Rt Hon Lord Lilley

    Lilley plan would give every working person their own pension fund

    The Rt Hon Peter Lilley MP, former Secretary of State for Social Security, today launches a new plan to ensure that everyone has their own pension fund, built up over their working lives, at least sufficient to free them from dependence on means tested retirement benefits. Each person?s fund would be paid for by rebates from their National Insurance contributions and would replace the unfunded State Second Pension[1] for the first twenty years of retirement.

    The proposals are published today by the independent think-tank, the Social Market Foundation[2] in “Save our Pensions? in which the former Secretary of State draws on his experience of reforming Social Security to inject some new ideas into the debate on Britain?s pension crisis. “Save our Pensions? details how every one would be guaranteed a minimum second pension and would have their pension/annuity topped up if their fund was insufficient to pay for an income at the guaranteed level[3]. The reforms would be phased in over time[4]. He says “these proposals apply the thinking behind ?Basic Pension Plus? (which I announced in 1997) to the new State Second Pension but would leave the Basic State Pension unchanged. The plan is far more radical than the idea floated by the government of making the better off opt out of the S2P. That would have left all those with earnings below half the national average reliant on the unfunded state scheme while creating difficulties for those whose incomes fluctuated around that level?[5].

    He argues that we are already compelled to pay for a State Second Pension but this is inadequate to free most people from reliance on means tested retirement benefits[6] which discourage saving by the less well off. Requiring everyone to make adequate provision for their own retirement would be fairer because the prudent would no longer be compelled to pay twice – to support the imprudent as well as themselves. It would also in due course render redundant the hugely complex Pensions Credit which extends disincentives to save up the income scale.

    Peter Lilley said today:

    “This proposal would bring the biggest extension of wealth ownership since the growth of home ownership. With ownership comes choice. Australian experience shows that once people own their own pension account far more choose to make additional voluntary savings. Moreover, it will give people freedom to choose when to retire (once their fund is sufficient to avoid dependence on benefits) while giving them a greater incentive to work longer.?

    “The government is rightly committed to raise the proportion of UK pension liabilities funded by savings to 60%. If it is to have any chance of achieving this without raising the state pension age, this sort of radical reform is needed.?

    “Requiring everyone to have a pension account will substantially cut management costs ? over half of which result from the cost of acquiring investors. A ?% cut in annual management charges would boost final pensions by about 13%.?

    Peter Lilley also argues that the individual fund should be set to provide a pension/annuity for 20 years of retirement after which the state should pay the unfunded State Second Pension. This would disproportionately cut the cost of annuities by removing the need to provide for unlikely but conceivable increases in longevity.

    He also proposes to boost pensions of the less well off ? who currently subsidise the longer lived rich – by enabling annuity providers to reflect life expectancy of different income groups.

    He concludes:

    “The current pensions crisis and our ageing population make radical action and creative thinking essential. These proposals – as well as extending wealth ownership not least to the lower paid, lifting people out of means testing, and restoring incentives to save – will generate an unprecedented flow of long term saving and investment, reduce the future tax burden on our economy, and enable us to draw on overseas investments to help pay for Britain?s ageing population.?

    Notes to Editors


    [1] The Government Actuary would set the rebates required to fund a second pension at a level sufficient together with the Basic State Pension, to ensure that everyone is floated clear of means tested retirement benefits. These rebates are paid directly into their personal or occupational pension fund.

    [2] The Social Market Foundation is an independent think-tank which commissions and publishes original papers on key topics in the economic and social fields, with a view to stimulating public discussion on the performance of markets and the social framework within which they operate. Its Chairman is Lord Lipsey of Tooting Bec and its Director is Philip Collins.

    [3] The funds would be invested on a statutory “Prudent Person? basis as in Australia. This would prevent fund managers betting against the guarantee if the fund has underperformed. They would also be required to invest the guaranteed and non-guaranteed elements of the funds on the same basis.

    [4] The new mandatory funded pension would be introduced progressively with each cohort of young people entering employment. Everyone in work who was born thirty years or less before the new system starts would be required to have a Funded Second Pension. They would receive a NI rebate equivalent to the value of the amount they would accrue under a S2P set at a level sufficient to take them clear of means tested benefits. Those born more than 30 years before the start date would retain the choice, as at present, of remaining in the unfunded S2P or opting into a funded private pension.

    [5] At present those with earnings below that level who wish to contract out can only receive rebates in respect of part of their entitlement to S2P. Lilley?s proposal would enable those with earnings below half the national average to receive a minimum rebate reflecting their full entitlement to accrue pension as if their earnings were equal to half the national average.

    [6]The Minimum Income Guarantee replaced Income Support in 1999 for those above the State Pension Age. It is set at a level higher than the Income Support level. In 2003/4 its basic value is ?102.10 per week for a single person and ?155.80 for a couple. Any pensioner with an income below the MIG is entitled to have their income topped up to the MIG level (subject to an assets test). From October 2003 this will be joined by the Pension Credit which will extend means testing further up the income scale.

    For further information:

    Please contact:

    Peter Lilley on 020 7219 4577 or 077 20 29 79 56 or

    Ann Rossiter, Director of Research at the Social Market Foundation on 020 7227 4408 or 07961 116108.