Below is the text of Mr Major’s joint press conference with the Secretary of State for Social Services, Peter Lilley, held in London on Wednesday 5th March 1997. The press conference was on the subject of the pension plans that the Government was planning.
Good Morning. I daresay earlier this morning many of you will have heard speculation about what Peter and I are going to announce. If I could just say at the outset, a great deal of that speculation, as you will see, is very wide of the mark. What Peter and I will present this morning are plans for a very fundamental improvement in our provisions for future pensions.
And the plans have a very long term horizon indeed, they will take effect over a generation and what you will see this morning reflects the outcome of a great deal of detailed work over a very long period. And for that reason the press conference this morning will take a somewhat different form from normal. In a few moments I will ask Peter to take you in detail through a presentation of how our plans will work. But before I ask him to do that I would just like to set them in a more general context.
We have pursued for quite a few years a strong and consistent policy of encouraging personal ownership by individuals and by families, and we have done that for sound reasons. We believe ownership of savings and assets gives people independence and it gives them security. It enables them to provide themselves for themselves and for their family, and with that self-reliance comes self-respect and a greater freedom of choice.
Over the last 18 years, for example, we have made huge progress in encouraging home ownership. The proportion of home owners across the UK has risen from around 54 percent in 1979 to 67 percent today. We have pursued the same path by encouraging long term savings through the introduction of schemes like TESSAs and Personal Equity Plans. Two and a half million people are now owners of Personal Equity Plans and there are four and a half million owners of Tax Exempt Special Savings Accounts.
We have also encouraged wider share ownership, not least through privatisations but in other ways as well of course. And many of you will have been present a week or so ago when I announced a further development of our policy for employee share ownership, and of course with the distribution of shares from converting building societies this spring, share ownership also will get another massive boost.
But apart from that, some of our most fundamental reforms have been in pension provision. In the mid-1980s when I was a Junior Social Security Minister, I helped Norman Fowler and Tony Newton create a massive expansion of private pensions by allowing people rebates of national insurance contributions to invest themselves in a personal pension scheme.
In 1979, funds invested in occupational and personal pensions amounted, in today’s money, to. around 132 billion, that is 25 percent of GDP. Today that investment amounts to 650 billion pounds, 95 percent of GDP, an investment that underwrites pension security for people in the future.
We have continued to build on those pension reforms in the 1990s. For example, the Pensions Act in 1995 fulfilled our manifesto commitment to make personal pensions attractive to people across the age range by introducing age related rebates of national insurance contributions. And just a few weeks ago I announced further measures to facilitate group personal pensions and to give greater flexibility to people with personal pensions who join occupational schemes.
At the moment, 70 percent of people retiring do so with an occupational or a personal pension in addition to the state retirement pension. And the steps we have taken already will ensure that the proportion of people retiring with funded pensions will continue to grow. If we took no further steps whatsoever, we would expect approaching 90 percent of people to retire with additional pension income by 2025.
So that is the background building up to the changes that I will set out in broad outline and that Peter will then set out in detail in the next few minutes. Because we have now reached the point where we can go a good deal further. Now that funded second pensions are established, are growing and are secure, the time is right to start progress towards a secure proper funding of the basic state pension as well. My intention is to ensure that all of the younger generation can look forward to the benefits and security of a pension fund, built up in their own name. The proposals that we are proposing today will do that, and it will do that by enabling every young person to accumulate an investment fund that could yield considerably more than their basic state pension entitlement. And the proposals amount to the most fundamental enhancement to the state pension scheme since it was first introduced.
At the heart of our proposals is a scheme called Basic Pension Plus. Firstly, to remove fears and misunderstandings, let me make this point clear. The state will continue to guarantee that everyone will receive at least their basic state pension, as now, uprated to take account of inflation, let me make that basic point straight away so that no fears and misunderstandings can arise. And let me also make it clear that the entitlement of the current working generation to the basic pension, and to SERPS, the Earnings Related Pension Supplement, will remain the same. This package is about increasing security in retirement and not threatening existing security in retirement.
What we propose is that the younger generation will have a part of their national insurance contribution contributed into a pension fund in their name, a pension fund that they choose to invest the money on their behalf and that will build up to an asset that they will own. When they retire, they will receive the full benefit from this fund. Assuming reasonable investment growth, the pension they receive from it, even on the minimum contribution, could be considerably more than the current state pension entitlement, and Peter will give you further details of that shortly. But the state will top up the income where it proves necessary, should it prove necessary, to guarantee the basic state pension entitlement uprated for inflation.
And as Peter will also explain in a minute, there will be a further rebate to enable those earning more to provide a second earnings related pension on top of the basic pension. Gradually, across a generation, this scheme will enable us to switch the financing of our state pensions to savings and investment, funded from reductions in national insurance contributions, rather than by current taxes and charges at the time the pensions are paid. Not only will that benefit the next generation of pensioners, but it will mean that in due course, by the middle of the next century, we will be gradually removing most of the 50 billion pounds costs of pensions that would otherwise be borne by the current taxpayers of that time.
The United Kingdom is already better placed than any other major European economy to fund its future pension liabilities. What we are announcing today, when it is put into place, will put us another huge step ahead, enabling us to sustain a healthy low tax economy for the future.
It is a reform that reflects the best traditions of the philosophy this government has followed; it is dealing with the long term issues in a far sighted way; it is reinforcing the security and independence of individuals and families by building up their own assets and their own resources; it will provide funds for investment in the economy; it is prudent with the public finances and it safeguards people’s expectations. It is a reform that will mean that the British people will be able to look forward to retirement with even greater confidence in future and it offers for our young people a pensions opportunity that quite literally will be unrivalled anywhere else in the world.
That is the outline of what we are seeking to do with these plans. I will now invite Peter to present to you those plans in detail so that you can see how they will work, what they will cost, what they will mean and remove any other fears and uncertainties people may have, and then we will take your questions.
Good Morning. Thank you, Prime Minister. I want to outline a plan which over a generation will bring about the biggest extension of personal ownership since the spread of home ownership. It will ensure every young person builds up their own pension fund; it will guarantee them at least as good a pension as the present basic state pension, fully protected against inflation; it will on top of that give them a chance to share in economic growth; it will harness the power of investment to help the less well off; it will massively boost the flow of funds, strengthening our economy; and it will ultimately reduce the burden of public expenditure by some 40 billion pounds a year. The plan is the next step in my programme of step-by-step reforms of social security and it is essential if we are to tackle one of the biggest issues facing all modern governments, how to ensure decent pensions for an ageing population.
When the welfare state began, there were 5 working people contributing to support one pensioner. By the year 2030, for every 5 working people there will be 3 pensioners, there will be more pensioners to support.
I have been struck by how concerned many young people are about whether the state will be able to provide them with pensions in the future. Indeed a recent Mori survey showed that more young people expect to win the national lottery jackpot than believe they will ever get an adequate state pension.
We must set people’s fears at rest, not with empty promises but concrete action to ensure the investments are here to pay for pensions without a crippling burden of tax. This country is already more successful than most similar countries in building up funds for the future. Because we have persuaded two-thirds of working people to opt out of State Earnings Related Pension Scheme, we have built up 650 billion pounds to pay for future pensions. That is not just more than any other country in Europe, it is more than all the other countries in the European Union put together.
But even in the United Kingdom, state pension provision still exceeds private provision. And the problem with state schemes is that they are pay as you go, nothing is saved or invested for the future. People may think that their national insurance contributions are being saved in funds to pay for their pensions; in fact what they put in goes straight out to the taxman, nothing is actually saved for the future. Yet we make companies build up investments so that they can meet their pension promises.
I believe it is now time to underpin state pensions with savings and investment and that is what we intend to do. But not by the state building up huge investment funds, but by enabling the rising generation to use part of their national insurance contributions to build up their own funds sufficient to pay their basic pension and more. In addition to the value of their contributions over their working lives, their funds will grow as the value of their investment grows.
So the plan has three key elements. First, the personal fund. Everyone in the new generation will have their own pension fund to finance their basic pension and more. They will choose an approved firm to manage it. They will own their own fund and any amount not used to pay for their pension can be passed on to their heirs. The second element is the rebate. They will receive a rebate from their national insurance contributions. Over their working lives it will be sufficient to build up a fund big enough to pay their basic pension. The government Actuary calculates that 9 pounds a week will be needed, so people will receive a rebate of 9 pounds a week, rising in line with inflation, paid into their fund. And the third element is the basic pension guarantee. The state will guarantee that everyone will receive a pension at least equal to their basic state pension, increased at least in line with inflation.
We have called the scheme Basic Pension Plus, because it is the basic pension, plus a fund, plus a rebate, plus a state guarantee. Each fund should grow to provide the basic pension. If for any reason a person’s fund is insufficient, the state will top up the pension it provides, so they will get their basic pension, everyone will be protected by the basic pension guarantee. No-one will do less well than under the present state scheme, and everyone stands to do better if, as we hope, the economy and their investments do well. If the return is 1 percent higher than they are assumed then the Government Actuary assumes they will get a pension nearly 30 percent above the basic pension. If the yield is 2 percent higher, the pension will be over 70 percent better.
In the 1980s Norman Fowler and John Major paved the way for more funded provision by allowing people to opt out of a State Earnings Related Pension Scheme into their own funded personal pension. Two-thirds of those eligible now opt for private schemes, but a third do not, mainly because their SERPS rebate would be too small to make it worthwhile setting up a personal fund. However, that problem won’t exist for people with a Basic Pension Plus fund. So everyone in the new generation will also be contracted out of SERPS. In addition to their 9 pounds a week rebate to fund their basic pension, employees will receive a rebate worth 5 percent of their earnings on which they pay national insurance. That will fund an earnings related second pension.
So a person on average wages will build up a fund which should be worth 130,000 pounds when they retire. That is sufficient to provide a pension of 175 pounds a week at today’s prices. And that is based on making the minimum contributions over most of a working life. But once everyone in work has their own fund, they and their employers will be able and encouraged to save more in their fund.
The new system will spread the benefits of investment to low earners and maintain help for the least well off. First, even low earners whose national insurance contributions are less than 9 pounds a week will receive .a full 9 pounds to pay into their pension fund. Second, people who are unemployed, sick or disabled, carers and some others, will receive credits, as now, towards their basic pension guarantee. And third, income support and other benefits will be available, as now, for those unable to build up adequate pensions.
We will phase in the new system of funded pensions gradually over a generation. Existing pensioners will not be affected by the new scheme and will continue to receive their state pensions rising at least in line with inflation. Likewise, the current working generation will continue to build entitlements to the basic state pension and be free to remain in or opt out of SERPS during the rest of their working lives.
The new Basic Pension Plus system will apply to the rising generation, all young people newly entering work, plus those aged up to their early 20s. They will receive rebates to build up their pension funds over their working lives. So it will take a generation to replace the present system. That means the impact on public revenues of the rebates needed to fund investment will grow very gradually over 40 years.
In addition, we could halve that impact by reversing the timing of tax relief on pensions for the new generation. Under the current system, contributions to pension funds attract tax relief, but pension income is taxable. That system will continue for the present generation. For the new generation, covered by Basic Pension Plus, I propose that pension contributions, including voluntary pension savings, be paid from net income and all pension income will be entirely tax free.
As far as the saver is concerned, the next tax treatment is equivalent to the old one, except for the lump sum, if the saver’S tax rate is the same in work and retirement. But for pension providers it should be possible to make the new PEP-style tax treatment far simpler and less onerous than the current regime.
To ensure that we do seize this opportunity for simplification, while protecting the immense contribution made by occupational and other schemes, I am inviting pension providers to join the working party which will draw up the detailed proposals to go in the Green Paper.
We are also determined to develop a simple but effective regulatory regime. The past abuse of mis-selling personal pensions to those who didn’t need them cannot recur under this proposal since everyone will need and get a Basic Pension Plus fund. But effective regulation will stop other problems, reduce costs, keep charges down, stop artificial inducements to switch between schemes and prevent over-risky investments being made to exploit the pensions guarantee. All that is explained in a technical note which you will be given later.
This proposed change in tax timing, combined with the gradual phasing in of the new system, will make the impact on public finances quite manageable. The net value of extra investment will amount to only about 160 million pounds a year and eventually it will produce massive savings in public expenditure reaching 40 billion pounds a year. At its peak, the net revenue foregone will be less than the peak costs of SERPS rebates which we have already taken in our stride. It will be a fraction of the savings resulting from the recent Pension Act, which will ease the burden of state pensions by some 13 billion pounds a year. And the extra rebates are small relative to normal growth of tax revenues.
Moreover, if the huge extra funds available for investment generated by the scheme, boost economic growth by just one-twentieth of one percent, the scheme will be entirely self-financing, although we have not taken account of this in costing the scheme.
All of us remaining in the present scheme stand to benefit from the extra investment in any jobs and growth it generates. Those who retire just ahead of the generation with Basic Pension Plus will know the state can better afford to look after them in old age as the cost of younger pensioners is lifted from the taxpayer.
To summarise, Basic Pension Plus will come in gradually over a generation. Everyone covered by the new system will have their own pension fund. They will receive a rebate of 9 pounds a week to fund their basic pension. They will be guaranteed to receive at least their basic state pension, protected against inflation. Employees will be opted out of SERPS and get a second rebate worth 5 percent of their earnings to fund their second earnings related pension. Because everyone will have a fund, they will be able and encouraged to save more on top. Anyone on average earnings paying in just the minimum contributions should accumulate a fund worth 130,000 pounds by retirement, paying a pension of 175 pounds a week in today’s money. Everyone stands to benefit from good economic and investment growth. An extra 1 percent investment yield would generate a pension 30 percent higher. The economy will be strengthened by a massive increase in long term investment funds. Ultimately the taxpayer and the economy will be relieved of the largest single item of public expenditure, some 40 billion pounds a year.
In short, British people can look forward to secure pensions, high investment and low tax.
I think, as you can see from that, a huge amount of work has gone into this over many months, predominantly by Peter and I congratulate him for that. Colleagues have been examining this for some weeks now and I am delighted we are now in a position to announce it.
Can I just say it is complex, there are many detailed questions that arise. We can provide you, there is a technical paper you can have, Oliver Heald will be available for those who wish to ask more detailed questions later and we will take some of the questions now. It is, I think, a revolution for the new generation in terms of pensions and probably one of the farthest sighted reforms produced by any government for a very long time, indeed.
As Peter said, we will be producing a Green Paper and consulting upon it and that will all take place before we finally commit ourselves to the detail of legislation which is going to be well into the next Parliament, probably even at the back end of the next Parliament by the time all the remaining work needs to be done.
QUESTIONS AND ANSWERS:
QUESTION (John Sergeant, BBC):
If it is going to be a fundamental reform, isn’t it a good idea to have as much cross-party support as possible for it, and is therefore this a good moment in what is effectively the middle of an election campaign to introduce a plan which will inevitably mean the other parties will disagree more than they will agree. And having said that, do you think it is a vote winner?
This has been under consideration for a long time, as I indicated a moment ago. And as to your point about cross-party support and support beyond it, that is precisely why we are not saying we are introducing it straight away, it is precisely why we have announced it now. We will have a Green Paper, there will be a lot of consultation and clearly we will wish to take as many people with us in this as we possibly can. But it has been worked out, it is ready to be announced, it seems to me rather unwise not to announce something that is worked out because you know sometimes these things leak in a rather unsatisfactory way. So I think it is better to be frank about what we propose, indicate we are going to consult and I would very much like to think we can bring other people with us. I think the idea of building up a personal pension pot, personal assets, that can be passed on to heirs after basic pension requirements have been met, is one that I think most people would find very attractive. But it is not going to be rushed into, there is going to be widespread consultation.
But is it a vote winner?
Well it has been designed to deal with the problems of public expenditure in the medium and long term. It is a very long term policy, but it isn’t a vote winner in the sense that we are saying to people in this election here you are, here is a new goody, because the people who are going to benefit from this in most cases will either only just be of voting age or not actually be of voting age. So it isn’t a short vote winner, it is the right thing to do for the economy, it is the right thing to do for pensions and it is the right thing that a far-sighted government should do, but it is not a short term scheme at all.
QUESTION (Peter Riddell):
You are going to increase enormously the assets in pension funds [indistinct] altering their structure, to say you have a personal asset is different from a [indistinct].
We will be operating so that it can run alongside occupational pensions which have been very effective and very valuable, and I think it can operate also for those with personal pensions. So it will be different from personal pensions as we have known it in that it will be a lot lower cost and universally available. So I don’t quite see what you mean by different, did you actually mean that the individual should have the right to pick and choose his shares within it rather than choose a manager?
It will increase vastly the amount of funds controlled, what is now a relatively small number of funds managed by management companies, the power you actually give to them over the economy is very significant indeed, and whether there has to be a change in the structure of those, whether to increase their power or not. just wonder whether you have given any thought to that?
We will certainly be consulting widely with the industry and want them to take an active part in helping us draw up the detailed Green Paper which this will need before we move to actual legislation.
We have thought of that, we have thought of a range of other things. And you actually put your finger on precisely why it is right to take this over the long term and right to consult on it. Peter mentioned in his presentation a few moments ago of course the particular problems there have been in the past with some people mis-selling on personal pensions. Over the last 10 years or so we have learnt a huge amount. I quoted the figures that have been built up in personal pension funds as a percentage of GDP over the last few years, so we know a huge amount more about how to do it and where the wrinkles are than ever we did before.
And this growth of future investment doesn’t suddenly appear overnight, Peter, it actually builds up substantially over the years. Peter quoted the figure of a net cost of 160 million a year, so it builds up over quite a time. There isn’t suddenly going to be a flood to create the problem you fear and we are consulting with the industry and with others about how to cope with the increased investment funds that will be available.
QUESTION (Michael Brunson, ITN):
How are you going to counter the argument that what you are doing, however good the reason is for you, is in effect privatising the pension, something that Mr Lilley said in the House that he would not do, but which your political opponents were making a good deal of. And secondly, will you condemn unreservedly the totality of David Evans’ remarks?
On the second point, yes. On the first point, we are not privatising the pension, we are personalising the pension. When you privatise something, you sell a state asset and it then goes entirely into private ownership. What we have made perfectly clear this morning is there is going to be a state guarantee of the basic pension, uprated in the future. So it is not a question of privatising, we are not privatising the pension, we are personalising it.
That is absolutely right. Privatising is a term that applies to assets, pensions are an obligation and the state stands foursquare behind its obligation to see decent pensions for people. We are doing three other things, we are not privatising, we are investing to make sure that that pension is more secure, we are personalising those investments by giving people a personal fund and a rebate to build up those investments, and we are guaranteeing that they will get at least what they get under the present system and in all likelihood substantially more.
We are guaranteeing in essence, and underwriting, the basic state pension and putting future governments in a position where they will never face the problem that they will be unable to meet their pension obligations. Now that is the real point. I can’t remember the figures, Peter will, as to how many people were in work for every person in retirement in 1950, but that proportion is shrinking and by 2020 or so there will only be about 1.6 people in work for every pensioner. Now that is a problem that wise governments address now, and that is what we are seeking to do, so that we can offer the state pension guarantee that otherwise might have been put at risk at a later stage.
QUESTION (Robin Oakley):
While you are talking of this basic pension guarantee, would this be the right stage, if you are really going to protect the worse off in society, to restore the link with earnings rather than merely with prices? And further to John Sergeant’s question earlier, since this is such a long term investment for the future of the country, would it not be wise to invite Labour and other parties to be involved, as pension providers are to be, in any advisory group that is now setting up the scheme for the future?
The Green Paper on consultation will accept from any, and we will accept advice and comment from anyone. There is no question of us saying to the other political parties that we don’t want to hear your views on it, we will want to hear their views on it, of course we will. Upon the first point that you raised, everybody would like to be in an economic position to increase the basic state pension, but it is in order to put ourselves in that position for future generations that we are going down this particular route, resources, to go back to earnings, are not something that any political party sadly thinks exist at the moment. But in order to ensure that better pension provision is available for everybody in the future, we need to look today to ensure that for the future, and that is precisely what we are doing.
And it does, for the first time, mean that people, even people just on the basic pension, can look to share in economic and investment growth because they will have that upside potential if their funds do well. And there is an earnings link in the second rebate, linked to their earnings, which means an increasing share of their future pension provision will be related to their earnings during their working life. So we are doing it in a prudent and affordable way. I think everybody realises that if one simply went to uprating pensions with no funds to provide for them in line with earnings, the state would have been in a much worse position to provide proper pensions in future and ultimately would probably have defaulted on its promise.
QUESTION (Trevor Kavanagh, The Sun):
Do you envisage these compulsory PEPS, which is basically what they are, being extended eventually to other areas of welfare such as unemployment and sickness benefit? And in view of the problems in Europe over pension funding and the possibility of a single currency, have you cleared it with the European Commission?
The answer to the second question is no and we don’t need to.
But what about the possibility of a single taxation and a single welfare policy which is being envisaged over there?
There is nothing that is being envisaged that would impact in that way upon our domestic pensions provision, and neither is there any possibility of this country being put in a position where it would have to pick up the pension liabilities of other countries because we have provided for our pensions and they haven’t provided for theirs. I know there is a great deal of worry about that and I am grateful to you for putting the question to me so I can dismiss that as a possibility. On your first point, whether we were thinking of extending this to other areas, we haven’t considered that at all, no. This is a free-standing reform dealing particularly with ensuring we can meet the pension requirements of future generations and meet it more generously than any government has been able to meet previous generations’ demand for good pensions, and it is solely in that context that we have produced this.
QUESTION (George Jones, Telegraph):
You have made a great deal of the guarantee that you are going to give that everybody will get the basic state pension, but as Mr Lilley pointed out, people could have 130,000 pounds in these funds. Will there be a guarantee that whatever happens to a financial institution, you could look at Barings, something like that, that money will be protected and they will get that? At the moment there are limits on the amount of investor compensation, have you thought about guaranteeing that sum, because people will have now their retirement funds compulsorily effectively put into a private scheme?
The basic pension will have the guarantee that we talked about. We of course strengthened the regulation of occupational pensions through the reforms I introduced in the Pensions Act 1995 and that particularly dealt with the threat which had been posed by Robert Maxwell to such funds, the only socialist that ever took private pensions at all seriously, and we believe that we have now created a much stronger regime to protect those investments than existed in the past and obviously that provides the framework in which additional investments over and above that to fund the basic pension will be made.
But if the fund collapses you only get back the basic state pension?
There is also a compensation mechanism for existing funds that people have, we have got 600 billion pounds already invested, this is an issue that already arises, and we have created a whole structure of regulation with, as a final long stop, the possibility of a compensation fund to bail out funds which were for any reason subject to a predator like Robert Maxwell or otherwise went belly-up. So that already exists.
QUESTION (Elinor Goodman, Channel 4 News):
You are presenting it as an extension of a choice of ownership, but to what extent would an individual have any say over what happened to their pension pot and are you sure that people actually want any more responsibility, isn’t this going to make people rather nervous, they don’t know anything about these kind of things and they are going to feel somehow more insecure?
They will know that they are at least as secure at present, and indeed more so because the government’s promise will be backed up by the investments to meet it. I agree with you that most people will not want to do the detailed management of an investment scheme and that will be handled by an approved manager, companies who wish to manage these funds will have to be approved by the Personal Investment Authority as meeting all the criteria necessary, and we don’t envisage individuals managing their own funds.
The Personal Investment Authority always warn us that the value of investments can go down as well as up. You say this should eventually save 40 billion pounds for the Treasury and it will build up a little treasure chest for every individual of around 130,000 pounds, a one percent increase in growth in the economy will add an extra 30 percent. On what is the basic figure predicated then, how well does the economy have to perform in order for these figures to work?
The Government Actuary makes cautious assumptions about the future yield of investments. When I tell you that the assumption he uses here and has been using, lies behind all the opting out contributions of SERPS, was 5 percent below the average yield throughout the lifetime of this government, so when I gave examples of it being 1 or 2 percent better, actually it has been S percent better over the lifetime of this government but I am not an insurance salesman so I don’t forecast that happening in the future because we can’t guarantee that this government will necessarily be here for the next 44 years, though I hope it will be for a large part of it. But in terms of the downside, of course there can be individual funds which will call upon the guarantee, and that will be an expenditure on the state. But clearly at present the state meets 100 percent of the cost of all basic pensions, this will be meeting part of the cost of some pensions where the fund fell short.
So to the extent that the state had a cost, it would diminish the 40 billion savings rather than create a new cost that wouldn’t otherwise exist, so that is the point you are getting at, isn’t it?
It is indeed, and I appreciate that on the other hand these must be predicated on some particular figure of annual growth in the economy and I wonder what that figure is.
It is predicated on the Government Actuary’s assumption on the yield on investments which is 4.25 percent, 4.25 percent more than inflation and the average yield since 1980 of pension funds in this country has been 9.6 percent.
So in short, with a small ‘c’, it has been predicated on the Actuary’s very conservative assessment, historically based on what he thinks funds will achieve.