Retirement outcomes

This year marks the 100th anniversary of the payment of the first state pension. Introduced by the government of the time in response to rising concerns about poverty in old age, the state pension was part of a package of reforms to help the most vulnerable in society.

The ageing baby boom generation, increasing life expectancy, seriously declining workplace pension participation and falling birth rates mean that, in the future, millions of people will face inadequate pensions in retirement.

The government estimates that over 7m people are currently not saving enough to achieve a reasonable income in retirement. So, 100 years on from the first pension reforms, the UK again faces a significant challenge to introduce reforms to enable people to have a reasonable income in retirement - particularly those who are on low to moderate earnings during their working life.

In 2002, an independent commission - the Pensions Commission - was set up under the chairmanship of Lord Turner, to review the UK pension system and to make recommendations for change. These recommendations achieved broad cross-party support and wide consensus amongst employer, employee, industry and consumer groups.

The government is therefore implementing an integrated package of reforms to help improve retirement outcomes in the future, based on the Pensions Commission recommendations.

As a result, the Pensions Act 2007 reformed state pension provision and increased the state pension age and the Pensions Act 2008 reformed workplace pension provision. From 2012 there will be a new employer duty whereby employers will be required to automatically enrol employees into a workplace pension and make a minimum contribution. Employees will retain the right to opt out.

The employer and employee contribution, taken together with tax relief, mean that most employees can eventually expect pension contributions of at least 8 per cent of qualifying earnings, thereby encouraging and improving the incentive to save for millions of people.

There is no doubt that these are radical reforms, they are aimed at improving retirement outcomes for millions of people over the next century. Without them, the choices are stark: millions of poorer pensions or an unrealistic tax burden on those in work to support the increasing number of those who have retired.

A key element of the reforms, the Personal Accounts Delivery Authority is charged with delivering the Personal Accounts occupational pension scheme. Some people currently have no access to workplace pension provision, maybe because they do not meet their employer's qualification criteria or because their employer does not currently offer a workplace pension scheme. The Pensions Commission identified a need for a low charge, universally accessible pension scheme for low to median earners who do not have access to good quality pension provision. The Personal Accounts scheme is therefore being introduced alongside existing provision to meet that need.