(10 years ago)
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Lord Bourne of Aberystwyth (Con)
My Lords, I am grateful for the opportunity to open this debate on the Pension Schemes Bill and the Taxation of Pensions Bill.
Before I proceed to introduce these Bills, could I say this is an important occasion for a different reason? My noble friend Lord Jenkin of Roding has given distinguished parliamentary service for over 50 years and served in Cabinet with distinction. He has made an immense contribution to public life in our country. His contributions to the House of Lords, always effective and to the point, will be much missed, and he too, of course, will be greatly missed from the Chamber.
Lord Bourne of Aberystwyth
I am sure that we all wish him a very happy and well earned retirement, and look forward to hearing his speech today.
I turn to the Bills before us today. Together, these Bills introduce the latest radical reform of pensions. These ground-breaking pension changes were the centrepiece of the Queen’s Speech, and are about encouraging new forms of pension saving, such as shared-risk schemes and the provision of collective benefits to give greater security in retirement, and giving people freedom and choice in how and when they access their pension savings. The time is right to make these changes to private pensions legislation. The new state pension will provide a simplified foundation for those in retirement, making it easier for people to know what pension they will receive from the state. It will provide a platform on which individuals can build their own private pension savings according to their wants and needs in retirement.
The excellent early results of automatic enrolment mean that millions more savers have joined workplace pension schemes. This Government have also taken forward other changes so that the future private pension landscape delivers high-quality, value-for-money pensions for members. For example, regulations are being brought forward so that, subject to parliamentary approval, from April 2015 there will be a charge cap in the default funds of qualifying schemes—schemes used for automatic enrolment—and new requirements for independent governance committees and trustees to report on costs and charges.
The market is therefore growing, and employers and the pension industry are already thinking about future pension provision. These Bills further encourage a flourishing private pensions market that provides greater choice for business on the pensions offered and for individuals on how they access their pension savings. Taking no further action is simply not an option. Despite government action, the Department for Work and Pensions estimates that there are 11.9 million people below state pension age who are not saving enough to provide adequately for their retirement.
I turn to the Taxation of Pensions Bill. My noble friend Lord Newby is the pilot of this legislative craft, but let me say a few words by way of introduction. The Taxation of Pensions Bill contains measures to make the tax system fairer by ensuring people have more choice about how they access their savings, to prevent this new flexibility being exploited by individuals to gain unintended tax advantages and to ensure the taxation of pension savings on death remains fair and appropriate under the new system. The Bill will mean that, from April 2015, individuals from the age of 55 will be able to access their money purchase pension savings flexibly if they wish, subject to their marginal rate of income tax, rather than the current 55% tax charge. In addition to the Government’s consultation after the Budget, we also published draft legislation for technical consultation in August.
I will talk about these changes in a little more detail, starting with measures to ensure people have more choice about how to access their savings. This Bill is about ensuring that people have greater choice at the point of retirement. The current system restricts choice at the point of retirement. Those with the smallest and largest amounts of pension savings have flexibility, but those with a moderate amount of savings have very limited options. The measures in this Bill will change that by extending this flexibility, such that it applies regardless of the size of the pension pot, thereby ending the effective compulsion to annuitise.
The Bill also introduces a new method to allow people to access their pension flexibly. The “uncrystallised funds pension lump sum”, or UFPLS—the clumsiest acronym I have ever seen in my life—is a new option. This will give individuals the flexibility to take one or more lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into draw-down or take all of their tax-free lump sum in one go. The Bill also increases choice by introducing changes to encourage innovation in the retirement income market, allowing providers scope to make annuities much more flexible products in line with consumer needs.
Lord Beecham (Lab)
I am grateful to the noble Lord for giving way. Could he tell us how much and for how long the Treasury will gain from the changes in the Taxation of Pensions Bill as people draw down or take their pensions early?
Lord Bourne of Aberystwyth
The noble Lord is right if he is inferring that there is a tax saving. Estimates have been made, but of course we cannot be certain of them. I have the estimates and I will ensure that I send them to the noble Lord—I do not have them to hand —but suffice it to say that this is not the thrust of the legislation. I think we will see that it is perfect in terms of providing what pensioners want, it gives a boost to the pensions industry and it probably saves the Exchequer money, although these are only estimates. However, that is not the main intention. As I say, it is to give consumers and members, after consultation, a very fair deal.
The Bill also contains measures to ensure that the new system cannot be exploited by individuals to achieve unintended tax advantages. If the Government were to put in place no protections, an individual over the age of 55 could divert their salary each year into their pension, take it out immediately and receive 25% of it tax free, thus avoiding income tax and national insurance contributions on their employment income. This is not the intention of the reforms. However, in the context of automatic enrolment, it is also important that any solution preserves the incentive for those aged over 55 to save after accessing their pension flexibly.
As a result of extensive consultation, the Government decided that introducing a £10,000 money purchase annual allowance for those who have accessed their pension flexibly strikes the right balance. On the one hand it allows people the flexibility to withdraw or contribute to their pension as they choose from the age of 55, while on the other it ensures that individuals do not use the new flexibilities, which are intended to provide people with greater access to their retirement savings, to avoid paying tax on their current earnings. It will also avoid unnecessary complexity for both consumers and pension providers when the new system comes into places in April 2015. As stated in the Government’s response to the consultation, we will be closely monitoring behaviour under the new system and will work closely with industry to ensure that it remains fair and proportionate.
I turn now to the changes made by this Bill to the taxation of pensions at death. As set out in the original consultation document which the Government published alongside the Budget, it is likely that the 55% tax charge which currently applies to pensions on death would apply to more people under the new system. If it were retained, it could provide an incentive for individuals to remove their savings from their pension in order to avoid the 55% tax charge. Consequently, the Government have amended the Bill to ensure that taxation of pensions at death remains fair and appropriate under the new system. The changes to the Bill will allow individuals who die with pension funds remaining to pass them on to anyone they choose. These funds can be paid tax free if the individual dies before the age of 75. If the individual dies having reached the age of 75 and the funds are paid out as a pension, they will be taxed at the beneficiary’s marginal rate, or at 45% if they are paid out as a lump sum. The aim of these changes is to ensure that individuals who have made sacrifices to save over the course of their lives can pass on their pension savings without worrying about those funds bearing excessive tax charges when they die. They will also preserve the incentive for individuals to keep money in their pension without fear of their beneficiaries being hit by a 55% tax charge.
Additionally, the Chancellor announced in the Autumn Statement that these changes will extend to annuities. Death benefit payments from joint life and guaranteed-term annuities will also be tax free when the policyholder dies under the age of 75, and such death benefits will be able to be paid to any beneficiary. This will also apply when an individual uses uncrystallised or draw-down funds to buy a dependant’s annuity. These changes will be legislated for in due course, although not through this Bill. The Taxation of Pensions Bill will therefore increase choice for the 320,000 people retiring each year.
The Taxation of Pensions Bill deals with the tax changes and the Pension Schemes Bill, which I will turn to shortly, deals with changes to enable the flexibilities to work as the Government intend. There are differences in the definitions of money purchase benefit in tax legislation and in pensions legislation which we have had to address. Tax legislation provides a definition of money purchase which in essence covers all forms of accrual that result in a cash amount. The pensions legislation definition is narrower, as it focuses only on those forms of benefit in which a deficit cannot arise. This is to ensure that the correct funding and member protection regime applies. In order to ensure that the provisions of both Bills work correctly together, the Pension Schemes Bill contains a new definition of “flexible benefit” which fits within the pensions legislation context and captures the forms of benefit to which the tax flexibilities apply. We also define the term “safeguarded benefits”, which are, in the main, forms of benefit to which the flexibilities do not apply but to which other provisions do. I will explain the context in which the term is used shortly.
I turn now to the Pension Schemes Bill. This Bill will make the changes required to pension legislation as a result of the freedom and choice created by the Taxation of Pensions Bill. This will include a legislative framework for a guidance service providing individuals who benefit from the new pension flexibilities with access to free, impartial guidance so that they are clear on the range of options available to them at retirement. The Bill places a duty on the FCA to ensure that the providers it regulates make people aware of their right to guidance and signpost them to this service, and the Department for Work and Pensions will ensure that the equivalent duty is placed on pension schemes regulated by the Pensions Regulator.
It is important to note that there is a fundamental distinction between advice and guidance. Providing advice on investments, including pensions, is an activity regulated by the FCA. A financial adviser will usually make a full assessment of a consumer’s circumstances and make a specific recommendation, and may sometimes sell a product, based on what is most suitable for that person. The guidance service will not aim to replicate this. Instead, it will provide tailored information to consumers regarding the options available to them but, unlike financial advice, it will not recommend specific products or providers. The guidance is designed as a first step for consumers, to support their decision-making and to empower them to make their own choices. Having had the guidance, it is expected that many people may wish to go on to seek financial advice to help them with their decision, and the guidance will help them to access the service they need.
The Government will continue to allow members of private sector schemes offering safeguarded benefits—that is, benefits other than money purchase or cash balance benefits—the freedom to transfer to other types of scheme. However, in the vast majority of cases where a member has safeguarded benefits, it will continue to be in the best interests of the individual to remain in their scheme. Therefore, two additional safeguards will be introduced to protect individuals and schemes. First, there will be a new requirement for individuals transferring safeguarded benefits out of a scheme to take advice from a financial adviser before a transfer can be accepted. Secondly, there will be new guidance for trustees of schemes on using their existing powers to delay transfer payments and taking account of scheme funding levels when deciding transfer values.
We will also ensure that the taxpayer and Exchequer are protected. First, transfers will not, other than in very limited circumstances, be allowed from unfunded public service defined benefit schemes into schemes from which flexible benefits can be obtained. Secondly, for funded public service schemes, Ministers will have a power to reduce cash equivalent transfer values in circumstances where there is a risk to the taxpayer.
The Pension Schemes Bill also makes other changes to the transfer requirements allowing individuals to access pension savings. We will do this by extending the current transfer rights for those with flexible benefits up to and beyond their schemes’ normal retirement age, and applying statutory transfer rights at benefit category—rather than scheme—level.
We will also make three technical changes to existing pensions legislation. The first will allow pension schemes to offer the new flexibilities to their members and will ensure that these flexibilities operate as intended in relation to those with cash balance benefits. The second will allow members to take one or more lump sums from their money purchase funds after the minimum age is reached. The third will prevent the conversion or replacement of non-money purchase benefits with money purchase benefits when a scheme winds up or during a Pension Protection Fund assessment period.
As the flexibilities will come into force on 6 April next year, we are making the relevant regulatory changes that are necessary to deliver these significant reforms by that date. The Department for Work and Pensions and the Treasury are co-ordinating a structured engagement with the industry on the drafting of regulations to ensure that final decisions are informed by stakeholder views.
With these changes, the Taxation of Pensions Bill and the Pension Schemes Bill together give the individual greater choice and flexibility in how they access their pension savings. The Pension Schemes Bill also introduces legislation to enable greater risk sharing between the employer and the saver—and, indeed, third parties—and risk pooling between savers, thus encouraging greater innovation in the private pensions market.
I now turn to the measures that grant pension providers greater flexibility in the sort of pension schemes they offer. The Queen’s Speech announced a radical reshaping of pensions legislation to ensure that it remains relevant for future generations. The Pension Schemes Bill reflects, recognises and encourages innovation in response to demand. It does this by creating a clear space for shared risk or defined ambition—as they are sometimes called—pensions and enables the provision of collective benefits in the United Kingdom. Those are two quite separate concepts.
With increased participation in saving, the Government are keen to support greater innovation in the products offered to savers, based on employer and member demand. Consumer trust in the pensions industry is relatively low, and although we can protect beneficiaries against risks of high charges or poor governance, our research shows us time and again that many individuals want more stability and more certainty. They want to know something about what their savings will give them and some protection from the worst of the vagaries of the market.
Many employers have found the increasing costs of longevity—welcome though it is—and investment risk too heavy to bear in traditional final salary defined benefits schemes, but if defined contribution schemes are the only alternative, outcomes for members and savers will be less certain and more volatile than for earlier generations, making it much harder for future generations of savers to plan for later life.
Although some forms of risk sharing can already happen, the current legislation is based on a binary structure, leading to a tendency for schemes to polarise into schemes in which either the member or the employer is bearing all the risks. While both of those types of pension can be the right product for many, we do not think it is right that the only future for pensions that our legislation explicitly recognises or encourages is either where the individual member or the employer takes on the full financial risk of such long-term savings.
Therefore, the Pension Schemes Bill introduces three categories of pension scheme and enables a new type of collective benefit along with requirements to ensure that there is appropriate regulation in relation to such benefits. The scheme categories are based on the type of promise that the scheme provides to savers during the saving phase about the benefits that will be available to them at retirement. The Bill includes new definitions of defined benefits, where the member receives a full benefit and the employer takes the risk, defined contributions, where the member takes the risk, and shared risk, or defined ambition, the third category of pension scheme.
The shared risk, or defined ambition, definition describes a middle ground between the defined benefits and defined contributions definitions. It creates a distinctive space to encourage innovation in pension design that provides for more certainty for individuals than defined contributions schemes, in which there is no promise during the savings phase, by sharing risks between employers, employees and third parties.
The new scheme categories will apply to existing occupational and personal pension schemes. They do not make any additional requirements about benefit design and do not change any current legislative requirements, such as occupational scheme funding or member protections.
The definitions work at scheme level, rather than the benefit level, so the wider legislative requirements that apply to certain benefit types still apply, regardless of the scheme category. That includes, for example the new Budget flexibilities, and the collective benefit requirements, to which I shall come shortly. The definitions are formulated very specifically and, along with the regulation-making powers, they ensure that current and new scheme designs will fall into the correct categories to reflect the member experience of certainty during the savings period.
The Bill also provides for a new definition of collective benefits. These are different from shared risk schemes, although shared risk schemes may include collective benefits. The collective benefit definition enables a new form of risk pooling among scheme members that can provide greater stability in outcome for members—partly by virtue of scale. Collective pension schemes are a key part of some other countries’ pension systems—for example, the Netherlands and some of the provinces of Canada—and they are recognised internationally as being of high quality. As we aspire to develop a pension system that is rated among the world’s best—we hope the best—it is only right that the United Kingdom should also have pension schemes offering these types of benefits. We also have the advantage of providing protections at the outset which address issues that have arisen in relation to these types of schemes overseas. The regulation-making powers are key to the success of collectives, ensuring appropriate safeguards can be applied and developed in discussion with industry, employers, and members’ representatives. The Bill enables collective benefits to be part of a defined contributions scheme or a shared risk scheme. The intent is that members of schemes offering collective benefits would be able to access their collective benefits flexibly, either directly or by transferring to a money purchase scheme.
The Bill makes changes to existing legislation in order to reflect the new scheme categories and collective benefits. It also provides for additional governance protections for these new types of pensions, reflecting the new types of decisions that are being made on behalf of members. We also intend to use regulation-making powers in other legislation in respect of governance and disclosure as appropriate. We have engaged extensively with stakeholders across the pensions industry and found there is appetite for legislation that allows for greater risk sharing and risk pooling. There are employers that would welcome the greater flexibility to create pension schemes that suit the needs of their workforce. Pension providers want the flexibility to design and offer pensions that provide greater certainty and more options for sharing risk, and individuals value greater certainty than that provided by defined contributions pension schemes and the greater stability that collective benefits may provide. All these are considerable advantages.
I turn to the other changes to private pensions legislation made by the Pension Schemes Bill. These are relatively minor in terms of the main thrust of the legislation. The Bill contains two clauses from the Ministry of Justice concerning judicial pensions. One corrects the Judicial Pensions and Retirement Act 1993, regarding the funding of pensions shared on divorce, to ensure that the Act works for cases where pension sharing is activated after a person has left judicial office. The second allows a pension scheme to be established for fee-paid judges, as required by relatively recent case law. It is aimed at old and transitional cases. Pensions for fee-paid judges will in the future be governed by a new scheme under the recent public service pensions legislation.
In addition, the Bill contains a minor and technical measure on the Remploy pension scheme. The legislation will allow the Department for Work and Pensions to fund the Remploy pension scheme directly rather than via the company, should this be required in the future.
Furthermore, the Bill contains an amendment to extend a regulation-making power in the Pension Schemes Act, relating to survivors’ benefits in the case of certain gender-change cases, to Scotland. Finally, the Pension Schemes Bill contains a provision the effect of which will be to permit schemes to increase the maximum age at which a pension credit, following a pension share on divorce, must be put into payment if the highest normal pension age for benefits payable under the scheme is higher than 65.
These are very radical reforms that build on this Government’s previous changes to improve pensions in the United Kingdom. Giving people greater choice is at the heart of these reforms—greater choice for business on the pensions they offer and greater choice for individuals on how they can access their pension savings. These are important changes to allow the private pensions market to flourish too. I commend these Bills to the House. I beg to move.
Lord Davies of Oldham (Lab)
My Lords, I thank the Minister for his extensive coverage of both Bills and reassure the House that my own contribution will be not to follow him down every detail of the legislation but to concentrate on those parts where we have anxieties and worries that we intend to contribute to the debate today and subsequently in Committee on the pension reform Bill. I thank the Minister for his extensive coverage but he will know that the Opposition support the principle of increased flexibility for people in retirement and reform of the pensions market so that people can get a better deal.
The Bill seeks to remove the limits on withdrawals from draw-down to make annuities more flexible and to prevent the Government’s pension reforms being exploited for unintended tax purposes, and we share those objectives. However, it is vital that the Government get the details of those changes right. We have set out three tests for pension reforms: guidance, fairness and cost. We are supporting the reforms to ensure that people have more flexibility in how they access their pension savings, but these are significant changes and we have to ensure that they work for all savers. First, on guidance, we need to ensure that savers get the right guidance, and I will develop that point subsequently. The fairness test needs to ensure that there are decent products for low-income and middle-income earners; it is fairly obvious that those with large pension pots are in a better position to look after their interests. The costs test that we are seeking to apply is to ensure that the reforms do not result in extra pressures on the state, either through social care or through pensioners falling back at a later stage on means-tested benefits such as housing benefit.
We have concerns about the speed with which these reforms have been pushed through. There was no consultation prior to the Chancellor’s Budget Statement, and the Government have refused our calls to publish further details and analysis of the behavioural impacts of these important reforms as well as, I might add, the potential impact on government revenues. I am not sure that the Minister was entirely convincing in his response to the point that my noble friend Lord Beecham made in his intervention; we need to examine carefully the potential impact on public revenues and resources.
We will press the Government to undertake a Treasury review within two years of the reforms coming into force. These are of such significance for such a significant part of our population that we need to know that they are working as intended. That review should detail the impact of the Bill on government revenues, with particular reference to opportunities for tax and national insurance contributions avoidance. The Government make great play of their approach to tax avoidance issues at present, but they must recognise that there are some anxieties about the potential effect in that area of those proposals.
The pension reforms will introduce increased flexibility for savers; however, they will also lead to the creation of a more diverse pensions market, with a range of new products available. Safeguards must be in place to protect customers from being exploited or facing unreasonable fees and charges. People need real support to negotiate this new, more complex landscape. That is why these changes must be accompanied by free guidance that is high-quality and impartial. The Government made a commitment to provide everyone with free impartial face-to-face guidance. They have a responsibility to ensure that that guidance is in place on time and meets customer expectations.
The Government are not always reassuring on that front; sometimes they seem to talk about guidance and sometimes about advice. Advice is something for which you pay in the industry; it is an activity regulated by the Financial Conduct Authority, which authorises individuals and firms acting as advisers. Guidance is different. Guidance in the context of the pension changes that will take effect from April 2015 must be free and impartial information to empower customers to make informed and confident decisions. That activity will not be regulated by anyone; the individual will have to make up their own mind as to the best route post-retirement.
After all, the FCA sums it up distinctly and neatly on its consumer website:
“The main difference between guidance and advice is that you decide which product to buy without having one or more recommended to you”.
That is why guidance will bear a heavy weight. The guidance envisaged in the Bill aims to provide the estimated 300,000 new retirees per year with defined contribution schemes with this service. Even with the distribution channels of the web, face-to-face—for example, Citizens Advice—and via telephone, including the Pensions Advisory Service, there must be grave doubts about the level of take-up that will be achieved. The amount of resources assigned and the task of preparation time leaves the impression that we are being subjected to rushed initiatives in the most crucial area for the citizen. There are no details on how the guidance will be delivered in a consistently high-quality manner, given that no specialist qualification, experience or regulation is required for the agencies to commence this process. The Minister must recognise our very clear anxieties on these points. Safeguards must be in place to protect customers.
The Bills, which share their Second Reading in this rather interesting procedure, allow for the establishment of the collective defined contributions pension schemes, which we promoted some time ago. We were convinced by the value of these potential schemes, and are of course pleased that they are included in the legislation. They have the potential to provide a more reliable retirement income than individual defined contribution schemes. Therefore, we are not opposed to the Bill but welcome it.
I hope that I have expressed the Opposition’s constructive criticism of the Bill, while at the same time indicating that we support its principles and wish it every success. Later in this debate and in Committee, my noble friend Lord Bradley will take up some of the challenges that I put forward. However, I hope that the House will recognise that our broad commitment of support does not involve a superficial approach to the very real challenges that this significant pension reform envisages.
Finally, in a rather more consensual manner than the one I normally adopt when expressing a view on government legislation from this Dispatch Box, I pay tribute to the noble Lord, Lord Jenkin, and his service to both Houses over a very considerable period. I will never forget the time when I had responsibility in this House for an Energy Bill on which we spent 17 days in Committee. The only noble Lord who was unremitting in his work at that stage, when even Ministers were forced to hand some responsibility over to each other, was the noble Lord, Lord Jenkin. It was a tour de force in everything we heard at that time, and of course the whole House will wish him well in his retirement.
Lord German (LD)
My Lords, I, too, join in the tributes to the noble Lord, Lord Jenkin, and associate the Liberal Democrat Benches with the good wishes that have been passed on to him so far. We look forward to his speech. Perhaps the House will afford me a moment for a small personal recollection. I know that the noble Lord, Lord Jenkin, has the words “love of music” stamped throughout him. One of the assurances that you can have about music is that you can continue to enjoy it no matter what age you are, from the youngest to the oldest. I wish him every success in his retirement, and hope that he will be able to join us, as he always has done, at future musical occasions of this Parliament, and enjoy with us once more those wonderful occasions. We all look forward to his speech later on in this debate.
This suite of Bills adds to the most comprehensive range of changes which we have seen to state and private pensions in a generation. Set against the backdrop of auto-enrolment—with the number of new savers reaching beyond 5 million and rising; the new single-tier state pension; establishing the link between pension age and life expectancy; and abolition of the retirement age altogether—I think it is safe to say that this Parliament has seen an unprecedented period of major pension change. In fact, I would venture to say that it has been a revolution, a quiet one, which has at last seen the coming together of major pension reforms.
I recognise that many noble Lords in all parts of this House, some present here today, have played a key role in ensuring that we have got to the place we are debating today. However, I pay tribute to my right honourable friend Steve Webb for the part that he has played in bringing these reforms to fruition. He is deserving of great praise, and it undoubtedly says something about his skills, as I understand that he is now the longest-serving Pensions Minister for many decades.
The Pension Schemes Bill follows two consultations, in November 2012 and November 2013. It will extend to three the present two-pronged approach to pension provision, defined contribution and defined benefit schemes. However, with the decline of defined benefit schemes, increasingly, as of now, for many people, the only realistic option available is a defined contribution scheme. The defined ambition option provided by this Bill provides a new alternative, one which allows people to act collectively, sharing risk, and smoothing out fluctuations, reducing volatility for the customer.
Sharing investment risks and longer-life risks has the potential to act against the interests of a consumer when operating as a solo investor. This measure will mean a reduction in the ups and downs of investment. The Bill therefore offers a third route, one which can provide more certainty and stability. I note that the Government do not claim that it will produce a better financial outcome, although some have claimed that it will—but it will provide stability. This new approach will also allow people to leave money within the scheme if they wish, even after entering the decumulation phase, so they can continue to see all, or part, of their pensionable savings invested.
As always, we look for parallel experiences in other countries, and my noble friend the Minister mentioned two in his introduction. However, each has conditions that render them unique, and it is not wise to try to lift the experience of others in a wholesale manner into the United Kingdom. For example, I anticipate that we will have a detailed discussion of the intergenerational nature of the new defined ambition pension. However, one benefit that your Lordships may wish to ensure as the norm in this measure is that joint action should lead to a spreading of windfalls and setbacks over time, so that fluctuations can be avoided. It is possible to mitigate changes in current market rates to reduce volatility and maintain stability within a collective pension scheme. The effect that this has on a defined cohort of pension recipients, by laying off the risk through smoothing over present and future generations, is one that this House will undoubtedly debate in detail at future stages of the Pension Schemes Bill. However, the experience of the Netherlands should lead the House to ensure that expectations are managed, that there are clear communications with members of the scheme, and that cross-subsidies within schemes are adequately and comprehensively managed, with legislative context for this to happen.
As a result of all the changes in pensions policy, and those in these two Bills, pension providers are increasingly being asked to think creatively, to adjust their provision, offer new products and provide more choice. Annuities have been a shackle on the pensions market, particularly as annuity return rates have gone steadily downwards over the past decade. The challenge for the pensions industry is to respond to the need for a strong dose of competition and innovation.
There is a danger that consideration of these Bills will mainly centre on the guidance guarantee. That is, none the less, a very important part of the legislation. It is important for the guarantee to consider the potential choices that a pension saver has, by looking at all assets that that person has. Here I must declare an unregistrable interest as a member of the advisory committee for the Equity Release Council. Housing wealth in this country is estimated to be £1.4 trillion—and many people also hold other assets, such as investments and savings. The FCA has just produced its “near final” rules and standards on the guidance guarantee, but the relevant standard, standard 20, is silent on the level of housing wealth being considered.
An Equity Release Council survey suggests that average housing wealth for the over-55s is £271,000. Meanwhile, the average defined contribution pension pot is in the order of £20,000. Whether these figures are robust is not the issue here, because they merely illustrate the need to consider housing wealth within the guidance guarantee. They show that housing wealth is more significant than the pension pot for most people over 55. This huge financial gap between the two assets is likely to continue in the next decade for people aged 40 and more, as this cohort is more likely than its predecessor to have defined contribution rather than defined benefit pensions, and they are just as likely to be pursuing home ownership through a mortgage that will be repaid before they retire.
I appreciate that the Government’s intention is for the guidance guarantee to equip people with basic concepts about their future financial needs, and to provide a basic knowledge of the range of products available. But not taking all assets into account when providing guidance will work against the guidance guarantee’s fundamental task, which surely must be to equip people with the questions they need to ask in order to help them make their decisions. To do this effectively the whole picture needs to be seen, and that means getting all the relevant information in one place, and in an easily understood format.
In respect of the pensions freedoms in these Bills, I would be grateful for confirmation from the Minister that the Government regard the FCA as the second line of defence, standing apart from the guidance guarantee, to ensure that the highest standards are met by those supplying financial products when people are at the point of making these crucial decisions involving their pension savings.
These Bills provide an opportunity for the introduction of much needed rights to improve the way that savers can engage with their savings. All the available evidence shows that people struggle to understand and engage with what is happening to their pension savings. This high level of disengagement must surely be a concern. One key mechanism for improving understanding and engagement is transparency—letting people know what is happening to their money. People are interested in knowing how their money is used, even though the language used by the financial sector may put them off. We could use this Bill to increase the ability for customer scrutiny over those who decide how to place their money. In a system where people cannot easily move their money, it is all the more important that their agents are held to account. What is required is customer-facing information and materials which help savers understand and access information. I look forward to a discussion on these issues at future stages of the Bill.
The number of government changes to the defined ambition Bill in its final stages as it went through the House of Commons was dramatic. Effectively, those changes added 65% or more extra detail to the Bill. This means that there is a real job of work to be done in your Lordships’ House to undertake scrutiny, particularly in Committee. I do, however, recognize that many of these changes were made as a result of announcements made in the Budget, after the Bill had been published.
Given the wide range and scope of subordinate legislation required for these Bills, there will undoubtedly be a need for detailed consideration at later stages of whether the affirmative or negative procedures are appropriate. Without draft regulations before us, I suspect that your Lordships’ House may well seek the affirmative procedure for many of these new regulations, but perhaps for some of them only on their first appearance in this House.
The timing of the new standards and rules governing all the issues in these Bills is a key consideration to be debated. The issues of quality of governance and levels of charging are high on the list of matters where the customer will require protection. The most urgent of these is the conversion of the FCA’s “near final” standards and rules on the guidance guarantee into their final form in time for when this Bill comes into force in April next year. I would be grateful if my noble friend the Minister could indicate when he expects these final standards and rules from the FCA to be received. Given that there are two regulators engaged in protecting the customer in these Bills, perhaps he could also indicate how it is proposed that the roles of both will be delineated, and how the Government will ensure that there is no overlap or, indeed, cracks between their respective areas of responsibility, where protection might subsequently fail. Perhaps my noble friend could give his and the Government’s view of whether it would be better to have a single regulator operating in this space rather than run the risk of overlap or gaps in provision.
In conclusion, I welcome these Bills and look forward to debating the key issues at future stages. They provide choice and rightfully put more powers in the hands of the consumer. They are to be welcomed.
Baroness Greengross (CB)
My Lords, I add my personal tribute to the noble Lord, Lord Jenkin of Roding, whom I have known for many years. He has always been very gracious in his various roles when I have wanted to discuss issues with him. He has made a huge contribution, and I shall miss him very much, personally and professionally.
I very much welcome the changes made through the Bill, as they seek to strike a new balance between the sensible accumulation of savings for later life and the freedom for people to choose how they spend their money in retirement. I believe that there should be more choice for people entering retirement. Increased choice should help to enable them to save for, and make informed decisions about, their retirement income. However, this means that they must fully understand the risks associated with these choices. My main point is that there are many risks attached to this, in particular, the risks associated with Part 3 of the Taxation of Pensions Bill, which creates the UFPLS. This will provide an additional option for flexible access to a pension, but there are associated risks here which I fear many consumers will not fully appreciate. I will come back to those risks later.
I very much welcome the fact that Schedule 3 to the Pension Schemes Bill will place a duty on the FCA to create and regulate the advice and information part of the “freedom and choice” pension reforms in the shape of the guidance guarantee, which is a crucial part of the reforms. My worry is that individuals are neither aware of the existence of this guidance, nor obliged to seek it, nor to follow it if they find it, and so many will remain seriously ill informed and may make wrong decisions. Recent research from Partnership has disclosed that, with so little time to go before the introduction of this new pension regime, 53% of people over 40 do not know whether they are eligible for the guidance guarantee, 18% said that they were not eligible and only 29% said that they knew they could use the service. There is a lot to be clarified, which we will work on at later stages.
While accepting that the FCA has the role of ensuring the quality of the guidance on offer, I think that there are areas that could helpfully be further clarified in the legislation. The proposed standards will work well for web-based guidance, for example, but I am not sure that they will work well for telephone or face-to-face provision; and that issue needs to be looked at. Perhaps also the guidance guarantee should be regularly reviewed in order to ensure that suitable information is there to make sure that people can make the important decisions that best suit their needs.
Also, a second line of defence regulation has been suggested—certainly, Dr Ros Altmann recently called for this—which would include knowing about dealing with risks such as outliving assets and running out of money or not providing benefits for a spouse on death. These are important issues and I very much hope that we can see some progress in those areas. Lastly, I should like the Government to commit to an annual report on the outcomes for everyone affected, whether they access the guidance or not.
Finally, the levy that will fund the guidance guarantee will come from only those firms regulated by the FCA. However, to create a level playing field, perhaps the guarantee should be funded by all pension and retirement providers, including trust-based pension schemes and master trusts, such as NEST, which currently would not contribute to the levy.
I end by considering people’s care needs. The funding of long-term care, which I mentioned earlier, is a growing concern of many retirees who potentially have to fund all or some of their social care needs out of their retirement funds. The proposals set out in the Care Act of this year will go a long way to helping to address some of those concerns, but these changes provide a good opportunity to encourage people also to consider how they could fund any long-term care needs that might arise. The role of care fees funding in pensions decumulation needs some consideration and should be part of the wider debate. I am wondering just how the Government plan to respond to the question asked by the noble Lord, Lord Hunt of Kings Heath, in last week’s Motion of Regret tabled by the noble Lord, Lord Lipsey: how will a pension pot be treated in relation to the calculation of a non-housing asset? Do the Government expect the new flexibility in assessing pension savings contained in the Taxation of Pensions Bill to have any effect on this policy?
In summary, these bold reforms bring with them new freedoms but many new risks, and we should all strive to ensure that the pensioners of today and tomorrow can fully enjoy the former in the safe knowledge that they will have appropriate information, guidance, advice and choices to minimise the latter.
Lord Hutton of Furness (Lab)
My Lords, I should like to draw the attention of the House to the interests I have declared in the register. I am an unremunerated non-executive director of Pension Quality Mark. I should also like to express my personal tribute to the noble Lord, Lord Jenkin of Roding, who in a few minutes will make his last contribution to our proceedings in this House. The noble Lord has made a truly extraordinary contribution to public and parliamentary life over a very long career. I, for one, am going to very much miss him in this House.
I strongly agree with what the Minister said in his opening remarks when he described these reforms as truly radical. They certainly are. I welcome the Government’s continued focus on looking at our pension system and ensuring, wherever possible, that people are thinking ahead to the needs they will have when they retire. This is a hugely important issue for our country. I regard it as perhaps the most important public policy challenge we face if one thinks about the nature and speed of demographic change in our country.
This problem has assumed even greater significance because of the general thrust and drift of public policy in the pensions space in the past 10 years or so. The burden of responsibility for providing secure retirement income is now rightly, in my view, steadily moving from the state to the individual. That is certainly the whole thrust behind the auto-enrolment reforms and the reforms to the state pension. For these policies to work, we have to be sure that people make adequate provision for their retirement. If they do not, the risk is that public finances will become unsustainable and that, once again, being old becomes the same thing as being poor. We need to avoid that outcome at every possible opportunity. Therefore, every reform to our pension savings system should pass one simple but important test: will it encourage more people to save more for their retirement?
There is much to be welcomed in the Bills before us today. None of us wants to be treated like an idiot, and it is right that we should therefore have more choice about what we do with our savings. I welcome that. However, it is right and proper that in this place we highlight some of the challenges that the Government’s reforms are going to create.
The first is that there is some tension between these two significant reforms—on the one hand, giving more freedom for savers in DC schemes and, simultaneously, providing for more risk-sharing in defined ambition schemes. Some people would say that these two reforms are not entirely compatible, and that is certainly the view of many in the industry. John Lawson, the head of pensions policy at Aviva and a much admired figure, went so far as to say recently that these reforms are completely incompatible with each other. On the one hand, encouraging more collective risk-sharing through collective defined contribution schemes sits oddly with the new freedoms at 55 to take out all the cash built up in conventional defined contribution schemes. One stresses the benefits of collective risk-pooling; the other, the right of the individual to make their own decisions about how to manage retirement income risks. In my mind, it begs the obvious question: what is the most important public policy objective that these reforms should prioritise? Is it freedom of choice or should it be income sufficiency in old age?
There is also the danger that we might begin to lose sight of something rather fundamental here. The purpose of a pension scheme is to provide secure retirement income for as long as the pensioner remains alive. It is not just about wealth accumulation and the instant gratification of converting your pension pot into a tidy cash sum. In my view, we should remain absolutely focused on the question of retirement income: how we can secure it and how, if possible, we can increase it.
One of the obvious risks in the Government’s approach to annuities reform is that there is a real possibility that more pensioners will start to run out of money in old age. Here, it is worth talking about the experience in Australia. It is true to say that auto-enrolment was heavily influenced by the Australian reforms, and successive Governments, including this one, have paid close attention to how this model has worked. The Chancellor of the Exchequer prayed in aid the Australian experience as providing the intellectual underpinning for his announcement on annuities reform. I am afraid to say that I am not entirely sure that he is on absolutely firm ground.
The recently published Murray report in Australia has recommended introducing compulsory deferred annuities that would pay out after the age of 85—going, I am sorry to say, in almost exactly the opposite direction to the one proposed by the Government here. This was recommended in Australia because it was found that a quarter of Australian pensioners had depleted their pension savings by the age of 70. There is a real warning sign here for us. That is why I strongly favour a hybrid approach—dare I say it, a third way—with greater freedoms to draw down pension savings on retirement, combined with a focus on the need to secure retirement income in later years. Allowing these new freedoms to be exercised at the age of 55 also poses another set of problems, particularly for employers.
The Organisation for Economic Co-operation and Development has also recently expressed similar concerns. It has pointed out—rightly, in my view—that pensioners in the United Kingdom are unlikely to achieve better incomes in retirement simply as a result of scrapping mandatory annuitisation. This, I think, gets us to the heart of the issue. We should remain focused on retirement income and on ensuring that every pensioner has adequate provision. At the end of the day, an annuity is merely an insurance against outliving your savings. This is a risk that the Government and individuals need to take very seriously. Partial annuitisation should at the very least be strongly encouraged as an integral part of planning for retirement. The danger today is that we appear to have created the sense that we have moved decisively against this kind of provision. That would be an enormous mistake.
As other noble Lords have said, there is the whole question of the so-called guidance guarantee which lies at the heart of the annuities reforms that are being set out in this legislation. I am yet to be persuaded that the guidance guarantee is sufficiently robust. It is not compulsory and what is being proposed is quite limited for such an important decision. Inertia will be a real problem. The FCA recently reported, for example, that 60% of people retiring with defined contribution schemes did not take advantage of the open market option of purchasing an annuity from a different provider, despite the fact that 80% of those individuals would have been better off. How confident can we be and how confident is the Minister that the guidance guarantee will be taken up properly?
The other great danger is that the benefits of the proposed collective defined contribution schemes are being seriously oversold. They are modelled largely on the experience of similar schemes in the Netherlands. It is important that we all understand that the Dutch pension landscape is not a land of milk and honey. I have no objection at all to these schemes being one option available to employers and employees, but I simply draw to your Lordships’ attention some problems. These schemes do not guarantee higher retirement incomes. They are no less vulnerable to unexpected lower investment returns than conventional defined contribution schemes. Just look at what has been happening in the Netherlands only very recently, with significant reductions being made to pension benefits. These schemes certainly expose younger savers to quota risks and the possibility that they will receive lower payouts as risks within these schemes are effectively shifted across different age cohorts.
I am not at all convinced that these schemes are all that progressive either. Lower earners who typically enjoy lower life expectancies effectively subsidise higher earners who tend to live longer. In the UK at present, those with lower life expectancies can receive higher retirement incomes through either enhanced or impaired annuities. This is not an option within CDC schemes. These schemes are inherently less transparent and certainly more complicated than other UK workplace pension schemes. My advice to the Minister and the Government is not to over-egg the pudding, although I suspect that it might be a little too late for that.
Looking at the provisions of the Bill relating to the defined ambition schemes, it is obvious that there is a very substantial regulatory risk for these schemes as the Bill grants enormous powers to the Secretary of State to legislate by way of statutory instrument as opposed to clearly setting out the parameters in the Bill. We do not yet know how these powers will be used and what form they will take. That creates obvious uncertainty for these putative schemes.
I shall conclude my remarks by saying one or two things about the Taxation of Pensions Bill. I am obviously aware that it is a money Bill and that we have no power to amend it, but I should like to raise with the Minister some concerns that I have about its provisions. I am pleased that the Government are removing some anomalies in the tax treatment of death benefits paid out of income draw down products and annuities, which will now be tax exempt if a scheme member dies before the age of 75. We all welcome that. It will, I hope, act as an incentive to save and should be supported. But the Government have made no changes to the taxation of a dependant’s pension scheme benefits which will still be taxable at the marginal rate of income tax. I am not sure that I understand the logic here. It seems perverse that a dependant’s scheme pension benefits should be treated adversely from a tax perspective compared with annuities and draw down products. This will surely encourage more members to transfer out of defined benefit schemes than would otherwise have been the case. Is this really the Government’s intention? It would be good for the House to know.
In fact the whole area of transfers from defined benefit to defined contribution and how they will be affected by these reforms is a moot point. It would be good to hear more from the Government about how they see developments in this space. Most informed commentators expect to see significant numbers transferring out of defined benefit schemes to defined contribution schemes to take advantage of the new freedoms on offer. There is a widespread concern that these DB to DC transfers, unless we are vigilant, are a potential mis-selling scandal waiting to happen. We really have to guard against that.
Much has been made of the fact that lump sum payments to nominated beneficiaries are going to be tax-free if the pension scheme member dies before reaching the age of 75. So far so good. I very strongly welcome the Chancellor’s focus on this issue. However, scheme administrators cannot nominate a different beneficiary from the person nominated by the scheme member himself or herself. That is clear from paragraph 3 of Schedule 2 to the Bill. I am particularly concerned that the effect of these changes could result in inheritance tax being payable on these lump sums—although not income tax because of the reforms in the Bill—on the basis that only death benefits paid out of a discretionary trust are exempt from inheritance tax. I hope that my fear is misplaced, but it would be very good to hear from the Minister on this point at some stage in our proceedings today.
I cannot fault the Government’s energy and commitment to pension reform, and I welcome it. It is impressive, particularly at this late stage of the Parliament, and both these Bills represent significant reform. The noble Lord, Lord German, who spoke earlier, said that this is a pension revolution. I think that it is, but, as any student of history knows, the problem with a revolution at the beginning is that you never can be quite sure where it is going to end. That, I think, remains the principal concern that I and many others have about the reforms set out in these Bills.
Lord Jenkin of Roding
My Lords, last month the House, in its wisdom, accepted the recommendation of the Procedure Committee that a Peer who has given notice of his wish to retire might have an opportunity to make what they christened “a valedictory speech”. I would point out that a number of noble Lords have retired recently, their retirements having been announced by the noble Baroness the Lord Speaker, and they have not felt it necessary to bother the House with any valedictory speech. However, when I see just how conspicuous this first valedictory speech has become, I wonder why I did not take the same decision. I suppose that one excuse I could offer is that I seem to have given the experts on pensions, to whom I have been listening for the last hour or so, a bigger audience than perhaps they might otherwise have attracted—although whether that is regarded as an advantage I do not know. However, I feel humbled, in a sense, by the numbers—their curiosity seems to have overcome their apprehensions—who have come this evening. I only hope that they will not regret it.
One undertaking I can give is that, in view of the very kind things that have already been said in this debate, I think I can be extremely brief. The Procedure Committee said not more than 10 minutes; I hope I will be rather less than that. I can give the House one further assurance. I have been advised that it is not necessary in a valedictory speech for the speaker to address the subject of the legislation in which he has chosen to make the speech. If my noble friends on the Front Bench and others will forgive me, I will not do so. I have been enormously impressed by the expertise that has been demonstrated. As a former Minister in charge of pensions, I am lost in admiration and realise that it is just as well that I am not trying to talk about this legislation.
In recent weeks, I have been approached by a number of noble Lords from all parts of the House asking, sometimes with some asperity, why I am retiring. After all, I am getting on a bit and I realise that, but I have two answers; one is very short and the other is slightly longer. The short one is that after 50 years in Parliament—a number of noble Lords have already made reference to that—and at the age of 88, I feel that I have done enough. I have done what I can offer, and it is best to bow out and let others carry on.
The slightly longer answer is that, if this House is to continue to perform its hugely important functions in the running of this country, I totally believe that there has to be a constant infusion of new blood introduced into the House, with people who have current experience and whose experience of business or whatever field they have operated in is completely up to date. They can bring their advice and guidance to the House. If the House is not to remain too big—there seems to be a fairly widespread if not universal view that, as the second largest legislature in the world after the Chinese congress, we are a little big—it seems incumbent on oldies to hand over to a younger generation. Everyone must make their own decisions about that: there is no sense of compulsion. I have made my decision and that is why I stand here before this House today.
Last month, a number of us were fortunate to attend what I found to be an inspiring thanksgiving service at Westminster Abbey for the late Mary Soames. Talking to people coming away from it afterwards, there was one phrase that was repeated by people: it really is the end of an era. When Winston Churchill’s youngest child passes on, that is the end of an era. I am conscious of having lived through much of that era. I was privileged in 1964 to follow Sir Winston as the Member of Parliament for Woodford, which was later renamed Wanstead and Woodford. I look back to the maiden speech that I made in the House on that occasion, where by convention the new Member is expected to say something nice about his predecessor. I thought, “What on earth can I say about that great man that would not be said with far greater eloquence by others?”. I therefore looked up his maiden speech to see what he had said on 18 February 1901. I was struck by a passage that impressed me. If nothing else, Sir Winston was a great parliamentarian. At the age of 26, just home from the Boer War, which was still going on, he said:
“In my opinion, based upon the experience of the most famous men whose names have adorned the records of the House, no national emergency short, let us say, of the actual invasion of this country itself ought in any way to restrict or prevent the entire freedom of Parliamentary discussion”.—[Official Report, Commons, 18/2/1901; col. 407.]
That was 40 years before Dunkirk, when the Nazis threatened the invasion of these islands. At the age of 26 he had such foresight. He was absolutely unique. Of course, during that war, as Prime Minister, he led this country to victory in 1945 and made sure that Parliament was always able to hold Ministers to account during that period. We should be very proud of that.
Here we are now in December 2014, 50 years after the 1964 general election. I look back and I have been very fortunate. I have had a very eventful life. It has had its tragedies. I never have the slightest hesitation when answering a question as to what for me was the biggest tragedy in that period. It was the death of my hero Iain Macleod, one month after he became Chancellor of the Exchequer. I see the noble Lord, Lord Armstrong, there. I have never forgotten—he was the Principal Private Secretary at No. 10 who rang us up early in the morning to give us the tragic news. For the rest of that day—indeed, for the weeks that followed—it was an appalling disaster and a huge loss for this country. I have no hesitation whatever in saying that.
Then, later on, the election of the first Thatcher Government was the start of six years’ service in her Cabinets. I have one disappointment. We always lined up every year for a Cabinet photograph, in two rows: the seated at the front with the Prime Minister and the standing at the back. I never made the front row. That gives one a very clear indication of where one stands on things. Those years saw successes and failures. I am not going to stand here and spell out the failures. There was a marvellous book published by two Essex University professors last year—a very revealing book— called The Blunders of Our Governments, by Professors Anthony King and Ivor Crewe. I have to tell your Lordships that my sins are ruthlessly exposed in that book.
I am sometimes asked what legacy one can point to. I am not sure that I am the right person to do that, but I offer two suggestions. In the other place I became Secretary of State for Industry and inherited six very major state-owned nationalised industries. As a former Chief Secretary, I could tell their chairmen and chief executives that there was no way they were going to get their investment requirements funded by the Treasury. I started with British Telecom and told the chairman that, if he wanted to have his £28 billion investment programme or whatever it was, he would have to go to the market and have 51% from the private sector. I look back at that decision: I was able to persuade first the Prime Minister and then the Cabinet that BT should be privatised. Other noble Lords were responsible for subsequent stages, but the decision to publish the White Paper and introduce the Bill was when I was Secretary of State. I look back on that with some pride. Nobody has ever suggested that that one should be reversed and I think it set a pattern.
What about this House? Some have pointed to the Science and Technology Select Committee report Science and Society of 1999. It was this report that convinced the scientific community—not just in the UK but across the world—that, if you wanted the public to support and understand, you had to engage with the public and not just preach down to them, and not just on the public understanding of science. It took a while for the message to get across, but there are very few national scientific bodies in this country or anywhere else that do not have their science and society activity, of which, quite rightly, they are very proud. Ten years after that report was published, the British Council organised a conference in London to celebrate the report. It was attended by the representatives of more than 55 different countries. As someone who never did any science at school or university at all, I felt rather pleased with that. It has not stopped: only last week at a gathering downstairs, to which I had been invited but did not attend, my son accepted an award for what is called “outstanding contribution to science”. It was meant for me. I am completely flabbergasted. However, there it is.
I am over my time. I must end by thanking all those who have made these 50 years possible, including my former constituents in Wanstead and Woodford, the clerks and staff of both Houses, and all the people who keep the wheels turning over and make it possible for us to do our job in the way that we do: the Library staff, the catering staff, the security staff, the police, the doorkeepers, the Printed Paper Office and many others. I offer to them all my heartfelt thanks. Above all, I thank my colleagues for their friendship and forbearance, and for their patience in listening to me this evening. My Lords, I will miss you all dreadfully.
[Applause.]
Lord Freeman (Con)
My Lords, it is a privilege and a pleasure to speak immediately after my noble friend Lord Jenkin of Roding. I must say that this is the first time I have heard applause in this House, and I think that it is a great tribute to my noble friend. He has announced his retirement after 50 years’ service in Parliament, 25 years in the other place and 25 years here. He was the MP for Wanstead and Woodford, and a Minister between 1970 and 1985. I think that those who have served in Government will realise that 15 years is a quite remarkable length of time. He was a Secretary of State three times—for social services, for industry and for the environment—and many of the Bills that he was responsible for and the decisions he took still stand and are respected.
I would particularly like to note the encouragement that my noble friend offered to new Members of the other place. He would not always praise them, but would offer them encouragement by saying, “I think that speech was a bit too long”—or too short, but that encouragement was always appreciated. It is now my pleasant duty to invite the House to salute in the traditional way a parliamentary career of great distinction and to wish my noble friend not only long life and happiness with his family, standing at the Bar and represented there, but also the wish to see him back here in the House often. We all salute a great parliamentarian.
Lord Freeman
My Lords, I am quite conscious of the fact that my contribution to the Pension Schemes Bill is not likely to attract this number of noble Lords so, as they say, please leave quietly. I shall restrict my remarks to a relatively short period of time, because we are pressed by our schedule.
These two important Bills follow the very welcome Budget and subsequent announcements from the Chancellor of the Exchequer, which I fully support. Many noble Lords will warmly welcome the flexibility of the rules being proposed in these two Bills, particularly in relation to defined contribution schemes. I shall restrict my remarks to direct and defined contribution schemes rather than defined benefit schemes, which of course for very large companies in this country, including in particular the public sector, make up the majority of schemes. However, it is the defined contribution schemes where the amount of money that has been saved by the prospective pensioner is going to be affected quite significantly.
I welcome the provisions in both of the Bills that are before us today, particularly with regard to flexibility on the drawing down of savings, but, as has already been mentioned by the speaker on the Opposition Front Bench, there are certain concerns which this House should have when reviewing the Bill in Committee so as to ensure that this new flexibility, which I welcome, does not put a pensioner in a position of inadvertent poverty. The point made by the noble Lord, Lord Davies of Oldham, is absolutely right. Your Lordships—and those who are responsible for the implementation of this legislation—should always remember that there is a tremendous difference between guidance and advice. Advice is something that you pay for, as the noble Lord, Lord Davies, pointed out, and is between the pensioner and either an individual or a respected firm. Guidance is something that the Bill deals with, and is much to be welcomed.
When one starts contributing to a pension scheme, if one is employed by a large company, and it is a defined benefit rather than a defined contribution scheme—that is, over the lifetime the individual earns an entitlement from the pension fund that is underwritten by the employer, which is a big difference from the contribution schemes where an individual is saving for later life—it is important to look at who is providing advice. The Bill provides for guidance as opposed to advice—free guidance to individuals, who may wish to ask themselves, “I have built up this substantial pot of money but I still have 15, 20 or 30 years after retirement. What is the most sensible proportion that I should leave in my pension pot and how much should I draw down, either in individual lump sums or all at once?”. That is where advice is absolutely crucial.
I hope that when the Ministers take these Bills through Committee, they will be able to answer some of the detailed questions about who pays for those who will give advice. My understanding is that it will be from public funds, which the Treasury will require to be raised from those who are providing guidance, and that the individual bears no financial burden by saying, “I want to draw down some money. Here are my assets. Here is how long I and my dependants expect to live”. That advice is absolutely crucial. The citizens advice bureaux are perhaps not the right entities to provide that advice. We need a new cadre of trained and respected bodies and individuals to provide that free advice. Pensioners and prospective pensioners should be strongly recommended to take that advice.
I will conclude by making a comment, if I may, on defined benefit schemes. Like a number of noble Lords, I have served as a trustee and now the chairman of a large defined benefit pension fund. That fund bears the risk of a diminution in the assets and—this is my final point—the movement of interest rates. When a pension fund calculates its deficit or its surplus, typically every three years, one of the factors used is the gilt rate. The gilt rates are at historically low levels at the moment, which means that when the actuary discounts the liability of the lifetime of the remaining members of the pension fund, which might be 15 or 20 years after they have retired or even longer, a very low rate of discount is applied and therefore the liabilities in the accounts of the pension fund rise. Over the past two or three years, they have risen dramatically. Although I welcome low gilt rates and low interest rates, when we come to the valuations very shortly—on 31 December of this year—we will find that the deficits of some of our largest pension funds have again risen. I have no solution to that, but we need to reflect on whether there needs to be some kind of change in the principles that are applied.
I very much welcome the Bill and I look forward to Committee.
Baroness Drake (Lab)
My Lords, I declare my interest as a trustee of Santander and Telefónica pension schemes and a board member of the Pensions Advisory Service and the Pension Quality Mark.
I am extremely concerned about the extent of the new pension freedoms and the speed of their introduction. I think that the Chancellor is rushing his fences. I have two real concerns: the behavioural impact of those freedoms and poor decision-making by the saver. I am now confused as to where the consensus on pensions policy now is. The rush to put the freedoms in place from April 2015 is dominating the debate, overshadowing consideration of their efficiency for the long term. I favour some more freedom, an increase in the trivial commutation level and reducing the proportion of the pension pot that has to be compulsorily annuitised, but the extent of the freedoms unleashed in these Bills will create new problems. There is now a complete separation of tax-advantaged pension saving from any requirement to secure an income stream in retirement. The effect of that decision will be profound.
The Treasury cited Australia and the US as examples where consumers have similar freedoms, but they both have problems. In Australia, few people buy an annuity. The leading accounting body, CPA Australia, found:
“Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s been lived now instead of being put aside to provide income in retirement”.
As my noble friend Lord Hutton comments, the Murray review into Australia’s financial system found that a quarter of people with a pension pot at age 55 had depleted it by age 70. The complexity is tipping people into cash, and the review now recommends a default back into annuities.
In the US, 51% of the workforce has some form of pension plan, mainly in 401(k) schemes. Thirty-five per cent of those who left jobs in 2013 cashed out their 401(k)s outright. The US Treasury this year said that it will offer a tax break for savers who buy annuities and allow pension schemes to offer long-term deferred annuities as a default. Both those nations are rowing in the opposite direction of the Bills. The Office for Budget Responsibility states that the tax consequences of the reforms are “highly uncertain” because no one knows how many people will spend substantial parts of their pot from next April.
Choice is now extended, but for many millions the biggest challenge remains building an adequate pension pot. The average annuity in 2013 was bought with a fund of just over £35,000; the median was £20,000. How will the reforms help the next generation of savers? The Pensions Minister and the DWP are to be complimented on the rollout of auto-enrolment, but on the default contribution rate of 8% a median earner’s pension pot will still be very modest.
The employer pension contribution had been expected to increase over time, but the new freedoms make that more difficult. The Government have sent out a clear message to the individual—“It’s your pot of cash. You saved it. You spend it as you like”—neglecting the contribution from tax relief and, in most cases, the employer. The now public focus on early access to cash from age 55 contradicts the more important messages of working and saving longer and drawing your pension later. Employers are integral to the success of workplace pensions, and a major influence on the level of contributions, but what is the Government’s message to the employer? “Pension pots are for people to do with as they like; they are no longer reserved for retirement income”. The premise on which employers were compelled into making a pension contribution under auto-enrolment no longer holds. How will that affect employer attitudes? They may be less disposed to increase their contribution and more politically resistant to an increase in the statutory 3%. Will a finance director want to pay more to a worker’s fund so they have freedom to purchase a Lamborghini?
Historically, employer and employee pension contributions were so tax advantaged because they supported a retirement income. I agree with the Pensions Minister that tax relief should be reformed to give a more efficient distribution, but if pension savings policy is now, “Spend it all as you like”, then the fundamental principles of the tax relief will inevitably be revisited. I would not want to see the incentive to save for the long term seriously reduced for the next generation of young savers because successive Chancellors claw back too heavily on tax relief, but I fear that is now where we may be heading. The Institute for Fiscal Studies has already questioned whether the contributions to a DC pension saving should continue to be so tax privileged if annuitisation is voluntary.
The new freedoms bring new risks and complexities and uncertainty as to how the risk of consumer detriment will be mitigated. The Government are dependent on the market to ensure the success of the new freedoms. The Pensions Minister, Steve Webb, has said he will watch the pensions industry “like a hawk”—not a statement of confidence. Antipathy to annuities has been driven by falling annuity rates and the behaviour of providers, who will continue to supply the retirement products—so it is new freedoms, same market.
The new FCA study, which examined how market conditions may evolve from April 2015, found that competition in the retirement income market is not working well for consumers and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The chair of the FCA in a recent speech made two key comments. He said the increase in regulatory rules has failed to prevent misconduct and does not,
“seem to prevent further problems arising”.
At some point, inevitably, the Government will have to place in statute a clear fiduciary duty on providers and asset managers to put consumers first. Meanwhile, some good providers will want to respond positively to the new freedoms, but how will the market be placed in April 2015? The Legal & General Assurance Society chief executive John Pollock said:
“The fact is we were given hardly any time and then expected to deliver a satisfactory solution”.
Many employers will find engaging with the new freedoms a step too far because they are too complex, too costly and they fear associating with the products and poor decision-making. We may see a greater switch from trust to contract, an accelerated move to default ex-employees out of company schemes and a greater reluctance to fund employee access to guidance and brokering services—employers do not want any liability come-back. Employers are not obliged to provide access to the new freedoms through their schemes and many will not. People will have to embrace the complexity and cost of transferring their savings to get that access. I suggest a further tip into cash.
As to savers, policy now relies on one set of behavioural assumptions when people are saving and another when accessing pensions. It is assumed that workers are prone to procrastination and behavioural biases, which prevent them from making active decisions to save, so they are auto-enrolled and defaulted into an investment fund. However, at the age of 55 they become engaged savers, making active complex choices and informed decisions about their income and risks in retirement. However, as the PPI confirms in its report, Transitions to Retirement, making informed decisions about accessing DC savings was the hardest of all pensions, retirement and other financial decisions.
The Government need to help people to manage these risks. We will have the guidance guarantee, which is welcome, and it needs to be a success. However, some consumer and industry players want the FCA to introduce a second line of defence, requiring providers actively to ask customers whether they have considered the most important risks. We have little clarity on the charges and quality standards on retirement products in future, and the annuity market still urgently has to be tackled.
The Pensions Minister, Steve Webb, and the DWP have been focused—desirably so, and I compliment them—on new approaches to risk sharing, defined ambition and collective DC being their proposition, so it is most surprising that these two Bills are now being run together because one directly undermines the other. The potential for collective DC has changed as a result of the new freedoms. Intergenerational risk sharing between members with the provision of retirement income becomes very difficult if people can crystallise the value of their fund and take their cash from age 55.
As others have said, collective DC schemes are designed to smooth out income. The individual does not have a well defined pot over which they have individual ownership. That the collective DC schemes are not really compatible with the freedoms in the Taxation of Pensions Bill is not just a technical point but a cultural one, too. The freedoms row back to taking cash and seizing the individual while collective DC and defined ambition culturally, emotionally and sentimentally move in favour of sharing risk. It is not a coherent framework.
The Pension Schemes Bill has a significant number of delegated powers, so there is much still to be understood. In order to be sustainable, collective DC needs scale, an assured flow of new members, excellent governance and full transparency. On governance, the Bill is largely silent, yet collective DC and defined ambition can be run by trustees or private providers. The Government have added a clause to enable regulations to impose a duty on managers of non-trust schemes to act in members’ best interests, but it is unclear whether this would place an unequivocal fiduciary duty on private providers. Neither the NAPF nor the ABI detect a current appetite for such schemes, as they confirmed to the Public Bill Committee, so defined ambition, collective DC and any collective risk-sharing future in pension schemes need to be driven if they are to take off. However, we have no visibility as to how the Government will do that. Rather, I fear that the work of the Pensions Minister and the DWP has been undermined by the freedoms that come with the taxation Bill.
Lord Holmes of Richmond (Con)
My Lords, it must surely be Christmas soon, with not one but two pension Bills in the same afternoon. What treats to pop under the tree.
I give my respect and honour to my noble friend Lord Jenkin for his 50 years in Parliament. My sadness is that I got to know him only about a year ago, but I appreciated the wisdom that he shared with me when I joined your Lordships’ House and his witty comments, sometimes sotto voce when he was sitting next to me, at which I found it very difficult to suppress at least a snigger.
Where are we with pensions? It has been a tumultuous 20 years. We have heard the words “security”, “freedom”, “flexibility” and even “simplification”, until we all finally concluded that pension simplification is probably one of our greatest oxymorons. Defined benefit schemes, once the gold standard, with the ability to deliver two-thirds of someone’s income in retirement, were a solid proposition but have been undermined and eroded over the years by a whole series of factors, not least the tax raise by the previous Government, which put the final nail in their coffin. However, these current changes offer a lot; there is flexibility, but that must be balanced with the ability to have assured choices. I will not dwell too much on the Taxation of Pensions Bill, which is a money Bill and not our responsibility, but I ask the Minister what assessments HM Treasury has made as to the likely impact on tax take—not least as regards NICs—of these changes proposed in the Bill.
Much has, rightly, been said about the guidance guarantee. I will not add to those comments, but it is at the core of so much of this. If guidance is to be given, it must be guidance that can be relied upon. For many individuals, pensions are not only dull, boring and uninteresting, but that person will potentially hit a point where a decision could dramatically and irreversibly give them a retirement which they did not deserve, expect or need to have if they do not get that decision right.
The idea that a pensions board clearly sets out all of somebody’s benefits in one place—they have a dashboard picture—makes such sense. As regards wake-up notices, because of the profound nature of these changes I ask the Minister to consider whether such notices need to occur at five or maybe even 10 years before retirement, to get people thinking about what potential exists and how they may choose to act. We will almost certainly have guidance on it, but that is no bad thing. Much has been said on the guidance guarantee from a member’s perspective, but for a moment let us consider this from a trustee’s point of view, when somebody may want to transfer defined benefits into a defined contribution provision. Currently it is required that trustees consider the “appropriateness of the advice” that that member would have taken. I ask the Minister to consider sharpening this as we go through the legislative process. As it stands, it could be interpreted that there is a responsibility on trustees to look into that advice to consider its appropriateness. What is meant by that and what should be clear is that trustees need to convince themselves of the appropriateness of the independent financial advice and that it has come from an FCA-authorised provider rather than a responsibility on trustees which would be almost impossible for them to exercise to go into the details of that advice, and which would also go far too deep into the private matters of that particular member.
To turn to what is best seen as the £30,000 rule—the trivial commutation—again, potentially £30,000 of benefits can be moved without the need for advice. However, as the Bill stands, how can that happen if a member does not have nor should need the knowledge to understand how to assess the value of their benefits? It will not be measured on the cash equivalent transfer value measure but on the lifetime allowance measure. Not only does a member not need to know this, but even if they do know it, it will be impossible for them to gain all that information if they had existing crystallised provisions in a whole series of schemes. I ask the Minister to consider whether in these circumstances a way around this would be to enable that measure to be made on the CETV measure, which would cut through a whole heap of headaches and certainly allow everybody who currently understands that measure to go forward.
As regards the new types of schemes, again, I commend putting risk in there—the new defined ambition. However, there is a new issue here with regard to cost, complication and potential confusion. There is potentially a cost for trustees who seek to have to go through a process to come to the conclusion that their defined contribution scheme is a defined contribution scheme, as they always suspected. There is potential confusion for members to have their scheme potentially fall into a different name, despite the fact that the benefits structure is exactly the same.
There are a number of smaller provisions on which I will go into more detail when we get into Committee. However, what I would like to draw out is that, despite people’s lacklustre and disinterested approach to pensions, they impact our lives way before we come to draw the pension. For example, recent pensions case law demon-strates that, potentially, a part of a pensions trust can fall within a bankruptcy order. How will these new changes affect that? Similarly, how will the legislation impact on pension-sharing on divorce ear-marking orders, already issued and those yet to come? Pensions matter from the moment when a person begins with an employer, when they change employer and when, perhaps, they become bankrupt or get divorced. So many life elements impact on pensions provision.
I support the intent but, as always with pensions, the devil is very much in the detail. It is complex and it makes your head hurt, but it matters—and time is incredibly short.
Lord McKenzie of Luton (Lab)
My Lords, I start by congratulating the noble Lord, Lord Jenkin, on his splendid speech this afternoon, and I give him my personal best wishes for his retirement. It has been a privilege to work with the noble Lord on a number of pieces of legislation. I have always found him incredibly knowledgeable and there is an old-fashioned kindness about his approach, as well as enormous stamina. There have been times when he has still been going at 10 o’clock at night, or 10.15 or 10.30 and beyond, when other noble Lords were flagging and wishing that somebody would call the House to order and to be adjourned.
We have two Bills before us this afternoon but, sadly, no opportunity to undertake a line-by-line consideration of one of them—the Taxation of Pensions Bill. It may contain only four clauses, but there are some 75 pages of schedules to add to the nearly 3,000 pages of tax legislation that the coalition has visited on us to date. If there were a Committee stage, we would have the chance to examine the very important issues that my noble friend Lord Hutton raised earlier.
The Government herald these two Bills as introducing a radical reform, giving greater choice for individuals and business. Indeed they do, but whether it will mean better outcomes in terms of retirement income for individual savers is another matter. As my noble friend Lord Davies of Oldham has said, we support the principle of increased flexibility for people in retirement and reform of the pensions market so that people get a better deal, but the changes undoubtedly bring forward a more complex landscape with different choices for consumers and the prospect of new, more diverse pension products. Given the huge significance of the decisions which individuals make at or when they approach retirement, affecting their lives and that of their partners for 20, 30 or even more years, it is vital that they are supported to make the choices that are right for them.
The Government’s rhetoric has been about the benefits for retirees, and they have been a little coy about the benefits expected to accrue to government. The Taxation of Pensions Bill, after taking account of changes to taxation of death benefits and the reduction in the annual allowance, will generate increased taxation for the Government of £3.86 billion in the period to April 2020. Can the Minister confirm that figure? Increased income tax receipts are expected through to 2030, with modest reductions thereafter.
With taxation receipts for government falling short of expectations, it is doubtless welcome news to the Chancellor that pensioners will be contributing more. However, we do not know much about who is going to bear the extra tax, and in what circumstances. How much of the extra tax will be derived from individuals putting themselves into higher rate tax bands? We know that for any sum taken from uncrystallised funds, 25% will be tax free and the balance taxed at marginal income tax rates. So those wishing to access the whole of their erstwhile tax-free amount will have to subject the whole of the balance to income tax in one go. Perhaps the Minister can give us some breakdown of all of this.
What percentage of retirees is it estimated will continue to take annuities, and what percentage will take their pension pot in one go? Notwithstanding this tax bonanza for the Government, there are lingering concerns that some, with resources and compliant employers, will see the new flexibilities as an opportunity to reduce their tax bills by the use of salary sacrifice arrangements, thereby saving national insurance and tax on the 25% tax-free withdrawal. The Government have addressed this issue in part, by reducing the annual allowance from £40,000 to £10,000 once flexible drawdown is under way, but there still appears to be the prospect of tax leakage in pre-flexible drawdown periods. Are the Government accepting of that?
As we have heard, the Pension Schemes Bill allows for the establishment of collective defined contribution schemes—an arrangement that we support, and indeed have called for. Similarly, we support the concept of shared-risk schemes. It is high time that pension provision was broadened to offer more than just defined benefit or defined contribution schemes. Increasingly, the binary landscape has left new savings going into DC schemes as the longevity, investment and inflation risks, coupled with accounting rules, became too difficult for many employers to sustain. Efforts to chip away at some of the perceived more burdensome obligations of DB schemes have not stemmed the tide of closures in the private sector.
As the NAPF 40th annual survey identifies, active membership of DB schemes has reduced by two-thirds since 1975, to just 1.1 million today. Active membership of DC schemes outnumbers that of private sector DB schemes for the first time ever, and the success of auto-enrolment is expected to reinforce this shift.
At the same time this is taking place, decumulation of DC schemes is happening in an environment of sustained low interest rates, with quantitative easing helping to create an environment of miserable annuity rates. All this has been accompanied by a substantially dysfunctional market. So the defined ambition elements of the Bill which provide the framework for risk sharing between employers, employees and third parties are to be welcomed—as is the prospect of collective benefits involving risk pooling between members, with the opportunity of greater stability of outcomes.
I understand that it is hoped that the necessary secondary legislation will be ready for April 2016, to coincide with the abolition of contracting out. Does that mean that we will not see drafts of the key regulations during the passage of the Bill?
Undoubtedly the aspect of the Bill which has attracted most comment involves the new flexibilities around decumulation of DC schemes. The speed with which these changes were announced and are being introduced is, as other noble Lords have said, worrying. The lesson from previous major reforms, such as the single state pension, auto-enrolment and most changes to the state pension age, is surely the benefit of laying the groundwork, through extensive consultation and stakeholder engagement, and building a consensus where possible.
The guidance service—the deliverer of the guidance guarantee—is especially important, because the availability, scope and effectiveness of the service will be key if the new flexibilities are to work as intended. As a very recent PPI report shows, we will have to recognise the changing circumstances that face individuals as they approach retirement—such as rises in state pension age and the normal pension age in private sector schemes, removal of the default retirement age, increases in longevity, and current economic challenges. These factors are changing the way in which people approach retirement and pension transition. It is no longer necessarily just a case of leaving work and taking a pension—although accessing DC pensions is, as we have heard, currently considered the most challenging aspect.
Just at the time that inertia is being put to good effect to encourage accumulation by auto-enrolment, the Bill seeks to galvanise engagement and enthusiasm when it comes to decumulation, as my noble friend Lady Drake said. This engagement is expected initially of a generation who have generally not saved enough for retirement, whose longevity is increasing, but where men in particular underestimate life expectancy, and who tend to overestimate their income returns.
So far as the current market is concerned, let alone one selling more diverse products, as two recent reports by the FCA make clear, providers are not generally treating customers fairly. One of its reviews showed that 60% of retirees with DC pension savings were not switching providers when they bought an annuity despite the fact that around 80% of those consumers would obtain a higher income on the open market. I think that my noble friend Lord Hutton made that point. As for those with medical conditions and lifestyle factors, the FCA estimated that 91% could get a better deal on the open market. The review identified that only 5% of annuities sold by providers to their existing pension customers were enhanced, compared with 50% of annuities sold in the open market.
So how can we have confidence that the guidance guarantee will facilitate better outcomes, especially over time when the vacated space of compulsory annuities will engender a wide range of products? There are a number of concerns. The first is whether people will seek to access the service in the first place, and some piloting by Legal & General was not encouraging. We know from the “near final” rules published by the FCA on 27 November that they will introduce a requirement —the first line of defence—for DC providers to ask consumers whether they have used the guidance service or received financial advice, and to encourage them to do so if not. That is all well and good, but a growing number of voices are calling for a second line of defence—we heard some of these this afternoon, particularly that of the noble Baroness, Lady Greengross —which requires providers actively to prompt consumers, to ask whether they have considered matters such as tax, their partners’ needs, benefit implications, medical or lifestyle needs, including social care ramifications, the impact of inflation and the risks of running out of money. The FCA reviews certainly give emphasis to the need for such a second line, and we will doubtless explore this further in Committee. But perhaps the Minister can say whether it is intended that there will be only one free session at which guidance is provided. How will this work over a lifetime in circumstances where an individual does not opt for an annuity and new products are coming on stream over his or her lifetime?
There is much else that can be explored in Committee —matters that are in the Bill and, indeed, some that are not. Certainly, we will wish to pursue the issue of removal of restrictions on NEST. I take this opportunity to say that my attention has been drawn to the operation of the PPF and how it affects certain categories of employees. In particular this issue has been raised by pilots of BMI and Monarch. BMI entered the PPF in 2012 and Monarch is in the assessment period. However, the operation of the PPF cap is raising the prospect of such pilots receiving pensions dramatically below their original scheme expectations. Can I meet the Minister to explore that issue rather than raise it endlessly in Committee?
These Bills have the potential to change the pensions landscape and we have a duty to engage with them constructively but rigorously.
Lord Kerr of Kinlochard (CB)
My Lords, it is a pleasure and a privilege to participate in the tributes to the noble Lord, Lord Jenkin of Roding. I should like to add one footnote. As a former public servant when he was a great man in the Cabinet, I should like to say how much his courtesy towards the public service was appreciated. He was a great team leader. He was not one of those who thought that the public service was a lesser breed without the law. It was a privilege to work with him at that time.
I also agree with every word of what the noble Lord, Lord Freeman, said so elegantly, particularly the tribute he paid to the kindness of the noble Lord, Lord Jenkin, in welcoming new Members to this House. I learnt a great deal from him when I first arrived here, in particular about energy policy. I will greatly miss his consistent stress on the need for further back-up investment in generation. Governments of both hues have perhaps not paid sufficient attention to that. If the lights go out and we find ourselves in the dark as we brush our teeth, we will remember the noble Lord with very great affection.
Lord Bradley (Lab)
My Lords, I begin by adding my own tribute to the distinguished career of the noble Lord, Lord Jenkin of Roding. As we have heard, he has given huge service to Parliament in both Houses over 50 years and held many of the great offices of state—even if he did not get on to the front row of the photograph. His contribution today is further testimony to his massive wit, wisdom and insight into both Houses of Parliament. I wish him a very happy and healthy retirement.
We have heard a wide-ranging and high-quality debate. I thank the Minister for his detailed introduction of the Pension Schemes Bill which we will explore in great detail in Committee and at other stages in this House. I thank all noble Lords for their excellent contributions to the debate. A theme that has run through it is that, although we are taking the two Bills together, they do not necessarily fit together quite as well or as coherently as the Minister argued when introducing them, just as the four pensions Bills introduced during this Parliament belie the proposition of the Minister for Pensions, Steve Webb, that, overall, this is a coherent set of reforms.
My noble friends Lady Drake, Lord Hutton of Furness and Lord McKenzie of Luton made clear in their excellent speeches that how the new freedoms and flexibilities in assessing pensions, introduced through the Taxation of Pensions Bill, and the provisions to allow the creation of collective defined contribution and shared-risk schemes, sitting between defined benefit and defined contribution schemes, will impact on each other has not been fully worked out. I am sure that, as we go into Committee, the Minister will provide further details about the new pension freedoms and how they will impact on the types of shared-risk schemes that may be created following the changes in the Pension Schemes Bill. We want to explore the potential tension between guidance, help and encouragement to build up a pension pot, particularly following auto-enrolment, and flexibility and choice in turning this into an adequate retirement income.
As my noble friend Lord Davies made clear, we support freedom and flexibility in accessing pensions but want to ensure that three tests are met: savers should get the right guidance—I stress that we are talking about guidance, which is different from advice; the system should be fair to low and middle-income savers; and the reforms must not lead to additional burdens on the state. These principles will steer the questions we ask when we look closely at the guidance guarantee in the Pension Schemes Bill. For example, will the guidance be of sufficiently high quality and impartiality to help people with perhaps the most complex financial decision that they will ever have to make? Will take-up be sufficient to ensure that people are not left unequipped to deal with this decision? Will those who receive an annuity or are defaulted into one still be able to access a good-value product?
The Government clearly understand how important it is that the guidance guarantee—or whatever it is eventually called—meets the substantial challenge of equipping people to navigate what can be a very difficult market. This reflects another tension between the different strands of the Government’s pensions reforms. Auto-enrolment is based on the idea that consumers do not always make the best decisions in a complex market and, instead, may end up doing nothing. The pensions freedoms are predicated on those same consumers becoming highly engaged with the decision in front of them when they reach retirement. The guidance guarantee is the bridge over which they attempt to cross that fault line between different reforms, and it will need to be up to the job. We will address this issue in Committee when we look at that aspect in the detail that the noble Lord, Lord German, set out.
Those difficulties are possibly made more pronounced by the pace at which we need these reforms to be implemented and the pace at which the Government are pressing through this legislation in this House, as the noble Baroness, Lady Greengross, clearly pointed out in her excellent contribution. In the case of citizens advice bureaux, for example, it comes on top of an already challenging set of circumstances for people who rely on that service. I hope that the Minister will be able to reassure the House that all the organisations that will be responsible for giving guidance, including the Pensions Advisory Service, will be adequately resourced to do what they are being asked to do. That is especially important given the disparate estimates that have been made of the take-up of that guidance, as came out clearly in Committee in the other place. As we heard from my noble friend Lord McKenzie, Legal & General has said that following its own pilot a mere 225 out of 9,000 contacted took up the offer of guidance. Therefore, take-up could be very low. TPAS has estimated that it will be 25% but I accept that others have made higher estimates. However, take-up will be crucial if the guidance is to be meaningful for the people who rely on it.
Questions remain unanswered about how the new flexibility that has been announced will affect the way that pension savings are treated. If they can be accessed at 55, can a creditor demand that money be drawn down to cover debts? Currently, the fact that pension savings are put aside for purchasing an annuity prevent them being accessed and treated as free money. There are concerns that the pace at which these changes are being rolled out means that the Government have not ironed out all the details of such important matters for individuals reaching that age.
The other principal change to the legislation ahead of us is the outlining of new definitions of the different kinds of pension schemes, moving beyond the general money purchase and non-money purchase definitions in the legislation to make it possible to create shared-risk schemes. We support the changes and in fact earlier this year we called for these changes to create CDCs. Their benefits have been laid out by other noble Lords. They have the potential to offer a more stable retirement income than individual DC schemes. Modelling for the DWP showed that a collective pension would have outperformed an individual one by an average of 33%, according to historic data, and, just as importantly, would have performed more consistently. We need to look carefully at those outcomes. However, there is obviously the potential in collective shared schemes to achieve that stability and longevity in retirement income.
There can also be benefits from not having to divest from relatively riskier assets into safer ones with a lower return as the saver reaches retirement age, as is often the case with individual DC schemes. They can also have lower administrative costs. As a result, IPPR work from last year showed that it was the most popular option for government reform, backed by a broad spectrum of the population. Clearly there are benefits to be had from collective schemes.
The Bill is light on detail. As the Minister intimated, it does not contain the detail of the kind of defined ambition and DC schemes the Government envisage will be arrived at. Nor is there much suggestion of how many collective schemes the Government envisage will be set up in the short to medium term. I hope that the Minister will provide some more detail on the DWP estimate for the number of employers likely to take up the option of a defined ambition scheme. I hope that we will have details of that not only today but as the Bill passes through its stages in the House.
There are a number of missed opportunities in the Bill. There are steps that the Government could take to improve the market that would fit well with these reforms, such as changing the legislation so that pension schemes are required to have a board of independent trustees with a fiduciary duty owed to scheme members over and above that owed to shareholders. That was clearly identified by my noble friend Lady Drake. The OFT has shown that the contract-based market is not getting value for money for savers. As we have heard, international evidence shows that if the Government were to move in that direction it is likely to lead to better governance and transparency. We look forward in Committee to laying out the evidence on how trust-based governance can improve dysfunctional markets.
With this there is also the chance to build up scale in a way that would drive efficiencies and build up those economies of scale, which we again know from inter -national evidence can improve administration. It would mean that fewer trustees could cover more of the market and lead to the lower transaction costs through intermediation as recommended by the economist, John Kay. Two hundred thousand schemes are too many, so it would be helpful if the Minister could outline what is being done to encourage scale.
There is also a missed opportunity to build on the good work that NEST has already done by lifting the restrictions placed on it in the light of the European Commission’s confirmation that doing so would not breach state aid rules, as the Government previously argued it would. For NEST to remain influential in the marketplace, it needs to be able to grow to reach more employers and attract more savers. We will be exploring that possibility in Committee.
It is also crucial that, in the excitement of the new flexibilities being rolled out this April, we do not forget about reforming the other parts of the market that have not worked well for consumers but which provide the types of product for which there may still be demand. The Financial Conduct Authority’s interim report on the retirement income market published last week showed that the market is still not working well, and we know that of the 40% of people who get an annuity with their existing provider, 80% were not aware of the option to shop around. Others were not practically aware of how to go about this, or did not think it worth shopping around in the first place. In fact, it can make a substantial difference to people’s retirement income. The National Association of Pension Funds estimates that not shopping around can cost up to 20% of retirement income. It would therefore be of great benefit to the consumer to require an independent broker’s recommendation before it is possible to sell an annuity to someone who has saved with the scheme they are purchasing the annuity from.
We also urge the Government to take action to prevent people who are taking advantage of the new flexibilities being subject to similar examples of consumer detriment, albeit perhaps through a different product. It is concerning that the Government’s plans to address rip-off pensions do not include income drawdown, despite the fact that 320,000 people are likely to be looking to access these products after April. If charges equivalent to many of today’s drawdown products were to apply then, someone investing a pension pot of £30,000 could see 27% of their savings taken away in charges. Given that the median annuity in 2013 was purchased with a pot of £20,000, these charges could be significant.
As we have heard from other noble Lords, this Bill is more a framework than a completed piece of legislation, enabling rather than fully formed. It will be difficult to scrutinise without further details from the Minister about the likely content of regulations and the timetable for when these regulations will be laid. It is essential for this House to have sight of those regulations so that we can look across the piece of the primary legislation and the regulations to be absolutely sure that we are scrutinising effectively the impact of the Bill on future incomes in retirement. However, the number of amendments that the Government introduced as it progressed through the other place, and the number that we are likely to see as it progresses through this House, means that it is vital that these proposals are adequately tested here. We may therefore look at whether clauses should stand part of the Bill when we come to Committee stage to enable us to debate the crucial issues that have been identified by many noble Lords this afternoon.
We want a pension market that protects consumers and provides them with what they need in retirement. That is precisely what we will attempt to achieve as the Bill passes through this House.
Lord Newby (LD)
My Lords, it is a great pleasure to be able to respond on behalf of the Government to our debate this afternoon. As ever, your Lordships’ House has demonstrated a very considerable degree of expertise in the subject. I am sure that I will not be able to cover all the points made, but we will have the opportunity of doing that at some length in Committee.
Like other noble Lords, I begin by joining in the tributes paid to the noble Lord, Lord Jenkin. I first saw the noble Lord when I, as an official at Customs and Excise, was drafted to sit in the Box during one day of a Budget debate when he was Secretary of State for Health and Social Security. I was very excited about this, until I was asked a question that I could not answer—fortunately, not by the noble Lord. The fact that in 1980 he was at the peak of his powers in that position and has remained a very influential Member in Parliament in its various forms since then is a real testament to his achievement. His interventions here, as noble Lords have said, have always carried great weight and have informed and guided our deliberations. We wish him a long and very happy retirement.
Lord Newby
I also pay tribute, very briefly, to my right honourable friend Steve Webb, who, as Minister for Pensions, has taken the lead in driving these and many other pension reforms forward. Many said that a coalition Government would not be able to make long-term reforms of a fundamental nature. Well, when it comes to pensions, whatever you think about them, you cannot claim that the Government have shied away from looking at all the issues. Indeed, they are effecting major changes.
At first sight, you would have thought that there could be no issue about the fact that giving people more freedom to spend their money is a good thing; that is what these Bills do, and therefore there will be unalloyed pleasure at the prospect of doing it. However, as noble Lords have pointed out, there are two challenges with this. First, many individuals either lack the financial literacy to make much sense of their finances, which we know about, or are slothful when it comes to thinking about pensions—which I think the current system encourages in some cases, not least because of the way in which they are treated by their pension providers.
As we know, many pension providers have been untrustworthy in the past, and have misled people rather than encouraged them. In the majority of cases, even now, they provide information to their individual policyholders in a manner that the policyholders cannot understand. Pension providers know jolly well that they cannot understand it and they have almost wilfully refused to make information available in a manner that people can understand. One of the great attractions of what we are doing on the guidance front is that it will require a template to be completed by pension providers about what on earth it is that individual policies amount to.
We have a market that is not working as markets are supposed to work. The purchasers do not have the information that they need and the suppliers very often are not providing products in a way that is fair to the consumer. That is why the whole issue of guidance is at the heart of these Bills and the debate today. I start with that because every noble Lord who has spoken has talked about guidance. As we have explained, from April next year everyone who benefits from the new flexibilities will get free and impartial guidance. The Treasury will take overarching responsibility for the service that will be delivered, but it will actually be delivered by the Pensions Advisory Service and Citizens Advice. I assure noble Lords that they will be adequately resourced and will be able to, and by their very nature will, give impartial advice.
To ensure that the service is in place in what is admittedly a tight timetable, an implementation team has been established within the Treasury to work with those providers. The Government have given the FCA responsibility for setting standards for guidance and monitoring compliance. This will, we believe, deal with the question asked by the noble Lord, Lord German, about whether the service will be of a high enough quality—we are confident that it will be. Further progress on how we intend to introduce and implement the guidance guarantee will be issued by the Government before Christmas.
Noble Lords asked whether there should be a second line of defence, so I should perhaps just explain what is already planned and what the FCA has already said. The FCA has made it clear that firms should not do anything to dissuade customers from getting guidance, but it accepts, and the Government accept, that not all individuals will seek to take up the offer of guidance. It is their choice to do so. In its new rules document, the FCA confirmed that pension providers must signpost individuals to the guidance service in wake-up packs. We have said that they should be issued four to six months ahead of an individual’s nominated retirement date. But I take the point made by a number of noble Lords that it might be advisable to think about giving earlier signposts to policyholders that they need to think about their pensions.
The FCA has reaffirmed the expectation that firms encourage consumers to shop around on the open market and that they should receive sufficient information about the consequences of their choices before signing up to a purchase. It is introducing a new requirement that, when communicating with customers about accessing their funds, firms are required to ask whether they have taken guidance or relevant financial advice. If not, they should encourage them to do so. As noted above, it has introduced a new requirement to recommend that consumers seek guidance or advice rather than simply signposting it.
Firms will be required to give a description of the tax implications of the option selected by the consumer and it has been made clear that firms can question the consumer’s decision when they feel that it is inconsistent with their circumstances without fear of overstepping the boundary into regulated advice. The FCA is considering whether it is appropriate to place further requirements on providers and, as noble Lords have mentioned, it is reviewing the rules in the first half of next year. The whole issue of what might constitute a second line of defence will be in its mind at that point.
Finally on the guidance, the noble Lord, Lord McKenzie, asked whether it would be one shot at getting the advice. I will say two things on that. First, the fact that the pension provider will have to provide details on the individual’s pension in a standard form will help to ensure that, when the person goes, they have the information that they need. One of my concerns is that people turn up without the key bit of information —I can imagine myself doing that. We hope that we are getting round that. At the very least, people who have had their advice will be able to go back to the website and access it to check further information that they then think they need.
I turn to individual noble Lords’ comments. The noble Lords, Lord Beecham and Lord Davies of Oldham, and others asked about the impact on the Exchequer. A number of noble Lords slightly implied that we were doing all this only to get a small amount of additional income. I can assure noble Lords that the public finances are not in such a bad way that we have completely to reorder the way we do pensions to get a short-term benefit. The Budget costings showed that the net additional income to the Exchequer from the scheme will be £320 million next year, rising to £1.22 billion in 2018, but then falling off after that because people will bring things forward. As I say, our motivation for doing that has nothing to do with something that is, though significant, a relatively modest figure in the overall context of the public finances.
The noble Lord, Lord Davies, set out the Opposition’s tests, which included guidance, which I have dealt with, fairness and cost. On fairness, we are ensuring that the generous tax reliefs available on pension savings are not used solely for tax planning, given the flexibility that the rules offer. Overall, we think that the rules promote fairness. On cost, and in particular the question of the impact of the changes on welfare and social care spending, that obviously will depend on how people choose to use their savings. However, the Government do not expect this impact to be significant in the context of the steps taken to improve the sustainability of pensions spending, such as the changes to the state pension age and reforms to public service pensions. I remind noble Lords that the estimated net impact of the Government’s key pension policies is a saving of about £17 billion in 2030 on today’s terms.
The noble Lord, Lord Davies, asked about the review. It has two elements. On reviewing the cost to the Exchequer, the Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts made at future fiscal events. On the guidance, it obviously will be extremely important that we understand its outcomes. The Treasury will establish robust KPIs to measure consumer outcomes.
My noble friend Lord German asked about the publication of the FCA standards and when that would be. The FCA has stated that they will be produced before the new scheme comes in, which is hardly surprising. We hope that it will do that significantly earlier than that, we hope at Royal Assent. On his concern about regulators working together, I say that the DWP and HMRC work closely with the Pensions Regulator and the FCA to ensure that there are no gaps in regulation in this area. We have no reason to believe that there are any. He also asked about housing wealth. The guidance will make sure that consumers consider questions about their situation as a whole and will direct them to further sources of information as appropriate. However, one of the problems of housing wealth for many people is that they do not have any intention of accessing it as part of their pensions. Some people do, but very many do not. Given the practical problems of downsizing, which we discussed recently in your Lordships’ House, many people who in an ideal world might want to do that in fact do not.
The noble Baroness, Lady Greengross, asked about a possible extension of the levy beyond the number of firms currently planned. Until now, the Government have decided that those firms which are most likely to benefit from better informed and engaged consumers should help to fund the service, hence the levy on the current range of firms. Occupational pension schemes do not currently offer accumulation products, as membership of such schemes is linked to employment and they do not sell products into the market in the same way as financial services firms. It is possible, however, that schemes may wish to change this approach over time, and we will keep the levy under review.
The noble Baroness also asked about welfare and the impact of these changes on social care, as well as how the Government are treating the new pension arrangements. We are treating the options as similarly as possible for the current welfare means test purposes by applying a notional income of 100% rather than 150% of the income that an annuity would have provided. We want to make sure that the decisions people make about drawing down their pensions will not significantly affect how they are assessed for welfare and social care support.
A number of noble Lords, including the noble Lord, Lord Hutton, questioned the evidence that the pension flexibility as proposed will encourage or discourage saving. Of course, we will not know that definitively until we have the scheme up and running. However, the National Association of Pension Funds found in its spring workforce survey that 28% of workers say that they are now more likely to save into a pension. Young people are the most likely to say that, and lower-income respondents also said that they were more attracted to pension saving. While a number of noble Lords have been rather gloomy about how people will respond to these changes in terms of savings, one of the reasons people do not want to save for a pension at the moment is that they often think that an annuity is such appallingly bad value. That is definitely the case for young people, and indeed more generally.
Baroness Drake
Will the noble Lord accept that in terms of people not actively saving, the behavioural evidence shows that it has nothing to do with annuities, but with their own inertia about dealing with complex decisions? Any complex financial decision has the same effect.
Lord Newby
My Lords, I think that the strong take-up of auto-enrolment suggests that people are actually a bit more long-sighted than they are sometimes given credit for. Young people in their 20s and early 30s who are thinking about their pension savings are looking at what kind of value for money they can get from doing that as opposed to putting their money into alternative forms of saving. So I am not sure that I altogether agree with the noble Baroness.
The noble Lord, Lord Hutton, said that the Government should strongly encourage partial annuitisation. We have always been clear that an annuity will remain the right choice for many at some point in their retirement because it can provide the security that they are looking for. He also asked about inheritance tax. I can say that the intention of the legislation is that the scheme administrator will retain some discretion over how death benefits are paid, ensuring that these benefits can remain outside the scope of inheritance tax.
Lord Hutton of Furness
I am enormously encouraged by the Minister’s response, but can he explain to me how they will do that?
Lord Newby
My Lords, I do not know, I am afraid, but I will write to the noble Lord as I am almost out of time. The House has rules that, as a Whip—although I know I am going to break them already—I can break only to a certain extent. I will write to the noble Lord in that respect. I might also write to him about the situation in Australia.
The noble Lord, Lord Freeman, asked whether the new flexibilities would put people at risk of poverty in the future. The basic principle here is that people must be trusted to make their own choices about how to use their savings to fund their retirement. We believe that the introduction of the new, simpler state pension in April 2016 will help minimise the impact on means-tested benefits as the full level of the new state pension will be above the level of the basic means test in personal credit, and we expect over 80% of those reaching state pension age in the mid-2030s to be receiving the full new state pension.
The noble Baroness, Lady Drake, took up the theme of the noble Lord, Lord Hutton, about the dangers of a revolution. She saw the dangers as being significantly more considerable, I think, than most noble Lords who spoke. Of course, some of the potential problems that she foresees are impossible to predict absolutely, but I did not recognise the gloomy landscape that she portrayed in a number of respects. She asked why we were still paying tax relief when people will spend all their money. Tax relief is designed to support and encourage people to save for their retirement.
Baroness Drake
I did not ask why we are still paying tax relief if people are going to spend all their money. I asked whether, if people did not have to have annuities, it was possible that, over time, successive Chancellors revisiting the consequences for the next generation might not have this generation’s generosity on tax relief.
Lord Newby
My Lords, I was just about to say that this Government certainly are not going to revisit it. It is impossible to know what future Governments will do about tax policy. One of the key points about tax relief is to encourage people to save and I think any future Government will want them to carry on doing that.
A number of noble Lords, including the noble Baroness, Lady Drake, talked about the possibility of people taking their pensions early at 55. There is that freedom but my personal view is that, particularly as people are working to a later age rather than retiring earlier, the number of people who will wish or think it sensible to take their pension at 55 will not be very great. For some people, particularly those with health conditions, taking an early pension is absolutely the logical thing to do.
The noble Lord, Lord Holmes of Richmond, asked whether trustees and scheme managers will be required to evaluate the appropriateness of the advice that individuals are given when moving from DB to DC. As we have set out in our consultation, we intend that trustees and managers will be required to check that advice has been received from an FCA-authorised person but they will not be required to evaluate the content of the advice or to check its quality. The detail of the process by which scheme managers will be required to check that the advice has been taken will be set out in regulations, which we will work closely with the industry to develop. I apologise for rushing through.
The noble Lord, Lord McKenzie, asked whether I would be happy to arrange a meeting with BALPA, and I would indeed.
The noble Lord, Lord Bradley, gave a strong explanation of the benefit of collective schemes. He touched on one of the key benefits of the changes. We do not know at this stage how many people will take them up; we cannot give detailed estimates of how many people will do any number of things at this point. We see strong practical reasons to believe that collective schemes will benefit many people and that the industry will move to develop them.
To sum up, as my noble friend Lord Bourne laid out at the beginning of our debate, these are radical changes that build on this Government’s previous reforms to the UK private pensions market. At the heart of the reforms is the Government’s intent to give people greater choice. That entails both greater choice for businesses regarding the type of pensions that they offer and greater choice for individuals in how they access their pension savings. These radical changes need to be made to reinvigorate the private pensions market and to ensure that it remains relevant for future generations of savers. I commend the Bills to the House.