. We ask the Government to set out what form its periodically commissioned pension reviews will take and what their remit will be. We recommend that they be held regularly, the timings set in advance, and that they result in reports which are laid before Parliament. We also recommend that by the end of the next Parliament the Government commissions an independent review to analyse how implementation is progressing, broadly along the lines of the Pensions Commission.

36. The Pensions Commission envisaged a wider role for the new Advisory body, including the monitoring of employment rates of older people and pensions provision.[48] It linked its recommendation to the need to secure and maintain consensus over time, to which we have already referred and will return throughout this report.[49]

37. We recommend that the Government consider alternative ways of building additional stability into its proposed pensions reforms, to allow the new system to absorb external shocks and changes in political opinion more effectively over time. These could include predefined calculations akin to the Swedish 'balancing mechanism', to allow for changes in key variables such as longevity, rather than politically-based reviews, establishing an additional duty for the proposed personal accounts scheme trustees to analyse and comment on future proposed changes to the pensions system (from the point of view of maintaining the Government's published criteria for success over time) and enshrining any variables which may prove vulnerable to future political fiddling in primary legislation.

Undersaving and lack of consumer confidence: a poisonous combination

38. The Government's White Paper and the Pensions Commission report described the nature of the 'pensions problem' in detail. We would highlight two issues in particular: undersaving and consumer confidence.

39. The White Paper described the current situation in grave terms:[50]

    "Millions of people are not currently saving enough to meet their expectations for income once they retire. There are persistent and powerful barriers to people taking the long-term savings decisions that would be needed to address this problem. These include inertia, financial myopia, the cost of pension saving and the complexity of the decisions involved."

40. The Pensions Commission's Second Report noted that between 9 million and 12 million people were not saving enough for their retirement.[51] The White Paper queried this overall figure, but commented that on the basis of its current modelling there was likely to be "a significant amount of undersaving across most income groups"[52] and concluded that there were 7 million people undersaving for retirement.[53]

41. Whether the actual figure is seven, nine or 12 million people, this level of undersaving potentially has a massive impact on people's quality of life in retirement. It contributes to high poverty levels and dependence on means-tested benefits. Addressing it is rightly a matter of priority for the Government.

42. One of the reasons for undersaving is undoubtedly low levels of confidence in, and understanding of, the current system. As Which? put in its written evidence to this inquiry, "one of the key causes of the pensions crisis in the UK is this low trust and confidence in pensions"[54] and the British Bankers' Association commented that "the anxieties surrounding pensions and other mis-selling scandals, for both customers and financial advisers, run deep."[55]

43. The series of problems and scandals have included the mis-selling of endowments and the closure of Equitable Life to new business and cuts in policy values. Falls in the stock market, changes in the tax regime and accounting treatment have increased the cost of company schemes and made them more likely to close.

44. Some final salary occupational pension schemes, in particular, wound up without sufficient funds to enable the schemes to pay pensions as expected. The Parliamentary Ombudsman published a report in March 2006 on this issue, Trusting in the pensions promise.[56] The Ombudsman made three findings of Government maladministration and concluded that the maladministration "was a significant contributory factor in the creation of the financial losses suffered by individuals, along with other systemic factors." She added that it caused injustice "in the forms of a sense of outrage, lost opportunities to make informed choices or to take remedial action and distress, anxiety and uncertainty." [57]

45. The Government published its response to the report in June. It stated that it did "not believe that the information issued by the Government can be regarded as having caused the losses described in the report."[58]

46. The Public Administration Committee, which leads on matters relating to the work of the Ombudsman, held a number of oral evidence sessions on the Ombudsman's report at the same time as we were conducting our inquiry. It is to publish a report shortly. We take an interest in this issue and took evidence in June from James Purnell MP, Minister for Pensions Reform, on the Financial Assistance Scheme. We await with interest the conclusions of the Public Administration Committee.

47. This is, therefore, a challenging environment within which to launch reform of the pension system. Measures to engage the public and build trust highlighted in this report will be critical to ensuring reform achieves its objectives. We recommend that the Government consults on what proactive measures it could take to rebuild confidence in the pensions system and savings generally.

1   Department for Work and Pensions, Cm 6841, May 2006, (referred to throughout this report as the "White Paper"). Back

2   Department for Work and Pensions, Simplicity, security and choice: working and saving for retirement, Cm 5672, December 2002 Back

3   Work and Pensions Committee, Third Report of Session 2002-03, The Future of UK Pensions, HC 92 Back

4   Treasury Committee, Fifth Report of Session 2005-06, The Design of the National Pension Savings Scheme and the Role of Financial Services Regulation, HC 1074-I Back

5   Pensions Commission, First Report, October 2004, p 1 Back

6   Pensions Commission, Second Report, November 2005, p 6 Back

7   Pensions Commission, Second Report, November 2005, p 21 Back

8   Pensions Commission, Final Report, April 2006 Back

9   See, for example, Q 1 [Professor David Miles and Alison O'Connell] Back

10   Q 248 Back

11   Ev 424, para 23 Back

12   White Paper, p 50 Back

13   White Paper, para 37 Back

14   White Paper, p 126-7 Back

15   Pensions Commission, Second Report, November 2005, p 9 Back

16   White Paper, para 39 Back

17   "The Pensions Commissioners welcome White Paper", Pensions Commission press release, 25 May 2006 Back

18   White Paper, p 15 Back

19   Q 249 Back

20   Ev 331, para 30 Back

21   Q 501 Back

22   White Paper, p 87 Back

23   White Paper, Volume 2, paras 1.72, 2.75 and 2.176 and p 148 Back

24   White Paper, para 1.141 Back

25   White Paper, para 2.33 Back

26   White Paper, para 2.55 Back

27   White Paper, para 4.13 Back

28   White Paper, para 3.68 Back

29   White Paper, Volume 2, para 3.82 and 3.86 Back

30   Q 250 Back

31   Q 250 Back

32   Pensions Commission, Final Report, April 2006, p 43 Back

33   Ev 154, para 44 Back

34   Ev 172, para 21 Back

35   Ev 196, para 1.6 Back

36   Ev 210, para 23  Back

37   Ev 229, para 4.10 Back

38   Ev 317, para 2.23 Back

39   Ev 417, para 20 Back

40   Q 501 Back

41   Q 458 Back

42   Q 458 Back

43   White Paper, para 2.52 Back

44   Q 251 Back

45   "The Pensions Commissioners welcome White Paper", Pensions Commission press release, 25 May 2006 Back

46   Q 357 Back

47   Q 229 Back

48   Pensions Commission, Final Report, April 2006, p 43 Back

49   Part of the Swedish Pension System has an 'automatic balancing mechanism' built into it. This is designed to enable the pension system to adjust automatically to demographic and economic change. For more information, see Sunden A, 'The Swedish Experience with Pension Reform', Oxford Review of Economic Policy, Volume 22, No. 1, Spring 2006, p 139 Back

50   White Paper, p 31 Back

51   Pensions Commission, First Report, October 2004, p 159 Back

52   White Paper, Annex A, para A10 Back

53   White Paper, Annex A, para A7 Back

54   Ev 151, para 9 Back

55   Ev 218, para 1.1 Back

56   Parliamentary and Health Service Ombudsman, Sixth Report of Session 2005-06, HC 984 Back

57   Parliamentary and Health Service Ombudsman, Sixth Report of Session 2005-06, HC 984, paras 5.245 and 5.246 Back

58   Department for Work and Pensions, Response to Ombudsman's Report, para 57 Back

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