PPI PENSIONS POLICY INSTITUTE Shaping a stable pensions solution - PowerPoint PPT Presentation

PPI PENSIONS POLICY INSTITUTE Shaping a stable pensions solution How pension experts would reform UK pensions Launch of the Final Report 29 March 2006 www.pensionspolicyinstitute.org.uk

PPI PENSIONS POLICY INSTITUTE Shaping a stable pensions solution • 1 year • 5 seminars • 8 papers • 79 experts • 43 organisations • 30 reform proposals

Majority view: PPI PENSIONS POLICY INSTITUTE 2 clear roles for the state 1. Deliver better on the one role that only the state can do - poverty prevention 2. Enable and incentivise the private sector to do what it does best – provide earnings- related pensions on a voluntary basis.

PPI PENSIONS POLICY INSTITUTE Majority view: Rationale 1. State pension has to guarantee against poverty in retirement 2. Extensive means-testing is not sustainable 3. Coverage of state pensions needs to improve 4. For earnings-related provision: voluntary (private) preferred over compulsory (state) 5. Working longer is key

More older people PPI PENSIONS POLICY INSTITUTE will be means tested Proportion of pensioner households eligible for Pension Credit under current system, PPI estimate 85% 75% 50% Today 2030 2050

The Pension Credit take-up PPI PENSIONS POLICY INSTITUTE problem Take-up, 2003/4 Guarantee Credit 69 - 81% only Guarantee Credit 63 – 73% and Savings Credit Savings Credit only 36 – 46% All Pension Credit 58 – 66%

PPI PENSIONS POLICY INSTITUTE Keeping the consensus solution stable • Standing pension commission: research & advisory, making recommendations, setting policy? • Permanent or regular? • Accountability and transparency? • Simplicity the best approach?

PPI PENSIONS POLICY INSTITUTE The UK pension system Tier 1 Tier 2 Tier 3 State State Private, tax incentivised Unfunded Unfunded Funded Contributory Contributory Contributory or credits or (different) credits Compulsory Compulsory Voluntary for most workers for most employees BSP: Basic S2P: State Occupational State Second and personal Contracting Pension Pension pensions -out Previously SERPS State Pension Credit = Guarantee Credit + Savings Credit Means-tested

The shape of the PPI PENSIONS POLICY INSTITUTE consensus solution Tier 1 Tier 3 State Private, tax incentivised Bigger Funded and Contributory wider Voluntary BSP: Basic Occupational State and personal Pension pensions Means-tested Smaller State

Pensions Commission PPI PENSIONS POLICY INSTITUTE preferred approach Tier 1 Tier 3 Tier 2 Tier 2½ State State State/Private Private, tax partnership incentivised Unfunded Unfunded Funded Funded Future accruals: Contributory or Contributory Contributory residency-based (revised) credits Universal over Compulsory for age 75 Compulsory for employer if Voluntary most employees employee does Compulsory for and self not opt out most workers employed NPSS: Occupational S2P: State National BSP: Basic and personal Second Pension State Pension pensions Pension Savings Scheme DB only State Pension Credit = Guarantee Credit + Savings Credit Means-tested

Means-testing could be PPI reduced, but the Pensions PENSIONS POLICY INSTITUTE Commission proposal maintains eligibility for Pension Credit at current levels Proportion of ‘pensioner benefit units’ eligible for Pension Credit, PPI estimates 85% Current system 75% After Pensions Commission proposals for state pensions 50% and NPSS 45% 45% Possible with a more universal flat-rate pension within the ~10% ~10% same cost envelope as the Pensions Commission 2005 2030 2050

State pension costs will PPI PENSIONS POLICY INSTITUTE increase Cost of Pensions Cost of state pension 9% Commission proposals, system, % GDP % GDP 8% 7% 6% 5% 4% 3% 2% 1% 0% 2010 2020 2030 2040 2050

PPI PENSIONS POLICY INSTITUTE Can we be bolder? • Reduce current means-testing? • Move to a flat-rate single pension quicker? • Go further to equalise entitlement? • Reform tax incentives? • Look for ways of paying for better state pensions?