My speech to the NAPF Investment Conference, Edinburgh, 15th March 2007


  1. It is a pleasure to be here and I would like to start by thanking your new Chief Executive, Joanne Segars, for inviting me to speak today and to wish her success in her new role.
  2. The Treasury and the National Association of Pension Funds have a long and productive relationship – and I know that you hold your annual pension investor conference every year around Budget time. Indeed it was a Budget clash which prevented my predecessor from attending your conference last year. I am pleased that I have been more fortunate today – but I hope you will understand that, with the Budget less than a week away, my answers to your questions later will necessarily be somewhat constrained.
  3. It is also a real pleasure to be back in Scotland again – my second visit since I became Economic Secretary with responsibility for financial services across the UK. Edinburgh and Glasgow represent the UK’s second largest financial centre, and are among the ten largest European centres for banking, life insurance, pensions and investment management as well as being one of the world’s major fund management centres, with over £530 billion under management.
  4. So it is appropriate that we are here in Scotland today to discuss pensions and the role of fund management. And if I start by saying that the pensions industry has been through a challenging period over the last decade, I am sure that no-one in this conference hall will disagree.
  5. When we came to power in 1997, this Government inherited a number of long-term and underlying trends in the pensions market, linked to wider social, economic, and demographic changes over the last few decades – trends faced by many developed countries. Since 1997, the Government has worked with industry, individuals and employers to respond and adapt. So today I would like to look back at the four most significant trends in the pensions industry, and outline the Government’s response to date. My argument is that while we have been facing real challenges, there have also been significant positive developments and these put us in a strong position to meet the challenges ahead and shape a new consensus for the future.

Long-term trends in the pensions market

  1. The first of these trends, and the most immediate challenge for us in 1997, was pensioner income inequality. In 1997 nearly a third of pensioners were living in relative poverty. And the income of the wealthiest fifth of pensioners had grown twice as quickly as the poorest fifth in the 18 years since 1979, reflecting both the success of the occupational pensions sector over the last generation and the relative decline in state support.
  2. Second, defined benefit schemes were facing growing challenges to their funding position which stretch back over the decade before 1997 but which were concealed by the strong stock market performance of the mid to late 1990s. These challenges include rising longevity resulting in increased liabilities; low and stable inflation leading to lower real long term interest rates; and changes in accounting standards including greater transparency and more stringent conditions on pension scheme funding.
  3. I know that some politicians and commentators believe the withdrawal of payable tax credits on dividends paid to pension funds contributed to these funding challenges. It will not surprise you that I disagree. The withdrawal of payable tax credits was part of a wider package of changes in corporation tax to improve the climate for quality long-term investment by removing a major distortion in the tax system that encouraged companies to pay out their profits as dividends, rather than retain them for reinvestment in the business: All the revenues were recycled back to investors and pension funds through cuts in the main corporation tax rates from 33% to 30%.
  4. The reality instead is that for many years strong equity markets and changing demographics could conceal the underlying financial pressures facing defined benefit schemes. It was significant improvements in life expectancy and new funding standards introduced following the scandals of the mid 1990s, combined with the stock market falls of the late 1990s and early this decade – accounting for a reduction of around £250bn in the market value of occupational pension scheme assets between 1999 and 2002 – which prompted many employers to pull out of defined benefit provision altogether.
  5. Which takes me to the third trend we inherited – the decline in contributions to private pensions since the late 1970s and early 1980s, despite private pension incomes being at an all time high.
  6. Contributions to occupational pensions fell from above 3 per cent of GDP in the early 1980s to around 1 and a half per cent in 1997, while the proportion of private sector employees participating in occupational schemes fell from around 37 per cent in 1991 to 30 per cent in 1997, and this trend has continued with a further decline to 26 per cent in 2004.
  7. Membership of occupational pensions has followed a similar trend, declining from around 12 million active members in the late 1970s to less than 10 million today. The growth of individual personal pensions since the late 1980s has only partly offset this decline and has not achieved the same degree of coverage.
  8. And fourth, there has been a marked decline in confidence in pensions and other financial investments in the last two decades. The mis-selling scandals surrounding personal pensions and endowment policies in the late 1980s and early 1990s damaged trust, particularly in the adviser market, and the scarring effects from those scandals still exist today.
  9. And the very high profile failure of a number of defined benefit pension schemes due to the insolvency of the sponsoring employer led to some members of pension schemes facing very significant losses in their pensions, damaging confidence in the security of employer sponsored pension schemes.

Policy approach since 1997 to address these trends

  1. So these are the background trends in the pension industry which in many cases have continued since 1997, but were firmly in place in the decade or more before this government came into office. Since then we have been trying to respond to these challenges. Inevitably it has been a learning process. But I believe we are making progress. Let me focus on a few areas where we have been working closely together:
  • tackling poverty;
  • promoting saving;
  • regulation
  • tax;
  • funding; and
  • corporate governance

Tackling Poverty

  1. First, from the beginning we have worked to tackle pensioner poverty. Since 1997 we have established Pension Credit, Winter Fuel Payments and have made successive increases to the basic State Pension, lifting more than 2 million pensioners out of absolute poverty, and 1 million out of relative poverty. And we have seen sustained increases in pensioner incomes more widely, with the poorest benefiting most. The average pensioner household was £1,400 better off this year than in 1997 whilst the poorest third of households were an average of £2,000 better off.

Promoting Pension Saving

  1. Second, we have been encouraging more people to save for their retirement. As a result of the move away from collective pension provision towards individual pension saving, the challenge we have faced, and are still facing today, is very much the same as previous governments: how to widen access to decent workplace pensions.
  2. We identified this as an issue with Green Papers in 1998 and 2000 – and subsequently introduced a range of policies, including stakeholder pensions, informed choice, and a simplified tax regime, to encourage pension saving based on the traditional ‘voluntarist’ approach between employees, employers, pension providers, and Government. This approach was based on an assumption that providing the right environment to save, and the right information and incentives to save, would be sufficient to encourage individuals to save for their retirement, and that providing them with simple, low cost, pension savings vehicles would enable them to do so.
  3. And we made some progress. Millions of stakeholder pensions have been sold to date – and the majority to their target group of moderate earners. And the low charges in stakeholder pensions have helped to exert downward pressure on personal pension charges in general.
  4. But progress was not fast enough, with many people still reluctant to start saving in a personal pension, leading to a growing concern that future generations were likely to reach retirement without saving enough to meet their expectations. This prompted the government to set up the independent Pension Commission, headed by Adair Turner, to assess trends in occupational and private pensions and long-term saving, and to advise whether there was a case for moving beyond the current voluntary system of pension provision in the UK.
  5. The Commission’s final report argued convincingly that individuals would fail to fill the gap in pension provision being left by employers because:
  • substantial portions of the market were not adequately served by the pensions industry; and
  • behavioural barriers were impeding rational long-term saving decisions.
  1. These are points that NAPF members would recognise – you have long argued the values of collective workplace saving for retirement.
  2. Last year, following the Turner report, we announced a substantial set of reforms across both state pensions and private pensions, many of which are in the pensions bill currently before Parliament.
  3. I have worked very closely with my colleague the Pensions Minister James Purnell over the past year on the implication of these reforms. We believe that the introduction of auto-enrolment, mandatory employer contributions, and Personal Accounts in 2012 will be a decisive step forward, with auto-enrolment helping overcome the behavioural barriers that may prevent individuals from starting to save for their retirement.
  4. Personal accounts offer, for the first time, access to decent pensions for the many who do not have access to an occupational pension with a 3% employer contribution. But we must make sure that personal accounts work effectively alongside existing provision to ensure that we level up not down.
  5. We face a considerable implementation challenge between now and 2012 and there are key issues we must get right:
  • the appropriate waiting period for schemes;
  • how exempt schemes should manage implementation of the reforms;
  • the appropriate method of charging for personal accounts;
  • how workplace pensions offered via a personal pension should be exempted from person accounts; and,
  • the information needs for personal accounts, and who should be responsible for these.
  1. And of course setting up the Delivery Authority and getting in the best private sector expertise will be imperative to ensuring that Personal Accounts follow best practice for pension scheme management.
  2. The DWP consultation on the Personal Accounts White Paper ends later this month. And we would like to thank the NAPF and others here today who have contributed to this consultation.

Pensions Regulation

  1. At the same time, my colleagues at the Department for Work and Pensions have been working intensively with the NAPF, pension scheme providers, and other stakeholders to improve the regulation of pensions and the protection of work based pension schemes. This improved protection included the establishment of the Pension Protection Fund and a proportionate, risk-based pensions regulator in the Pensions Act 2004, ensuring a solid and proportionate protection regime for pension scheme members, whilst minimising regulatory burdens on responsible schemes and employers.
  2. The Pension Protection Fund covers approximately 10,000 schemes – as a result 15 million people now have their pensions protected to PPF levels.
  3. The new Pensions Regulator has consulted widely in developing its pro-active risk-based approach to regulation, and its funding regime. Whilst it is still early days, its approach has been broadly welcomed, including by the NAPF
  4. The PPF and TPR also work together to produce the “Purple Book”, published for the first time last year. This will be an annual publication, and already covers over 50 per cent of schemes and over 85per cent of scheme members, and aims to increase knowledge and help understanding in the industry. The Purple Book illustrates that pension scheme deficits do vary quite markedly depending on when and how they are measured, and are particularly sensitive to movements in gilt and bonds rates. But over time the Purple Book should play an important role in exposing long term funding trends.
  5. We recognise that there is still work to be done on the regulatory framework. The NAPF, together with other stakeholders, are presently working with two independent reviewers and DWP on the pensions deregulatory review. The reviewers recently published a consultation document and we look forward to receiving their recommendations in the spring.

Pensions and taxation

  1. At the Treasury, it is our responsibility is to get the tax regime right – this is crucial to providing the right environment and incentives to encourage pension saving.
  2. By the beginning of the decade and after many years of change and reform at the margins, the pensions tax regime had become much too complex. There were numerous different regimes each with its own set of rules and limits. Tax relief – a longstanding part of the UK pensions landscape, worth up to £14bn per annum – is a valuable tool. It raises incentives to save in a pension relative to other products; encourages employer engagement; and sits alongside our role in tackling pensioner poverty. Yet these signals were being lost in complexity.
  3. That is why we have introduced the new simplified regime for pensions tax – which was introduced from last April, following a long period of consultation in which NAPF and its members played a critical role.
  4. In implementing our pensions simplification programme, the Government’s ambition has been to maintain stability, fairness and encourage long-term saving based on a small number of key principles which underpin pensions tax relief. These principles have guided and continue to guide our actions. Being clear about our principles supports our objectives of fairness, transparency, and flexibility and therefore enables people to make informed choices about pension saving.
  5. Let me take them in turn.
  6. First we provide generous pensions tax relief to support pensions saving to produce an income in retirement. Pensions tax relief is not there to support pre-retirement income. Nor is it to support asset accumulation or inheritance.
  7. Second, it is because pension savings are necessarily less flexible than other savings and are locked away until retirement that we provide pensions with more favourable tax treatment compared with other forms of saving.
  8. Third, since it is more efficient for pensions, like many other benefits to be provided on a collective basis through the employer, we provide extra incentives for employer contributions.
  9. And finally, affordability: we have always been clear that the cost of the incentives in the pensions tax system must be within the current fiscal projections.
  10. I understand very well that in implementing pensions simplification, it is important to provide a stable environment to allow the pensions industry to plan ahead and minimise disruption to the regimes already in place that are working well.
  11. At the same time we will need to respond to circumstances which risk taking us away from these principles – or when the market seeks to identify loopholes in legislation that permit behaviours that were clearly outside the original intensions of that legislation.
  12. We do not want to stifle innovation or prevent the industry from responding to new challenges. But there have been and will be times when the Government needs to act to respond to use of the regime that is not in accordance with these principles. And the more transparent we can be about our principles and intentions, the less likely we are to have misunderstandings on the way.

Pensions and funding policy

  1. The Treasury also has wider responsibilities which have a direct impact on pensions saving and investment, not least the long-term stability, productivity and profitability of the economy as a whole.
  2. There are two further issues I would like to focus on today:
  • the role that fiscal and funding policy plays in supporting pension scheme investment;
  • and the importance of ensuring that institutional investment supports long-term investment and dynamism in the economy.
  1. First funding policy. Developments in pension scheme funding led us to review the regulatory framework we had in place for pensions in 2004. As key players in the financial markets, you are sensitive to movements in the market, and contribute to those movements.
  2. And the financial position of pensions funds is highly sensitive to financial market fluctuations as recent events attest. From 2001 to 2003, the overall funding position deteriorated mostly due to the fall in equity prices. Since then, the equity market has recovered somewhat, but this has been offset by the sharp decrease in interest rates, as new accounting standards require pension schemes liabilities to be discounted by mark-to-market bond yields. And since the beginning of last year, the increase in bond yields, strengthening in equity markets, and sizeable contributions from sponsoring companies, have led to a substantial reduction in size of deficits.
  3. As you will of course know, interest rates at long maturities fell to very low levels last year. They have risen more recently but, nonetheless, remain at close to historic lows.
  4. This mainly reflects wider trends in global saving and investment. However, the UK yield curve has been consistently inverted for the better part of a decade, suggesting a sustained UK-specific influence on long term interest rates over and above that exerted by global influences. One important explanation is the rising demand from defined benefit pension schemes for long-conventional and index-linked bonds in order to match pension liabilities.
  5. Over the last decade, the composition of your portfolios has gradually shifted from equities to bonds and similar fixed-income assets: the percentage of equities in defined benefit schemes has fallen from around 75 per cent in 1995 to 55 per cent in 2005. This shift has intensified recently.
  6. Underlying this increased attractiveness of long-dated and index-linked bonds are several factors including:
  • the growing maturity of liabilities both due to ageing of schemes’ members and to the closure of defined benefit schemes to new entrants, and in some cases to new accruals;
  • the cumulative effect of regulation over a long period designed to provide more protection to scheme members and which has changed the nature of pension fund liabilities, making them more ‘debt-like’.
  • a better understanding of risks, their measurement and a decrease in risk tolerance of both trustees and corporate sponsors; and
  • the implementation of new accounting standards (FRS17), which highlighted a source of volatility to pension funds and sponsoring companies’ balance sheets to interest rates fluctuations that was not apparent in the previous system. This greater awareness of risks has encouraged pension funds to invest in liability matching assets, such as bonds, in order to offset liabilities volatility.
  1. The Government has listened carefully and responded to this strong demand:
  • After consultation, we introduced nominal and real ultra long gilts in 2005, and built them up to benchmarks.
  • We have heavily skewed gilt issuance towards long-dated and index-linked gilts, as this was consistent with the Government’s cost minimisation objective. Both long conventional (£25.3 billion) and index-linked (£17.3 billion) absolute issuances in 2006-07 are the highest since the DMO was established in 1998.
  1. Our annual consultation in January with gilt-edged market makers and major end-investors showed clear support for this strategy. As usual, we publish our funding remit on Budget day.
  2. And as usual, our debt management strategy is clearly based on value for money for the tax-payer and managing risk to the public finances. Last year, this meant skewing issuance towards the long-end of the curve, while balancing the cost advantages of doing so against the risks.
  3. I can see that underlying conditions, notably the shape of the yield curve and strong demand for long-dated and index-linked gilts, are very similar to a year ago and also seem likely to be sustained over the medium term.
  4. Reflecting this, my conclusion is that our policy of skewing issuance towards long-dated and index-linked gilts is the right policy and will continue.
  5. I hope you will agree that this is the right strategy both for pension funds and for the wider economy.

Institutional Investment

  1. Finally let me say something about the wider role you as institutional investors play in the economy. As I said in a speech last week looking at the importance of long-termism in the British economy, a dynamic and successful economy depends on two key characteristics. First, competition so that firms experience pressure to adapt and change. And second, companies succeeding through making the right long-term investments in the areas which are critical to competitive advantage.
  2. The environment which determines the climate for firms to invest is not simply a function of macroeconomics, tax, or regulation, vital though these all are. Investment decisions are also determined by a chain of relationships – we call this the “investment chain” – linking the owners of capital, through savings products or pensions, to institutional investors, to fund managers to the boards of companies, themselves accountable to shareholders.
  3. The efficient functioning of this chain is critical to the effective allocation of capital, and therefore to the UK’s productivity and long-term economic performance. And as you know, since 1997 the Government has responded to concerns that the investment chain has not been operating as efficiently as possible, by systematically reviewing each link in the chain, through the Myners, Sandler, Higgs and Morris reviews among others. These reviews have identified a number of important issues of particular relevance to pension fund trustees and fund managers.
  4. First, the sheer complexity of the chain means those acting at each stage of the chain may not have the right incentives and expertise to ensure the long-term interests of pension fund beneficiaries are effectively represented.
  5. Second, savers – in this case pension fund beneficiaries – often struggle to exert effective pressure, and therefore have difficulties holding trustees and their managers accountable. This is possibly due to a lack of financial skills on the part of savers, or their inability to access and act on information on how their savings are invested. Or, it can be due to weaknesses in the role and expertise of those whose role it is to protect customers’ interests – especially pension fund trustees.
  6. Third, there is a set of issues around improving the governance of public companies including the need for more active and engaged shareholders.
  7. Fourth, Myners pointed to areas of uncertainty in the relationship between pension trustees, advisers and fund managers. This leads to a lack of clarity in the asset allocation process and unnecessary short-termism in fund managers’ approach to investment, due to misunderstandings about the timescale on which their performance is judged.
  8. And these issues are only compounded if pension fund trustees lack the skills, information and resources to make decisions effectively. As the NAPF recognises, taking steps to ensure effective decision-making is the most fundamental of the Myners Principles.
  9. I recognise the effort trustees have made to integrate the Myners principles – and the associated Institutional Shareholder Committee principles of engagement – into their decision-making. I say integrate because with a principles-based comply or explain regime the key requirement is ‘thoughtful adoption’ – rather than ‘grudging compliance’. But surveys have shown that there still remain gaps in the uptake and use of these principles.
  10. More can certainly be done to strengthen shareholder engagement and the effectiveness of trustee decision-making. So we fully support the current review of the Myners principles by the National Association of Pensions Funds. This Review asks searching questions about the Principles and the ways to improve their effectiveness, as well as seeking to determine if the gaps that we identified in 2004 have closed. I should add here that Joanne has asked me to remind you to get your responses in on time!
  11. And I also want to expand briefly on the point I have just made about accountability. It is accepted that pension fund trustees and their fund managers should be accountable to their beneficiaries. Savers – in this case pension fund members – should be able to judge with confidence that their funds under management are being managed to the best of their interests.
  12. The exercise of voting rights attached to shares is a crucial element of an effective engagement strategy. It is clear to me that savers, as ultimate owners, have a right to know how their agents are managing their investment. This knowledge will help to improve the accountability of institutional investors to their clients, and it will also reduce the potential for conflicts of interest that arise when institutional investors vote on resolutions by companies with which they have, or indeed might have, a relationship.
  13. I applaud the progress made by institutional investors in voluntary disclosure of voting. In 2003 only 2 institutions disclosed how they voted their shares. In a group of the largest firms, that figure is now 16 out of a possible 33, and represents 42% of managed UK equities. But there is clearly a long way to go before all savers can know how the ownership rights of shares – bought with their money – are exercised.
  14. The Government’s objective is to achieve a practical and workable regime that provides reasonable levels of disclosure at a proportionate cost. Our clear – and stated – preference is for industry to work to a voluntary approach. Regulation is neither the Government’s or industry’s first best choice. But, any voluntary approach needs to be effective. An effective voluntary ‘comply or explain’ code would result in industry:
  • acknowledging the desirability of disclosure of voting disclosure
  • having a disclosure policy in place;
  • considering the basis for disclosure against that policy and making disclosures where appropriate; and
  • where voting is not disclosed, providing principled reasons where voting is not disclosed, either in general or in specific cases.
  1. I met the Institutional Shareholders Committee last week to discuss progress with a voluntary approach and I am encouraged that the ISC have said they will have an industry comply or explain code up and running by the Summer, following a period of consultation. The Treasury will cooperate fully with the ISC in this and we will encourage them to involve a wide range of interested parties in the development of this code.


  1. In conclusion, this has been a challenging period for all of us involved in pensions policy and provision. It has been a period of significant adjustment for both the industry and Government in response to powerful and long-standing trends in demographics, financial markets and behaviour.
  2. I believe that together we have made real progress. There is a real prospect of consensus in pensions policy for the decades to come. And we look forward to working with you and the wider industry to deliver what I believe are shared objectives – and a strong and stable economy and safe, adequate and fair pension provision for all for the years to come.
  3. Thank you.
Posted November 26th, 2015 by admin