(11 years, 12 months ago)
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Baroness Greengross
To ask Her Majesty’s Government what action they are taking to ensure access to good advice for people with small pension funds, and to maximise such people’s retirement income.
Baroness Greengross
My Lords, I start by declaring an interest. I head up the ILC-UK and the International Longevity Centre Global Alliance, which look at the impact of demographic change on all our services as we plan the future. I am really pleased that we have an opportunity to discuss what I want to look at—people with small pension pots—and the impact of the Financial Services Authority’s retail distribution review, which will be implemented on 1 January 2013. I support the principles underpinning the RDR; they are excellent. But there is at least one unintended consequence that might well follow, which really results from the fact that advisers will no longer be paid by commission but will charge a fee for the work that they do. I and others think that people on modest incomes will either be priced out of or excluded from the advice market. I have a deep concern that lots of people will not get the advice that they need. There will be an advice gap, with a detrimental effect on their incomes that will continue throughout their retirement, which as we know is likely to last much longer than they think it will last. These tend to be the people who have the least knowledge about what is going to happen to them regarding their pension when they retire.
The DWP estimates that by 2050 there will be 4.7 million pension pots of £2,000 or less, with many more than today expected to reach retirement with these small pots. The National Association of Pension Funds has said that there are currently 1.1 million retained DC pension funds with less than £5,000 in them; collectively these hold £2.3 billion of pension assets. A recent survey by KPMG of more than 3,000 customers found that only 31% would be prepared to pay for financial advice; 54% would pay no more than £50 for an hour’s advice; and only 1% would pay more than £200. There is a big risk here. These are exactly the sort of people who will receive no advice at all. Deloitte has recently found that more than 5 million clients may be left without advice as a result of RDR, as costs are made transparent and independent financial advisers focus, inevitably, on higher-net-worth customers.
Partnership Assurance has given us figures that tell us that 78% of annuities sold in the UK in 2011 were for fund sizes of under £40,000. For people with impaired health or lifestyle conditions, the difference between the best and worst rates can be up to 40%. At the same time, very few people exercise or even understand the benefits of exercising the open market option. Figures from the Association of British Insurers report that while joint annuities accounted for 42% in 2011, up from 29% in 2008, only 46% of annuities were bought via the open market option in 2011, up from 35% in 2008. But more people with larger pension funds choose this route than those with smaller pots—the people that I am really concerned about.
Ways of improving the situation might be to narrow the advice gap so that those with very small incomes have access to advice and do not miss the retirement income that they could have, and avoiding an information overload for people who just do not understand what all this is about anyway. Much more needs to be done to ensure that customer information is developed—and it must be from a consumer, rather than compliance, perspective, because people are just not interested, do not understand and then suffer later on. Urgent steps need to be taken to halt the continued erosion of the culture of saving that we used to have in this country. Inevitably, at the moment, we have lost a huge amount of trust in the industry, which is very sad and adds to this inevitable problem. The Government could also perhaps provide a much clearer distinction between the provision of information and the giving of advice, making it much clearer to what extent providers are able to guide customers without it being deemed advice, and joining up the public policy agenda on financial advice, which would enable saving.
In terms of the industry, I very much welcome the ABI’s recent consultation to increase transparency in the annuity market by publishing annuity rates, as part of its code of conduct on retirement choices. I also welcome the fact that PICA, the Pensions Income Choice Association, is working with other industry participants to build a directory of advisers and shopping around brokers who can help investors, particularly people with small pots, to shop around when they retire. This will help customers to understand the decisions they need to make, the products that are available, and how they can shop around. We know that there are several annuity “interface portals” for people who have sufficient IT skills, but our real worry are those who are excluded from all this, because they just do not have the knowledge that is necessary.
The mechanics of the pensions industry have made it very difficult for retirees to get good annuity rates, as we know. Annuity advisers and providers should explore greater uses for technology in delivering advised and non-advised services to help people understand their options at retirement and help them to make the right decisions.
I will end by sharing a real concern I have that lack of cohesion and policy fragmentation created by silos between the Financial Services Authority, leading on RDR, HM Treasury, with the policy lead on financial advice, and the DWP, leading on retirement outcomes for pensioners, will result in the poorest and least well-off people receiving sub-optimal retirement outcomes. Perhaps something can be done to raise awareness of the challenges and responsibilities that individuals have, particularly those over 50, who need to focus on a multitude of retirement decisions and have far fewer pensions and savings assets at their disposal than they actually need. Nobody really believes that they are going to live for as long as they will, and nobody really calculates what they are going to need over all these years, with the need for care, and so on. Explicit government support and signposting would help to ensure that these people—the small pension pot holders—have as easy a time as possible in getting help with their shopping around. Will the Minister consider creating some kind of forum so that the industry, the regulator, the DWP and HM Treasury can get together to meet and discuss how better to work together to improve customer outcomes?
Lord Patten
My Lords, the noble Baroness said that there are 1.1 million people with a pension fund of £5,000 or less. That is 1.1 million very admirable people. I greatly admire those who from small incomes, little bequests and savings over the years have decided to save for a pension. That is an admirable and a good thing. Compare and contrast them with others who may have exactly the same, albeit small, resources from income, bequests and savings, who choose to spend it and rely entirely on the state. The 1.1 million people to whom the noble Baroness referred are the deserving savers, which is why I share her hope that the Government may find ways in which to help deserving savers to get a better deal from those who give advice and those who invest.
It must be very lonely for someone who is of pensionable age, has that small sum of money and does not know which way to turn. However, if there were ways of grossing together all those people, imagine the purchasing power and the purchasing strength that 1.1 million people with £5,000 or less in their pensions would have in negotiating good advice or, indeed, negotiating a better deal when they invest.
The noble Baroness suggested that there should be a round table to deal with this as one way of looking at helping these people. Despite the rather austere framework that we are in at the moment, there may be market-driven opportunities here because I understand that those 1.1 million people have more than £2 billion to invest between them. It may be possible for those in the market to think of setting up a vehicle which would help, by pooling resources, to get a better deal for pensioners, strictly regulated though it should be. Therefore, I would like to put before your Lordships and, indeed, before my noble friend the Minister, an idea which I hope the Government will not stand in the way of: someone trying to set up such a body whereby the purchasing power of small pension holders could be pooled and used to their advantage. I have no interest to declare in this matter, by the way.
Let us look at each of the two areas referred to in the noble Baroness’s excellent Motion: “access to good advice” and maximising people’s retirement incomes. Access to good advice is critical. In the past, the world of the independent financial adviser and others has been a very peculiar one, suggesting to people, who often had small sums of money, that they should invest in this or that because there was a trail commission going back to someone. Under those circumstances it is natural, I guess, that people very often have said, “Go to this fund. Go to that fund—this bond fund, that equity fund”, because a commission is involved. That has all been stopped, which is a thoroughly good thing because I think that it was as close to being corrupt as you could get. But at the same time the unintended consequence is that people are now being told they will have to pay for the advice that they thought they were getting for free but was actually coming from commissions trailing back to suppliers.
It should be possible to think of ways in which individuals with small pensions, banded and grossed up together, could have much more purchasing power, first, to get better advice but, secondly, to get better investment returns. Let us take not £5,000 a year but £10,000 a year—forgive me, I can do that arithmetic. At present rates of about 3.5% returns, you get £350 a year to add on, which is a lot of money to people on small incomes. The trouble is that you go to a fund which promises 3.5% and very often that fund—say one called East European Opportunities Fund, to make up a name—then itself invests in other funds investing in funds of funds, and each of those has their layer of charges. Before you know where you are, a combination of slowly growing inflation and a multiplicity of charges has abolished any possibility of real growth in that pensioner’s income. People often talk about the magic of compound interest but the tyranny of high hidden charges directly on pension funds is very destructive of wealth.
Who does someone living alone turn to? They cannot afford advice so they look at what a Sunday newspaper says—“Invest here, invest there”—and what happens after that is very often a diminution of those people’s wealth, not an addition to it, which they have notably saved for, which I think is to the common good, rather than their just relying on the state. Therefore, I urge the Government to keep an open mind on new market entrants who would be strictly regulated by the great panoply of regulators that we have at the moment that regulate absolutely everything in the City after the events of 2000 and 2008. If private sector people are willing to invest on behalf of such pensioners, and they can see that they can make a reasonable amount from doing so, I urge the Government to make it possible for them to do that.
I do not think that the state should provide funds to do this. My noble friend will be relieved to hear that I make no request for extra government money, as I think that would be wrong. The new normal, we are told, is bumping along the bottom until 2017-18. Everyone is suddenly austerity-aware, and people who used to think that there were free lunches and free dinners now know that we live in a pretty austere world. I do not expect my noble friend to reply to the suggestions that I am about to make but I ask her to undertake in her wind-up that she will pass them on to the Treasury and to the right honourable gentleman the Chancellor of the Exchequer, whose policies I greatly admire. A time of maximum austerity is the time to get rid of a lot of perks for well-off pensioners which they do not deserve and do not need. The better sort of better-off pensioner makes a point of not claiming them. All those TV licences, all the cheap travel, all those winter fuel arrangements—
Lord Patten
I am making my speech. The noble Baroness barracks splendidly but I am picking on the three things which go to pensioners from government expenditure. I do think that now is the time for my right honourable friend to get rid of these things. There will be no political backlash at all. People think that it is bonkers and barmy to provide these benefits. I certainly do. I think that it is wrong and we should not be in that position. The Chancellor, half way through the Parliament, way ahead of a general election, with the full and stalwart support of my noble friends the Liberal Democrats in every Division on every single occasion in your Lordships’ House, should seize this opportunity and all will be well.
Baroness Hollis of Heigham
My Lords, who are we on these Benches to contest such a magnificent final flourish? I wish only that we could have persuaded the noble Lord to extend his shopping list of things to be remedied from higher rate tax relief to some of the other perks that presently go to incentivise the rich to save, as opposed to those who most need help—that is, those who are worse off.
I come back to the topic of the Motion of the noble Baroness, Lady Greengross. A key aspect of small pension funds is stranded pots. It is that which I want to talk a little about tonight. A Norwich hairdresser coming up to retirement has £20,000 in one pension pot and two other pots, one eight years old and one perhaps 12 years old, with £2,000 in each—total savings of £24,000. That hairdresser can annuitise her £20,000. She cannot access her two pots of £2,000. She cannot commute them into cash because she is over the trivial commutation limit and she is too late for the 2009 changes on triviality. She cannot annuitise those two small pots because they are too small. At the moment she cannot transfer them into her main pot because the companies do not want her business. They are orphan assets. So this woman, with her £24,000 of pension savings, cannot touch, and has actually lost, £4,000 of her £24,000 savings. It is a scandal, and with the help of the Pensions Advisory Service, TPAS, of which I declare I am a board member, we have been tabling amendments on this subject for the past five years wherever possible, which is why we are especially grateful that tonight the noble Baroness, Lady Greengross, has introduced her Motion.
As I am sure colleagues know, TPAS provides free independent information and guidance from technical specialists and a national network of 400 voluntary pension professional members to those who, for the most part, cannot afford or cannot access private information and guidance in their own right. Our website receives about 2.5 million hits every year, some 12,000 written inquiries a year and some 40,000 helpline inquiries a year for individual guidance.
A high proportion of that is fielded by volunteers. We have satisfaction ratings in the upper 90th percentile. TPAS is therefore especially aware of what pension issues are coming up in the lift as it offers information guidance day in, day out, hour in, hour out. About a third of our inquiries are about state pension and pension credit issues and the interlocking of benefits with small occupational pensions, which we hope very much will be addressed by a forthcoming Bill on the new state pension. Another third are on occupational pensions, including a growing number of inquiries on auto-enrolment—inquiries which I am sure will expand as the small and medium-sized enterprises coming later into the system are embraced. Thirteen per cent of our inquiries are on personal pensions, including SIPPs. Relevant to this debate, about 10% of our queries and problems are associated with small pots—how to trace them, how to access them and how to commute them.
Steve Webb, an admirable Pensions Minister, has told us that without action there will be 60 million small pots floating around by 2050—small pots orphaned out there, and for many people inaccessible. Why has this become a growing scandal? Pensions do not work for the main holders of those small pots, who are women. Pensions conventionally assumed a man in a 40-year job with a 40-hour working week, backed by a DB scheme and a dependent wife. If he held on to his job and she held on to him, his and her pensions were secure in retirement.
Now men have nine job changes and women have something like 11 job changes in their working life. If they have a pension—two-thirds of those in the private sector now do not—it will be DC. These DC pots have lower contributions from employers, who promptly halve their contributions when they go from a DB to a DC scheme with lower costs, passing both high charges and high risk on to those least able to cope—the employees. Those pots also receive lower contributions from the lower-paid and increasingly female part-time workers, as they continue to care for children and elderly parents alike.
This problem of small pots is compounded by what is happening in the pension industry overall, by what is happening to the labour market and by the problems that women have in caring not just for children but increasingly for older relatives and members of their family. The problem of small pots will be greatly magnified by auto-enrolment.
As my noble friend will know, I tried hard when NEST was introduced to allow small pots to be transferred into it. This was batted away because of the self-interested howls from the industry, which feared it would lose money under management, in much the same way as it has batted away early access to a slice of pension savings, which would also help transform the savings culture for women, and poorer women in particular. The industry was wrong—disastrously wrong in my view—on both counts, as it is now perhaps slowly beginning to realise, but much damage has already been done.
Pensions reflect the labour market. They were constructed decades ago by pale males with dependent wives for other pale males with dependent wives. They have never worked for women. Now, with people living longer and needing to save harder, with flexible labour markets, with auto-enrolment into low-contribution DC schemes, with half of all older women aged between 45 and 64 by 2020 to 2030 being unmarried and therefore needing a pension of their own, those low-paid part-time women especially, as they are in and out of the labour market, will collect a portfolio of small pots—hard-earned savings—some of which will be inaccessible to them at retirement as the situation now stands. Those pots will go AWOL and be inaccessible—frankly stolen from them by the structure of the pensions industry that we, all together, have constructed and inherited.
It is a problem that is simple to rectify. We expect two pensions Bills next year—one for public sector pensions and one, I hope very much, for the single state pension that Steve Webb has done so much to promote. Allowing employees to transfer small pots—otherwise potential orphan assets—into their larger pot would be an easy way to remedy this, provided we have the political will to overcome the short-sightedness and self-interest of some of those practising in the industry.
Without such speedy action, auto-enrolment could become a mis-selling scandal of orphan pots that will destroy any residual trust—and there is not much of that around—in the pensions industry. For all our sakes, including the Government, but above all on behalf of the poorest paid, poorer women, in some cases the self-employed, perhaps black and ethnic minority women, and men who find themselves churning between employment, unemployment and self-employment—for all those we have to rectify the problem of small, stranded pots which they will otherwise lose, to the distress of themselves and to the shame of us all.
Lord Stoneham of Droxford
My Lords, I am very glad to follow the very informed contribution of the noble Baroness, Lady Hollis, whose remarks I completely agreed with, and the cross-party consensus of my noble friend Lord Patten, with whom I also thoroughly agreed. I congratulate the noble Baroness, Lady Greengross, on the timing of this debate—coming the week after the Government published their consultation document Reinvigorating Workplace Pensions. It is refreshing to have in government a Minister—my colleague Steve Webb—so committed to pension reform and with the confidence to pull the right levers in government.
One important lever has been to build on the cross-party strategy of the Turner commission, which has helped this Government to add to the Labour Government’s initiatives and to bring in the start of auto-enrolment, the restoration of the earnings link for state pensions, the abolition of the default retirement age and, of course, the commitment to the single state pension. As we start auto-enrolment, however, we have a huge problem of raising understanding and commitment to increased pension provision.
The noble Baroness, Lady Greengross, is right to raise the need for good advice for people with small pension funds. I agree entirely with what she so wisely said. However, I would like to widen the concern to three themes. Those themes are the need for much greater simplicity; the need for more education, ongoing communication and advice; and, most important of all, the need for trust.
Simplicity is essential to improve the understanding of pensions. The single state pension will do away with the confusion of pension credits, and restores incentives to save. The important power of inertia is being exploited through auto-enrolment and it will help to raise saving but, as the noble Baroness, Lady Hollis, was saying, the automatic rollover of small pots is essential to individuals needing to keep track of their savings to ensure that they do not lose out from duplicated high charges.
We have to recognise that the move to more defined contribution pensions increases uncertainty and the chance of misunderstanding on the eventual pension income that individuals will receive. They put additional burdens of decision-making on individuals who will not have the guidance of trustees. Somehow we have to demonstrate the underprovision for pensions when the actual pension outcome is so uncertain, compared with defined benefit schemes. The efforts of the Pension Minister to promote the concept of defined ambition pensions to provide more certainty and to encourage more risk-sharing is an important initiative. We also have to recognise the ongoing reliance of housing investment and ISAs on individual provision for pensions. It is wise for individuals to make provision through a number of means and we should encourage whatever individuals understand best and whatever they feel comfortable with.
Education was my second theme. A prime task is to get people to make greater provision for their pensions. There are three steps in the need for greater education. We have somehow to get people to recognise the need for pension provision early in their working careers. We have to improve understanding on how individuals can increase their pension income as retirement approaches, and appreciate particularly what fees and charges they are susceptible to. We also have to improve people’s understanding of turning pension pots into retirement income, which is critical.
Communication and advice are key elements in improving understanding. I congratulate the Minister, Steve Webb, on his big drive to make language in the pensions sector more understandable. The department’s own guide to language for auto-enrolment is very helpful. It is not fashionable to say it these days but we need more of the language of the Sun and the Mirror, rather than that of the Telegraph and the Guardian, to improve understanding among those who need the most advice.
Web communications and e-mails from the department, NEST and other pension providers should be targeted at the key stages of the life cycle which are so critical to pension provision—at the early stages of working life and the mid-career key stages, and at those preparing for retirement 10 and five years out, while there is still time to make adjustments. Government must have a big interest in encouraging greater provision because, if it is successful, it will ease the burden of old age on the state.
However, personally I worry about the multiplicity of providers, the ongoing apathy and the lack of understanding among the working-age population. Trust is a key issue. I am also concerned about whether competitive pressures and the habits of the financial services could lead to ongoing threats to trust, which it is so important to sustain. Mis-selling and the underperformance of investments will lead to a serious undermining of confidence and trust in pension provision.
Defined benefit pension schemes had trustees to safeguard pensioners’ interests, but defined contribution schemes are normally governed by contract rather than by a trust deed. In my view, the fiduciary character of the management of pensions should not be affected by this change. We need to strengthen the concept of stewardship and mutual confidence based on trust. The responsibility of agents in pension investment should be defined in a way that establishes and reinforces trust.
The noble Baroness, Lady Drake—I am sad that she is not with us today; normally she would be—and I tried on two occasions to strengthen the Financial Services Bill by proposing that the current FSA regulations should be strengthened to say that investment agents must act in the interests of their customers. It is too weak to say, as the regulations say at the moment, that:
“A firm must pay due regard to the interests of … customers and treat them fairly”.
It is also too weak to say that conflicts of interest must be managed fairly. The fiduciary duties of investment agents now need to be redefined and the recommendations of the Kay review need serious consideration by the Government at an early stage. Simplification, education, communication advice and trust are all essential elements in focusing awareness of pension provision, particularly for smaller savers. However, the greatest element must be trust, as without it we will not get the increase in saving that we need.
Lord Lipsey
My Lords, first, I declare an interest as the unpaid president of SOLLA, the Society of Later Life Advisers. Because I am unpaid, I can say that this is an admirable organisation which takes on independent financial advisers wishing to specialise in the affairs of the elderly. SOLLA trains and accredits them so that people know they get what they need and not what the adviser wants them to hear.
I thank the noble Baroness, Lady Greengross, for raising this important but neglected subject this evening. Its importance has been highlighted by the excellent briefings that noble Lords have received from a number of outside organisations. It may seem a bit negative but I have to note that there was one briefing that I did not get. I did not get a briefing from the Financial Services Authority, and that seems extraordinarily neglectful because, as the noble Baroness, Lady Greengross, made clear, it is the Financial Services Authority’s retail distribution review that is blamed by many for the advice gap that exists in this area. I shall come back to that later. Surely this House had a right to hear the views of the FSA on this matter, its defence of the RDR and its approach to the problems that have been raised. I do not know whether this is FSA incompetence or FSA contempt for Parliament. Neither would surprise me and I hope that there is a more benign explanation, but it should know that this gap has been noticed.
As some noble Lords know to their cost, I am the House’s statistical geek, and I now want to make a statistical point. The size of the pots involved is often exaggerated due to a statistical quirk. The figure of £28,000 that one sees is the size of the average pot. This “average” is, as most of us learnt at school, the mean average but it is not the appropriate average in this case. There are a few very large pots—£1.5 million for judges and some people in the private sector—and a large number of other pots. However, the correct measure—I say “correct” because there is no doubt about this—is the median pot, where half the pots are bigger and half are smaller, and the median is below £20,000. Therefore, we must not allow the quoted size of the average to mislead us as to the scale of this problem.
Many of these pots are small but we should not conclude from that that they are unimportant. Let us take that median £20,000 pot. With a bit of luck, it might yield an annuity of £1,000 a year. I am afraid that to those of us in this House that may not seem a vast sum. However, let us compare it with the state pension, which is £107 a week, although I know that there is pensioner credit and so on on top of that. An annuity of £1,000 amounts to 20% of the single state pensioner’s income, and it makes the difference between mere penury and getting by.
Perhaps I may take this argument a step further. If somebody is well advised, that may make a difference of 40%—this is not an exaggerated example—so the income they get may go up by £20 or £24 a week or, if they are unlucky, it could be as low as £8 or £16 a week. That makes a huge difference to these people—more so than sums many times that amount would make to better-off people.
In order to get a better annuity, you have to be aware that if, for example, you have diabetes and heart disease you can get a bigger pension from your annuity pot. Indeed, if you smoke, you can get a bigger pension from the pot, but perhaps we will quickly pass over that—not many people will be able to afford to smoke much with this amount of money. However, for that, you need to know that you can do it, yet 75% of people do not know what an annuity is. They have not even reached stage 1, and that is why we need to do something about the advice.
I now turn to a slightly more controversial part of my argument on the advice gap. It is said that people are willing to pay only £35 for advice. The cost of advice from an independent financial adviser is £750, and therefore there is an absolutely unbridgeable gap here. I want to make one or two points. First, £750 is a substantial cost but it will be worth it for many people. I gave the example of a 40% gap in the annuity. If you got an annuity which was 40% better, you would pay for the advice within two years of receiving the pension and then there might be 20 or 30 years in which you would get a much higher pension as a result of the advice that you had taken. Therefore, the cost is not that disproportionate.
Secondly, in my experience, many independent financial advisers are prepared to provide advice even though it is unprofitable for them at the time. They do so partly because, believe it or not, many of them are very socially interested people—that is why they have chosen to specialise in older people—and partly because there may be other business down the line. For example, they may be asked to carry out inheritance tax planning so that the person can do something with their house, and they will therefore get future business from someone whom they helped with their pension and whose trust they won. So we should not think that every transaction has to be profitable. Good advisers can find other ways of benefiting from giving advice.
What worries me, however, is that because of the gap between the cost of advice and what people are willing to pay, we will finish in a wrong place by thinking that it is quite alright to give bad advice because bad advice is necessarily better than no advice. It is not. There are plenty of people who have been flogging payment protection insurance and plenty of advisers who have been getting rich off commission. They are kind of looking at ways in which to give inadequate advice to people on a money-making basis. Although I understand the criticism that is made of the RDR and the end of commission, equally I do not want us to jump off the other side and provide poor advice that is provided for the purposes of people making profits by preying on elderly people. Poor people should not get poor advice; they can afford it less well than anyone else, not more.
In the time available tonight one cannot go into the detail of how a system could be devised that avoids that trap but makes sure that advice is available to those who need it. That includes voluntary organisations of the kind to which the noble Baroness, Lady Hollis, referred. There are ways of doing it, perhaps through simplified technology, and so on. It is not beyond the wit of man, though we have yet to see if it is beyond the wit of the Financial Services Authority.
Lord Kirkwood of Kirkhope
My Lords, it is a great pleasure to follow the noble Lord, Lord Lipsey, and very reassuring to all of us to know that we have an expert in our midst in terms of giving us pension advice. If he would be kind enough to set up a surgery on Wednesday morning in the Bishops’ Bar I am sure that there will be a queue, and I will be at the front of it. It is typical of him that he spends some of his time devoting his expertise to this very important subject.
It is a very important subject and the timing of the debate is perfect. The noble Baroness, Lady Greengross, has championed this subject and, indeed, the International Longevity Centre-UK has done an amazing amount of extremely good work. That work is very professional, well thought-through and very constructive. It and she deserve some serious attention in the debate, not just this evening but in the future. I think she is right that the retail distribution review—it will be put in place next year and I do not think that any of us has any fundamental objection to it—represents an improvement but will have unintended consequences. I confess that I am only just beginning to appreciate the extent of the unintended consequences. Some of the figures that we have heard from all sides in all the valuable, interesting and positive contributions to this debate have demonstrated how deep and wide the problem could be if it were allowed to continue to 2050. Some of the figures are worrying.
The noble Baroness, Lady Hollis, in her inimitable and passionate way, argued her case, and particularly the case for women and stranded pots. This is not the first time that I have heard her make that speech but it is always worth listening to her every time she makes it. It is absolutely correct and I would encourage her to go on making it. In fact I have lifted bits of her speeches and used them in other places. I confess that that is a weakness that I have with some of the contributions she makes.
The need is urgent. There is a lot of passion and urgency but I do not think that there is much politics in this. I believe that the industry gets this problem. I have talked to people in industry and a lot of them are coming up with some sensible workarounds for some of the worst effects of this advice gap, which is the core of the debate. It is the centre that needs to be sorted. The noble Baroness, Lady Hollis, is right to say that there are a couple of pieces of pensions legislation in gestation so there might be another opportunity for us to get together once the RDR is implemented to try and get some purchase on making the improvements that are necessary.
I echo the surprise of the noble Lord, Lord Lipsey, that we did not get some briefing from the FSA. I do not think that he missed it in his earlier remarks—it will have got the point. I endorse that; the point he makes is absolutely correct. However, there is a wider problem, alluded to by the noble Baroness, Lady Greengross, which I want to reinforce. I think that there has been a bit of dereliction in duty in terms of the way in which those three main policy departments are co-ordinating their work. She is right to say that the FSA, the Treasury and the DWP, from the respective positions, should have been across this problem with some positive responses before now. I would very much like to know—although I will not ask the question because it might embarrass the Minister, who is completely blameless: she has an alibi; she was not around at the time—whether there have been any ministerial meetings on the subject across those three departments. I think that I know the answer. I do not think there have even been official meetings across the three departments. That is no longer good enough. We now need to require an assurance from the new Minister—we wish her well as she works her way into the department—that she will go back to the department and make sure that she attends a meeting talking about this subject intelligently across these three departments. Nothing less will do. If she does that, she will find ready support from the industry.
Many things are happening. There is a lot of concern out there that the ineffable complications and complexities of our pension rules and regulations are getting in the way. I cannot for the life of me understand why you get stranded pots at the end of your saving life and £2,000 here and £2,000 there. These are in DC invested schemes—the money is there—and I cannot understand why people cannot put it together collectively. I cannot see who would lose from that. It is true that the industry has the idea that it will lose business but I am unconvinced by that argument. We need to be more straightforward about this. My noble friend Lord Patten is right: the austerity that we are in means that we are constrained in what we can do, but that should not stop us introducing innovative approaches to sort out some of these matters.
Of course, I support what my noble friend Lord Stoneham said about what the Government are doing. Steve Webb has had a huge workload—successfully discharged, as far as we can see—on the NESTA front and therefore he has not been looking for things to do. I genuinely support the long-term vision he has because it is the correct one. He may say, “Well, we have been looking at issues such as pots following the member automatically when they transfer jobs”—which I think is a correct thing to do—but I would like to see the colour of that in some of the upcoming legislation before I can be certain that that was secured. Knocking small pots into fat pots—or whatever the parliamentary language is for explaining that—seems entirely possible with a little lateral thinking and a little support from the industry, which, as I say, is there.
I hope that when my noble friend replies she will at least undertake to take back some of the important, positive ideas that have been discussed this evening and see if she can press them across the DWP, the FSA and the Treasury.
My noble friend would do me a service if she would look again at the Money Advice Service, because my noble friend Lord Stoneham is right about the need for education. I am worried about the Money Advice Service. Since April it has had responsibility for debt counselling across the United Kingdom. It has a budget of £78 million. That sounds like a lot of money but when the universal credit comes into being over the next five years or so I think that it will be swamped. It may be that that should be the priority, but that is not the point that I am making. The point I am making is that if the FSA levy produces £78 million—if I have got the figure correct—it will need to be monitored quite carefully. The Money Advice Service is now in a crucially important position to help people with OMO questions and decumulation issues as they approach retirement; it is an essential co-part of its work. I do not think that it is properly resourced at the moment for the future demands that will be placed on it. I would be grateful if the Minister could go back and ask cogent questions about whether the service believes that it has the resources to discharge the important responsibilities which Parliament has put on it, and provide us with some reassurance at a future point in the debate.
This is a very important debate and I hope that the Minister goes back charged up with a new enthusiasm to get the co-ordination across the departments that is so necessary to achieve positive outcomes in this area.
Lord McKenzie of Luton
My Lords, we should be grateful to the noble Baroness, Lady Greengross, for the opportunity to discuss, albeit briefly, issues of access to good advice, particularly in relation to small pension pots. The debate touches upon just one of the issues which are part of the challenging backdrop to the current UK pension system, which has an aging population but with working-age people still not saving enough to meet their expectations of income in retirement.
Our discussion this evening has mostly been around private pension provision, be that personal pensions or workplace pensions, but the state pension has cropped up—the noble Lord, Lord Stoneham, and my noble friend Lady Hollis referred to it. We should not forget that advice in relation to the state pension may be appropriate as well for people who do not have a full contribution record—advice on how they should deal with that and advice on whether they should defer their pension and, if they do, whether they should take the lump sum or the extra annual amount. So not only private pensions are involved.
My noble friend Lady Hollis, in particular, referred to proposals to create a single-tier state pension and the benefits that that would have in relation to rewards for saving. I certainly agree with that. The White Paper which was issued last week states that the reforms will be introduced in the next Parliament, that the new rules will apply to future pensioners only and that the Government will publish more details on their plans for single-tier shortly. Can the Minister expand on how short is “shortly” and whether we might expect the legislation in this Parliament even if it may not be introduced until the next Parliament, if that is a matter for the coalition’s determination?
We know that too many people do not save for a pension outside of the state provision because they do not trust the system. ICM research shows that 56% of savers lack confidence in those who manage their investments; 60% of private sector workers are not saving for a pension at all; and old DB schemes are available to fewer and fewer private sector workers. That is why the introduction of auto-enrolment in October this year, developed under a Labour Government but with cross-party support, is so important. It turns pensions inertia on its head: you are enrolled unless you positively opt out. It is to be hoped that auto-enrolment will be part of the route to restoring trust and confidence in the pensions system.
If people are to have more secure retirements, that confidence must not just be about decumulation; the issues run throughout the pensions life cycle. They relate to contribution levels, investment strategies, default funds and, of course, to charging. We know, for example, that an annual management charge of 1.5% can reduce a final pension pot by 22%, while a 0.5% charge—the NEST equivalent—will reduce the pension pot by 9%. Greater transparency and more straightforward charging structures are essential. The noble Lord, Lord Patten, spoke with some passion on this matter.
The provision of financial advice has been affected by the upcoming implementation of the retail distribution review. While this will raise standards in the advice sector and change the way people pay for advice, unless further action is taken an unintended consequence, referred to by a number of noble Lords, is likely to be that those on modest and small incomes and pension pots will be excluded from or priced out of the advice market—and this at a time when the number of small pots is set to grow as auto-enrolment draws more into pension savings and a changing job market means that, on average, an individual will change jobs 11 times over their lifetime, and with the prospect of the abolition of short-service refunds. The noble Lord, Lord Kirkwood, said that he appreciated fully the extent of what that change may bring.
We know that small pension pots are costly and inefficient to administer, and can be difficult for individuals to keep track of and convert into pension income. We therefore support the Government’s attempts to address the inertia preventing consolidation by some form of automatic transfer. The current proposal is that the pot will follow the individual. Perhaps the Minister can give us an update on progress on the thinking around that. Further, can the Minister say whether it will apply to existing pots or just future pots that are created? The logic would seem to be that pots can follow individuals into NEST. Can the Minister confirm that that is going to be the case?
The current landscape was the subject of a retirement income summit hosted by the International Longevity Centre and the actuarial profession in June this year. I think that the noble Baroness, Lady Greengross, is a distinguished board member, and I believe that the noble Lord, Lord Kirkwood, was at the summit. It saw the immediate challenges as the advice gap, too few savers exercising the open-market option, insufficient focus on the type of annuity purchased rather than the annuity rate, and information overload. What is of particular concern from the analysis is that only 2% of annuitants who did not take advice bought an enhanced annuity, although up to 50% are thought to be eligible. This means that thousands of people will miss out on hundreds of pounds of income each year. The National Association of Pension Funds estimates that half a million people a year fail to shop around for the best annuity, losing in aggregate £1 billion a year in income. The failure of married couples to include a spouse’s benefit can lead to significant hardship for a dependent spouse on the death of the policy holder. Clearly, these outcomes could be improved through access to proper advice. My noble friend Lord Lipsey said that £1,000 a year may not be a huge sum for some in your Lordships’ House but that for some it means the difference between surviving and going under.
The ABI code of conduct on retirement choices may assist in this, and the recent government White Paper points out that the open market option review group is currently developing an evaluation test for the code. Can the Minister tell us whether the evaluation is actually under way and what further steps might be contemplated in the light of it? A brief from the Society of Later Life Advisers, referred to by my noble friend Lord Lipsey, states that while the cost of advice is an issue, and while government action on improving transfers and dealing with small pots is welcome, what really prevents people taking advice is that they do not know where to go or whom to trust. Raising awareness of the benefit of advice is important, but in itself it will not overcome the hurdle of lack of trust.
There is of course no lack of information and guidance from providers and organisations such as the Pensions Advisory Service, referred to by my noble friend Lady Hollis, the Money Advice Service, to which the noble Lord, Lord Kirkwood, referred, particularly on the volume of queries it is getting and likely to get, and the Pension Service itself for the state pension. But that information and guidance must be distinguished from advice, and indeed it can be part of the problem of information overload.
The noble Baroness, Lady Greengross, made an important point about clarity on the distinction between advice and information. Noble Lords, and in particular the noble Lord, Lord Kirkwood, will recall the debates we had on auto-enrolment about what employers had to do and whether it was information or advice: it was, of course, the former. The retirement income summit proposed that the regulator should work with the pensions industry to develop a solution for those with small pension pots. In particular, the FSA should develop guidance for providers on how to implement simplified advice models safely and in the consumer’s best interest. It is impossible to disagree with this proposition but it is not easy to deliver.
In conclusion, I echo the comments of my noble friend Lord Lipsey: poor people should not have to put up with poor advice.
Baroness Stowell of Beeston
My Lords, one of the great advantages of being a Government Whip is that we get to learn about lots of new areas of policy that we may not have been exposed to before. However, it also brings the great responsibility of sometimes having to respond to debates where those who have participated are far more experienced and provide greater expertise on the matter than the Minister in charge. That is particularly so in this debate. I congratulate the noble Baroness, Lady Greengross, on securing this debate and pay tribute to her for all her work in the world of pensions for so many years.
I reinforce and share the views of my noble friend Lord Patten. I, too, am very concerned about people who have done the right thing and saved hard for their pensions. This is one of the reasons why I am pleased to be here tonight and to participate in this debate. I also note the important point made by the noble Lord, Lord Lipsey: we are talking about people with small pots and, to many people, the small amounts of money that we are talking about make big differences. Like the noble Lord, Lord Kirkwood, I acknowledge that the topic of pensions does not lend itself to politics, and nor should it. However, the Government want people to be able to get the maximum benefit from their pension savings and we recognise that people can, understandably, find making decisions about their pension and the process of securing an income in retirement complicated.
We need to be clear that professional financial advice is not, and never has been, free, as has been acknowledged by many noble Lords tonight. Even though many people may have thought in the past that the advice that they were receiving was free, the cost of paying for advice may outweigh the benefit of receiving it. This is particularly important for those with small pension pots and we should not assume that paying for financial advice is the right option for everyone. It is important that consumers can make a decision about whether approaching a financial adviser represents good value for money. To do this, they need to understand how much it will cost and that the adviser’s interests are aligned with their own. The Government support the Financial Services Authority’s retail distribution review—or the RDR as it is commonly called—which seeks to bring transparency to consumers on these issues. In response to the point made by the noble Lord, Lord Lipsey, and repeated by the noble Lord, Lord McKenzie, that poor people should not receive poor advice, one of the added benefits of the RDR is that financial advisers will be required to have a higher level of qualification to ensure that the quality of their advice is better.
We also need to bear in mind the basics of what people need to know to make these decisions. As has been mentioned, understanding the options available and the language alone can be overwhelming. That is why, as the noble Baroness, Lady Hollis, made clear, the free, generic information and advice offered by the Money Advice Service and the Pensions Advisory Service are so valuable. The advice that is available from those two services, and particularly the Money Advice Service, includes helping people to think about whether professional advice is appropriate for them, because it may not necessarily be necessary.
Clearly it is important that professional financial advice is available for those who have decided that it is appropriate for them. However, we should be wary of overstating the problem about access for those with small pension pots. A recent survey by the FSA revealed that 63% of advisers are planning to continue to offer advice to those with savings and investments of between £20,000 and £75,000. A further 38% of advisers plan to continue offering advice to those with less than £20,000. I will come back a little later to the point made by my noble friend Lord Patten about pooling and whether it is possible to pool in order to access advice.
People have big decisions to make at retirement. I am pleased to say that this Government have already taken steps to ensure that people have more flexibility and better information to support those decisions. Of course those with pension savings below £18,000 have an additional flexibility in their options, which is that they can take their savings as a lump sum. For those who want to be able to guarantee an income for life, from 1 March next year the process of buying an annuity from an ABI member will include making customers consider their options for both the type of annuity that they need and which provider to purchase it from. This is what is known in the jargon as the “open market option”, which, as several noble Lords have said, is all about helping consumers to shop around.
The new ABI code of conduct, as part of the package of measures announced by the OMO review group in March, provides a real step change in the requirements placed on providers and in assistance to annuitants. The package has been developed to ensure that people approaching retirement will receive much greater support to get the best possible retirement income.
The noble Baroness, Lady Greengross, asked whether the Government would set up a forum to discuss the issues that have been raised in this debate. The noble Lord, Lord Kirkwood, in his usual colourful way, wanted me to be sure that there was cross-party working on this area. There is already a group similar to that described by the noble Baroness, which is alive to the issues raised. That is the aforementioned jointly led DWP-Treasury open market option review group. The group includes representatives from industry, consumer organisations, regulators and the Government and has met to discuss these issues since 2007. That has prompted a laugh from the noble Baroness, Lady Hollis. I have noted that.
The group has collaborated to deliver a number of key outcomes over the past five years, including the package of measures announced in March. It was responsible for the joint letter that was sent to the ILC on these matters earlier in the year. The OMO review group is now in the process of agreeing an evaluation strategy for this package. This will include assessing both the impact and success of the new measures but will also aim to consider the extent to which there are issues that remain to be addressed.
Of course, the decisions that someone can make at retirement will always be limited by what they have done and how much they have saved before retirement. That is why the Government have taken steps to encourage a culture of saving. The introduction of automatic enrolment will hopefully see between 6 million and 9 million people newly saving or saving more into a pension. The Government have also established NEST, which has been referred to, as a high-quality, low-cost pension scheme to support this. However, our work continues.
For example—the noble Baroness, Lady Hollis, spoke very passionately about this—people change jobs and will tend to leave small dormant pots behind them in their former employers’ schemes. The Government believe that as individuals move jobs their pension pots should follow them, as far as is possible. Consolidating pension pots helps to drive down administrative costs and boosts engagement with saving for retirement. The DWP is working with the pensions industry to develop an automatic transfer system for these small dormant pension pots. The aim is to develop an efficient and cost-effective system that minimises the risks to individuals and works to drive down charges.
This is probably an appropriate point at which to respond to the idea put forward by my noble friend Lord Patten about whether the Government would support an industry initiative to pool pensioners’ assets and increase purchasing powers. The Government welcome innovations to the industry that meet the needs of consumers, so my noble friend’s idea is certainly one that we would want to consider further.
The noble Baroness, Lady Hollis, and the noble Lord, Lord McKenzie, asked in relation to small pots whether legacy pots are yet in the scope of automatic transfer. They are not at this time, but we have not ruled out the option that they will be brought into scope in future. In addition, as of April 2012, up to two small personal pension pots of £2,000 or less can be taken as a lump sum by those aged 60 or over, even where people have other savings.
Baroness Hollis of Heigham
I was looking earlier today at the 2009 regulations, which may be what the noble Baroness is referring to. She may wish to follow this up by letter, but my understanding is that those pots have to have been earned in the previous three years. The problem with legacy pots is that they could have been earned 20 or 30 years before. I realise that this is a policy issue currently under discussion and that the noble Baroness will almost certainly wish to take advice from colleagues, but it would be hugely helpful to all of us if the Government could find a way to bring those legacy pots that are not covered by the 2009 changes into any future system, so that people do not find that some of their smaller pots remain inaccessible.
Baroness Stowell of Beeston
On a matter such as that, I will have to write to the noble Baroness.
Lord McKenzie of Luton
Perhaps the Minister might write on another point: whether or not the automatic transfers—be they legacy pots or otherwise—could be transferred into NEST.
Baroness Stowell of Beeston
I will certainly write to the noble Lord about that matter as well.
The noble Lords, Lord Stoneham and Lord Kirkwood, referred to the Government’s Reinvigorating Workplace Pensions strategy. As they acknowledged, the Pensions Minister, Steve Webb, announced a range of proposals to restore people’s confidence and trust in pensions and to encourage savings. The most significant, in terms of scale, is the defined ambition scheme. I absolutely acknowledge the point made by all noble Lords tonight that there is a serious issue about lack of trust and confidence in pensions and savings; that is something on which the Government are very clear. For me, however, perhaps the most important point made in that strategy—indeed, it is one specifically raised by the noble Lord, Lord Stoneham, although others mentioned it too—was the Minister’s call on industry to use plain language when sending information to its members. As a new reader on this topic, I absolutely share people’s view that the jargon around pensions can create a real barrier.
I have very little time left but would like to say in response to the proposals from the noble Lord, Lord Patten, about perks—as he described them—for well-off pensioners that I will of course highlight to my right honourable friend the Chancellor what has been said. However, if I may beg the indulgence of the House, as my mum will definitely be watching on a matter such as this, I would be doing her a great disservice and be in huge trouble if I did not say that many of her friends, as pensioners, make the point to me on many occasions that they feel passionately about their bus pass. I want to mention that for my mum.
In conclusion, the number of stakeholders who have engaged with the Government in developing all these policies is indicative of common goals and a real drive by all to ensure that consumers can engage with the choices that they need to make about their retirement income. In the future, the FSA will be closely monitoring the impact of the RDR on consumers’ engagement with the market through its post-implementation review. An evaluation strategy will be agreed for measuring the success of the open market option package of measures, including the code of conduct. More generally, the Government remain committed to ensuring that everyone has the information and tools that they need to make responsible and informed decisions at retirement. I will of course follow up this debate with any letters to cover the issues that I have not been able to cover today.