(9 years, 5 months ago)
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Lord Flight
That this House takes note of recent and proposed reforms to the state and private pensions, including the triple lock, the introduction of a single tier pension and increased pensions freedom.
Lord Flight (Con)
My Lords, I start, if I may, by declaring my interest and congratulating Dr Altmann—my noble Friend Lady Altmann—on her appointment. I can think of no one better to do the job that she is doing. She is enormously respected in the industry and I look forward to her being a powerhouse in further reforms of pensions and retirement saving. I have been involved in the management of pension funds for 45 years. I am still a trustee of my company’s old pension scheme and have advised the industry body TISA on its major pension reform project.
The first point I would like to make is that I think it is desirable, if possible, for pension reform to have cross-party consensus. This was broadly achieved with the auto-enrolment scheme. For individuals, pension and retirement saving is long term and the one thing that is not desirable is too many changes with changes of government.
I congratulate both the last Government and this one on the reforms that are now being implemented. We have had the most significant reforms to pension saving for a generation.
I have long supported abolishing the obligation to buy an annuity. Indeed, I recollect that I had a Private Member’s Bill on this in the other place. The crucial point is that people are at the mercy of the interest rate cycle. If someone buys an annuity when interest rates are extremely low, they will get a bad deal for the long term. Those are the present circumstances.
With regard to the ability to withdraw money from pension savings subject to an income tax charge, I think that is ultimately desirable and a good thing. One of the big disincentives to saving was that people could not withdraw money if they really needed it for other purposes.
We all heard the Chancellor’s announcement yesterday, and read about it in our papers, with regard to issues around people not being able to withdraw money and charges. I make the point that there are two sides to the story, and a number of regulatory requirements were introduced at the very last minute that need to be dealt with. The fundamental point is that if there is a substantial withdrawal, the life company is obliged to make sure that the individual has had advice on the steps that they are taking, which is quite difficult to organise. I know that the number of inquiries that the industry has had to deal with in the last few weeks has been huge. I am hopeful that in a co-operative way the Government can get together with the industry and sort out these problems so that people can freely withdraw cash and are not overcharged when they do so.
Similarly, I have strongly supported the single-tier principle. The great problem with pension tax credits was that they discouraged people from saving. I hope that it will end up as a complete single tier, as under the present arrangements some people will get more, some less, than they were otherwise going to get. Some issues still need addressing, such as the fact that a wife who has relied on her husband’s pension contributions for her state pension will not be able to do so, yet has not really had time to make alternative provisions.
The triple lock is generous, and there are questions as to whether this will be affordable long term: already 46% of adults are over 50. However, it must be borne in mind that pensioners typically have a higher rate of inflation as a result of energy costs going up than the official inflation figure, so there is a fundamental case for the relative generosity. As noble Lords will be aware, the triple lock means that pensions will go up by whichever is the greatest: inflation, 2.5%, or earnings.
Happily, auto-enrolment is up and running but it is still very modest, at 1% contributions. By 2018, these are to increase to 3% from the employee and 4% from the employer, and effectively 1% is expected from the Government. I make the point that this really is still not enough even under the assessment by the DWP, which has recommended that contributions need to be in the order of 15% of earnings per annum. Still, I think that auto-enrolment is going to be crucial. I am hopeful that, as we have seen so far, the number of people opting out will be very modest.
Areas still to be looked at are the relationship between pension saving and care providers. There have been some useful suggestions that pension accumulation could go straight to care providers without a tax charge where there is the need. In a sense, it is robbing Peter to pay Paul that the Government might otherwise have to pay through other channels, so it is a question of making that easier. I am also a strong supporter of the passing on of residual pension savings to children. This could be a very powerful savings incentive, just as owning a house was very much driven by the attraction of parents being able to pass something on to their children.
A crucial point is that retirement savings are not just about pensions. Different routes have come up. I particularly support the Government’s measures with regard to ISAs, both increasing the maximum and allowing the surviving spouse to inherit the full tax benefits of ISAs on the death of their spouse. This was a very fair and necessary reform. The figures are extremely impressive. ISA totals at the end of the last tax year stood at £470 billion. They are likely to be in the order of £530 billion now, with some 13 million ISA savers. Interestingly, the total volumes of cash ISAs versus security ISAs are roughly the same; the amount going forward is greater with cash ISAs but the total accumulated is roughly the same. ISA saving is running at something like seven times individual money-purchase pot saving, and it is equal to some 60% of total contributions into pension schemes, of whatever sort, by employers and employees. Its great virtue is that it is simple, and in my experience large numbers of the self-employed are using ISA saving for their retirement provisioning.
Many in their 30s and 40s have opted to go into the buy-to-let market as an alternative, largely because property returns have been superior to equity returns. I am amazed to note that there has been such an increase in the number of private sector landlords over the past seven years, making a total of some 3 million landlords, a lot of whom are likely to be individuals in the buy-to-let market. For a lot of people it is the appreciation in value of their owner-occupied house that they will look to as some source of retirement income. There is a need for properly regulated property equity release schemes.
My biggest point is that retirement is an out-of-date concept born of an age when many men did hard physical work and really had to retire. In my experience most people want to work longer, partly for the money but substantially for the companionship. Look at this very House, where I believe the average age is now 71. I greatly welcome the reforms and more reforms and incentives for people to work longer. It is inevitable that in due course the retirement age will rise to 70. It is a function of longevity. Indeed, 70 today is a lot younger than 65 was 40 or 50 years ago in terms of people’s health and life expectancy.
However, people are still not saving enough to provide for their retirement years or in an economic sense. About a third of the population has less than £250 in savings and two-thirds are still not saving at all for retirement. Even allowing for the fact that a lot of people have more than one pension pot, the average pension pot saving per saver is still only £55,000, whereas the DWP target is for people to have a non-state pension income of £8,500 per annum. At a macro level, our savings rate has been too low for too long. The cumulative current account deficit of the last 15 years is some £700 billion and has been financed by selling businesses, property, and in a sense the family silver. It is a major reason for low investment and poor productivity growth. Our economy needs a savings rate closer to 10% than its present much lower rate. I am pleased to note that the Government are committed to addressing the savings gap.
Some issues still need to be considered and resolved, such as the pot follows member versus aggregation debate—I personally think that pot follows member makes more sense—and the need for full and meaningful transparency of cost disclosure. There is also a huge need to get pension savings better managed. I much welcome what the Mayor of London has initiated with regard to small local-authority pension schemes.
Most people with money purchase pensions go for the default option. That is actually not a bad decision, as they are often quite sensible funds, but some 90%—even 92%—are NEST savers, which is particularly illustrative of the fact that people really do not understand the territory. As regards pension direct-contribution savings of all sorts, I am concerned that as people get over 50 a lot is shifted into bonds for investment. Bonds may be safe in the short term but are highly dangerous in the long term if you get a burst of inflation with much higher interest rates. Those over 50 are increasingly having too much of their pension savings automatically placed into bonds under what are known as lifestyle arrangements.
It is a tragedy that RDR has resulted in a massive contraction of pension advice. More than 70% of the population has no source of advice. The Government’s arrangements for advice on the principles are all very good but leave people hanging in mid air when finding out what product to select. It is a tragedy that defined benefit saving has virtually collapsed over the last 15 years. A major cause has been IFRS17, which requires the calculation of the pension liability to be related to gilts, and therefore an artificially low interest rate in the long term.
The reality is that pension schemes that appear to be in deficit are going to be in huge surplus as and when bond interest rates return to normal. The main reason why companies have wanted to close their defined benefits schemes is because of the risk of deficits which they are required to make good. We want to encourage savings and the limits need to be reviewed. My own view is that it would be sensible on the contributions side to limit the tax credit to 20% for everybody and to have a maximum of £50,000. I would also abolish the overall lifetime limit, which is often quite complicated to arrive at.
On 29 June, there will be a seminar in Room 3 to present the proposals of the industry group that has worked with TISA on what other things might be done for the pensions industry. Two of its best suggestions are, first, for everyone to have a digital passport, which would make anti-money laundering requirements much easier to deal with and provide individuals with easier access to information by product, for transfers and to enable them to review their pension and other savings. In a sense, it would be a pension dashboard that people could tap into. The second suggestion is that there should be a much more powerful Minister for Savings and Pensions within the Treasury to co-ordinate, develop and implement savings policy.
The real need is to make pension saving easier. Even among your Lordships, when I have asked people what their attitude is many not surprisingly find it far too difficult and are turned off by it. I believe that is even more true of the country as a whole and that the further reforms that we ought to be looking at over the next five years should involve measures to make retirement saving much easier for people. It is staring us in the face that that is one of the reasons why ISA saving has been so successful.
Lord Hutton of Furness (Lab)
My Lords, it is an enormous pleasure for me to follow the noble Lord, Lord Flight, of Arundel. He brings tremendous expertise and knowledge to our proceedings on pensions and in a sense, although I hate to say this, has made my speech pretty well redundant because I want to echo everything that he said. He made some very important points but that will obviously not stop me, as a former politician, making my own speech in my own way. I hope to avoid repeating all the things that he said but he has done the House a great service. I say that because pensions and retirement saving will be one of the most important issues facing Parliament for the next few years, and the reasons why are self-evident.
Britain is changing; we are getting older and the demographic forces at work will literally change the face of our society in our own lifetime. It is therefore absolutely obvious—I think it has been to us all for a long time—that if we are to manage the effects of that change sensibly and avoid the calamity of the next generation of pensioners finding themselves living a life of poverty, which has been the curse of just about every previous generation of pensioners, then we have to take matters into our own hands. In simple terms this primarily means that, as individuals, we all have to accept more direct personal responsibility for ensuring that we have adequate means in our retirement years to sustain and afford the lifestyle that we want.
This is also a critical point in understanding the reforms of the last 10 years and making sure that they work because, as the noble Lord, Lord Flight, said, we have the best chance of managing this demographic change effectively if we can try to maintain and sustain the consensus about retirement savings and pensions that has existed since the noble Lord, Lord Turner, and his fellow commissioners produced their ground-breaking report in 2005. Sometimes in politics, consensus is not a good thing and you need someone to stand up and say something difficult to change things. That in fact was what the noble Lord and his fellow commissioners did. In the process of producing their report, they established a new common ground between all the main parties. This is one area where we should all strive to sustain that consensus—and, to their credit, the previous Government did that. They took forward auto-enrolment, which is a fundamental pillar of encouraging greater personal financial responsibility for retirement, and implemented those significant reforms. They also took forward a very necessary change to the social security state pension in the United Kingdom. The new single-tier flat-rate pension is an excellent idea. There have been and there probably will continue to be disagreements about aspects and details of those policies. I do not think, however, that there is anyone left standing who does not think that those reforms are some of the essential things that we need to do to encourage more people to save more for their retirement. That is the holy grail that we now have to pursue.
The last thing any of us should want to encourage is a return to the decades of disagreement and division that were the hallmarks of the previous 20 years of pension policy. It will not help us build for the long term, and that is fundamental if we are to encourage more people to save more for their retirement years. A constant chop and change will, by definition, undermine any policy designed to encourage long-term saving. We have to sustain the consensus. We have to maintain it; we have to work at it if Britain is to be a nation of savers. As the noble Lord said, we have an awfully long way to go if we want to be a nation of savers. Our savings rate at the moment is a matter of dispute among economists as to how to best calculate it, but it is probably about 6%. Once automatic enrolment and the reforms that the Turner commission recommended have matured fully, we know that people will be saving around 8% or 9% in the defined contribution schemes in their workplaces. The simple truth is that that will not be enough. It is not going to give people sufficient retirement income for the extra decade or more that they can now expect to live.
I will talk primarily about workplace savings and pensions because these are absolutely fundamental. As I said, we are going to have to take more personal responsibility for our income in retirement, and that is clearly the logic behind the reforms to the basic state pension. The fundamental question that is inevitably going to arise during the course of this Parliament, particularly when we get to 2017-18, when automatic enrolment has matured, is “Are people saving enough?”. It has been a success so far: we have 2 million new people saving in workplace retirement accounts, and opt-out rates have been very low. However, of course people are contributing only about 1% of their salaries today. I do not think many people will notice that coming out of their pay packets. When that starts to creep up to 3% or 4%, people are definitely going to know. Will that increase the rate at which people opt out of these new savings plans? Probably. I think we can expect the opt-out rates to start rising. Therefore, there is going to be a pretty obvious moment in this Parliament when we are going to have to stop and ask ourselves, “Will the current course be sufficient to equip people with the income they need for their retirement?”. I do not think it will be. The question is not “Do we have to look at this issue again?” but “When will we have to look at this again?”. Of course, there are two aspects of this equation—how much people are putting in, and how many are opting out. At some point, we will have to look at both issues.
I welcome the Minister to her place on the Front Bench. As the noble Lord, Lord Flight, said, she is a lady of tremendous status and knowledge of pensions, and we look forward to her time as Pensions Minister with great excitement. To encourage her a little bit, I do not think she needs to start digging around in the undergrowth just yet. It will be important to see what happens in 2017-18, when we get to the point where people are contributing the maximum amount envisaged under the legislation. That moment is going to come during this Parliament. There are some cases of public policy of which we can say, “We tried to encourage people, but they did not take up our incentives. They just went on in the way that they were doing before”. We could do that on this occasion. We could shrug our shoulders and say, “It is all too difficult. We have had 10 years of legislation. We tried to encourage people to save, but they did not”. I do not think we can ignore any evidence that is emerging that people are not saving, or that their savings are not sufficient. We are going to have to do something.
Obviously the question then is “What are we going to do?”, because making people save—removing the right to opt out—is a very big policy step to take. So, too, would be increasing the contributions into these pension plans because, of course, legislation restricts the amount that employers can contribute to 3%. That is a very big step to take. If we get anywhere near that, I would strongly suggest to the Minister that she ought to have another look at the Work and Pensions Committee’s report from the last Parliament and its recommendation that the Government set up an independent pensions commission. I was the Secretary of State who decided not to do that in 2005, so I am holding my hands up and saying, “I am guilty”, but I think that we now need to have another look at this, at the 10-year mark since the noble Lord, Lord Turner, produced his report. We are at this critical juncture, and we may well face some important decisions in the next couple of years about going further, and probably faster, in encouraging more people to save. If we are to take the noble Lord’s advice and maintain the consensus, as I think we should, we must also ask: who and how? What is the best way in which to maintain that cross-party consensus? Would it be best served by the Minister coming to this House and making an announcement, or by bringing together people with knowledge and experience of the industry and the changes that are taking place in society and asking them to report to Parliament on the next steps? There is a precedent, in that we did that a few years ago with the independent Committee on Climate Change, to try to take as much of the politics as we could out of it. There is a useful precedent that the Minister might want to follow. The adequacy of savings will be a major issue in this Parliament and we have to address that before we go any further.
The issue of adequacy can also be tackled from the other end of the telescope. There is the question of what we do with the legislation on auto-enrolment, but there is another debate that the previous Pensions Minister, Steve Webb, opened, which was long overdue, on the adequacy of defined contribution as a savings platform. I think that DC is a good thing and an inevitable thing, as the noble Lord said, because employers were leaving DB and they are not going to come back. There has to be a better savings platform for people in the workplace, and defined contribution will do all the heavy lifting in the decades to come. But it is pretty clear that the track record of defined contribution has been pretty patchy, and there are a lot of concerns about whether it can do all that heavy lifting. The debate that the former Minister opened up on defined ambition pensions is a very worthy one, which I hope that the Minister will find it within herself to prosecute.
I am particularly not a fan of collective defined contribution schemes, not because I have anything in principle against them but because I do not think that they can be grafted on very neatly to the UK pensions savings system. I hope that I am wrong, but I do not think that I will be. Employers are not really showing any signs that they want to share more of their longevity or interest-rate risk with their employees. I do not think that that is going to happen. But there is a lot to be said for the writings of the leading US pensions thinker, Robert Merton, and I hope that the Minister has had the opportunity to read them, or will have shortly. Robert Merton won the Nobel Prize for economics with his work on financial instruments. He has a very clear view of the inadequacy of DC and the fact that it is focused on the wrong risk. We are managing volatile assets and trying to focus on that, and we look at the pension pot and try to grow that, but there is no one really managing the risk that the income that the saver might have when retiring on a DC plan is going to be inadequate. Of course, the wonderful thing about defined benefit plans is that you will know pretty well all the way along what your retirement income is going to be; it will be expressed as a fraction of your earnings, whether it is a career average or final salary. So you will know what your retirement income is and you can plan accordingly. That is a great comfort and peace of mind to savers. Unfortunately, in the switch from defined benefit to defined contribution, we have completely lost the fundamental and important language of income. We talk about assets and the value of those assets, but no one can really talk about income to someone saving on a DC plan: “What is the retirement income that I can expect to see?”. I hope that that will be looked at in the department and, if the Minister is so minded, the department will task a new independent pensions commission with responsibility for looking at it. This is an issue that needs to be explored more fully—a fundamental, almost do-or-die issue. If defined contribution is going to do the heavy lifting, we must keep our focus on DC as a savings platform, in addition to being concerned about whether people are saving enough or at all.
The noble Lord also drew our attention to the other significant reform of the last Parliament—the change to the rules about annuitisation. It is absolutely right that in today’s times people should have more control over their money. We do not want to be treated like idiots or children. At a time when annuities do not look like a good deal for a lot of savers because of the historically low rates of interest, it is right that they have more choice. That is particularly true if that saver also has the benefit of some legacy DB in their savings plan, as they might have accumulated a few defined contributions pots because their jobs have moved and they have changed.
So I have no objection in principle to the reforms, but it is important that the Government are doing something to monitor this and make sure that they know what is going on in the marketplace. They must know what people are doing. I do not see that they have any means at their disposal at the moment for collecting that information. and they need them. They need to bang heads. One can disagree with a policy—people can think it is a good or a bad thing—but, it having been legislated for, it is unacceptable for financial service providers to block people’s access to their pension pots if they want to cash them. If that is what is going on, Ministers need to act.
The Minister has an enormous agenda. I wish her the very best. She has the good will of everyone in this House behind her in tackling some of the enormous responsibilities that she has been charged with.
Lord German (LD)
My Lords, I pay tribute to the noble Lord, Lord Flight, for introducing this debate. He is well known for his commitment to savings. Reflecting on the comments by the noble Lord, Lord Hutton, I must say this is unlikely to be a debate in which there will be a great deal of controversy, but it is a debate in which there will be some need and desire to predict what we might do in the future and to take that step forward.
I congratulate the new Pensions Minister, who has a long and tremendous record as a campaigner and advocate and latterly as the champion for older people. I shall start by quoting her words in the Sunday Times on 31 May 2015. She said:
“I also want to continue the pensions revolution that my predecessor, Steve Webb, so ambitiously started ... we have seen some important changes that will alter the pensions landscape for generations to come”.
I hope she will not mind if I spend a few moments paying tribute to her predecessor Steve Webb who, I understand, was the longest-serving Pensions Minister, certainly in my lifetime—perhaps someone will correct that, but I think that is the case. He recognised that society owes a debt of gratitude to older people for the contribution they have made to making our country a better place through their hard work during their lives. He brought in a pensions revolution addressing some key issues by the legislation he oversaw.
The three factors in that revolution were: preparing people for their retirement; getting people to save more; and making adequate state pension provision—that is so important for lower-income workers and women who depend so much on the state pension. It is worth recognising that the level of the state pension moved, in purchasing terms, from the lowest it had been for almost 30 years in 2008 to the new promised single state pension, which is likely to be more than £150 a week and will be supported by the triple lock. As the noble Lord, Lord Hutton, said, this ambition was shared across parties, but the big changes occurred under the previous Government on Steve Webb’s watch. We on these Benches pay tribute to his knowledge, understanding and drive.
Now we move on—it is time for implementation and to learn lessons, changing and adapting as we move forward putting these ideas and this legislation into practice. I take the point about a savings revolution being needed, so first among all these must be raising awareness and understanding, which the noble Lord, Lord Flight, mentioned. Financial education should start in school. Saving for a pension is not something which crosses your mind when you are getting that all-important first job, but it is important that it does. Later in life, understanding how to make your savings work best for you is a critical judgment, so there is plenty of work for the new Minister, and we on these Benches wish her well with the challenge.
I want to touch on some of the issues that the Government now face. I recognise that in some ways I will be reiterating some of the contributions that have already been made, but perhaps I will be treating them in a slightly different way. On the triple lock, the Government like the concept and have agreed to keep it for the full five-year term of this Parliament. If it is good for the foreseeable future, why not enshrine its use in legislation so that it would take another Act of Parliament to change it? We on these Benches believe that is right, just and a fair answer to raising the state pension. It is a true buffer against a Government making real-terms reductions for a group of our people who can make no alternative arrangements if and when that happens. That is why we would not just keep it but legislate for it.
Auto-enrolment has been a big success so far in the number of people who have been brought into saving. Its rollout to deal with inertia in pension saving has been a success story, but, as the noble Lord, Lord Hutton, said, it has some challenges ahead. With millions of new pension savers now enrolled in a pension scheme, the most encouraging feature so far has been the small number who have voluntarily withdrawn from pension saving. But the most challenging group of companies and people to be auto-enrolled is yet to come, as the self-employed and micro-businesses are brought within the ambit of the legislation. In her response, can the Minister tell us in what ways the Government intend to help this group of people with the bureaucracy that they will face? Will the Government be on hand to help this most difficult segment of our working population into saving?
So far, we have seen no real evidence of companies reducing pay in order to make the employer contributions that the legislation requires. However, as the levels of contribution have to be ramped up, and as wage increases so far have been fairly low, it will take some time to see whether this is happening on any scale and whether there will be a reduction in pay awards in order to make those employer contributions. Yesterday we were told that wage increases are now running at 2.7%, so there is beginning to be a greater possibility that some of that increase may be foregone in order to meet the costs of the employer contributions. We need to be wise to that fact and look out for it.
This issue is closely tied to the increase in contribution levels envisaged in the legislation, and to where we need to go beyond the current legislation. As others have said in this debate, people need to save more for their pensions, and companies will have to match that increase in their contributions. Perhaps the Minister can tell the House what studies of these effects are currently under way and when meaningful results will become available.
A further issue is that of exclusion from saving for lower-paid workers. As the thresholds have risen —now in the £10,000 range, with further rises promised—there is a danger that the earnings trigger will exclude a number of workers from saving who would benefit from being in a pension scheme. Is the Minister contemplating lowering the earnings trigger, so that it brings more lower-paid people into pensions saving?
During the coming months and years, we on these Benches will want to examine tax exemptions on pension contributions. In particular, we will want to consider whether there should be a single rate of tax relief on pension savings—which the noble Lord, Lord Flight, alluded to. We do not want simply to make changes that might create cliff-edges in the way that government investment might work. For example, by simply reducing the tax relief on those earning more than £150,000, you create a cliff-edge immediately.
The issue of charges and fees on pension savings has already been raised in Questions in this Session. We on these Benches will want to examine the Government’s intentions in this matter—not just fee and charge caps but also transparency. In the savings journey travelled between the pension saver and the pension investor, and then back again as savings are withdrawn, there are many tiers of influence, each with the potential to make a charge to the next tier. Savers deserve to know what is happening to their money in each of these tiers, and many of the charges are hidden and not known, so transparency and fee caps will be very much on the agenda for my noble friends on these Benches.
The defined ambition schemes introduced in the last Parliament, providing more certainty of pension outcome than defined contribution schemes, were referred to by the noble Lord, Lord Hutton. There needs to be a genuine debate and examination of the way in which these schemes can be progressed and the take-up of the principle that is outlined within them.
The early evidence on pensions freedom should be available to us fairly soon. We are told that 60,000 people have now withdrawn some of their pension pots, so some early evidence will be available on how the work of this scheme has been for them, particularly their relationship with the Pension Wise scheme. The particular evidence that we want to see includes the inclusion of housing wealth in the assessment, which was, again, something raised by the noble Lord, Lord Flight. With housing wealth being sometimes 10 times the average pension pot of an individual, it is an important factor. We need to assess how important a factor that has been in people’s decision-making about their new freedom and whether that has been fully taken on board in the advice and guidance given by both financial advisers and Pension Wise.
Secondly, has appropriate consideration been taken of making appropriate savings for future retirement? We will also want to examine in depth the effectiveness of the second line of defence recently put in place by the FCA. We need to know what the pensions industry is doing to adapt to all of these changes. It has to adapt because more flexible approaches are demanded by savers as they seek to draw down their money. There is a whole host of new ways in which people take their retirement, and the circumstances in which they do this will also vary. The use of these flexibilities will increase, not decrease.
We are in a new world. Retirement dates are not fixed and people will make choices as they see their future in differing ways. It may be that we will need to consider a more regulated market in this decumulation phase in order properly to protect consumers’ interests. We want to see the evidence of the market and what it is doing. Is it offering appropriate new financial products? We need to examine the early evidence of what the market is offering, and deal with restrictions placed by some companies on people being able to access their money. Also, can and should NEST step in where there are gaps in the market offering?
The Government may have some money in hand in order to support some of these matters because they expect to get tax receipts as the pension freedoms kick in. Tax paid at the marginal rate on the average £17,000 draw-down, reduced to tax on under £12,000 after the 25% tax-free sum is deducted, will not meet the extra £12 billion-worth savings in welfare that the Government are looking for, so they should put some of this extra tax into supporting a better savings culture in our country—an enhanced savings strategy. Noble Lords may wish to consider how that is to be determined during the course of this Parliament, but it is, as both of the previous contributors have said, a significant factor in the way that we need to move forward.
This has been a bit of a canter around the pensions landscape; each item is worthy of a debate on its own. To return to my opening remarks, the legislative foundations are in place, but there is a need to examine the many points of implementation. We look forward to working with the Minister on these matters, and where necessary challenging the Government on their approach. But that is for the future. We wish the Minister well today. I am sure that she recognises the challenges ahead of her. We look forward to her maiden speech and to working with her in the coming years.
Baroness Drake (Lab)
My Lords, I refer to my interests in the register as a trustee of the Telefónica/O2 and Santander schemes and as a member of the boards of the Pensions Advisory Service and the Pension Quality Mark. I begin by congratulating the Minister on her appointment; I look forward to debating with her in this Chamber. She has certainly assumed responsibility for pensions at a time of radical change, but I have no doubt that she is more than capable of embracing it.
Commenting on the freedom of choice agenda is made difficult when the Government’s strategic objectives for the long term remain unclear. People now have open access to their savings, but when the state has auto-enrolled workers into schemes, compelled employers to contribute and invested billions in tax relief, there is a public policy interest in knowing what the Government’s intended long-term outcomes are. As the noble Lord, Lord Flight, conceded in opening this welcome debate, we no longer have a private pension system; rather, we have a long-term saving system. We no longer talk about desirable replacement incomes, because people are no longer required to secure an income. What is the desirable savings pot size for the median earner that policies should be targeting? What is the Government’s aspiration for contribution rates and how will they achieve them? What is the intended balance between individual freedom and societal outcome? As my noble friend Lord Hutton indicated, these are matters of some significance, on which society requires the political system to come to a consensus position.
Let us take employers, for example. Their workplace pensions are key to delivering savings. The Government’s pension proposition has to be attractive to the senior managers who decide on their company’s pension arrangements if we are to avoid a drift to simple minimum compliance. Employers’ disengagement from pensions was, after all, a major reason for the decline in savings that led to auto-enrolment and employer compulsion. Yet their behavioural response to the freedom agenda has attracted very little analysis. There are more changes to come—tax relief, lifetime allowance, annual allowance, salary sacrifice—but what is the impact of policy decisions on the level of employers’ engagement with pension saving? Saving for retirement is a 40-year project and policies must work not only for today’s older workers who have been able to save but also for younger people who are still to save if they are to get to retirement and have a reasonable existence.
There is clearly benefit in giving greater freedom to the saver, but the impact of the extent of the freedoms, the speed of their introduction, the response of the market, the shift of the risk to the individual and the impacts on employers were never fully considered. The Government are dependent on the market to deliver the choice agenda, yet we know that there are features of the pensions market that hinder the proper functioning of competition—complexity, consumer inertia, asymmetry of knowledge—and that legitimise more state intervention than would otherwise be the case.
We see problems emerging that were raised in this House only days ago, in particular by my noble friend Lord Bradley. It was therefore welcome to hear the Chancellor acknowledge that there are concerns that some companies are not doing their part to make those freedoms accessible and that the Government are now considering a cap on charges and have asked the FCA to investigate. Yet the FCA warned some months ago, in its interim report on the retirement income market, that consumers were poorly placed to drive effective competition and that the introduction of greater choice and more complex products would reduce consumer confidence and weaken the competitive pressure on employers to provide good value.
What of the requirement on the independent governance committees to report on draw-down products? Will the Minister be asking them to give the matter priority? The Chancellor advised that he wants to make sure that savers are treated fairly, but the FCA’s rules on treating customers fairly contain no explicit requirement on providers to act in the best interests of savers. They rely on effective competition to deliver for the saver, yet time and time again experience shows that competition is not able to deal with conflicts of interest and the failure to deliver value for money. The Government need to find a sustained resolution to the dysfunctions in this market. We cannot go on endlessly dealing only with the symptoms.
What is required is not an alignment of interests but a hierarchy of interests, where conflicts of interest are resolved in favour of the saver. Providers have to be able to make a profit but only on products which are designed and operated in the saver’s interest and which provide value for money. Now, we face an urgent need for substantive data so that regulators and the Government can identify early and respond quickly to emerging problems. It would be helpful to know from the Minister how the Government intend to meet this need.
New freedoms come with new inefficiencies, which undermine value for money. These include some providers’ restrictive processes for accessing the freedoms, their charges for advice, for transfer out and for transfer in, charges for looking after your money, charges for accessing your money, embedded commission and other charges, which need to be addressed.
There is a danger in the current debate that the message simply becomes, “Everyone must be free to make a dash for the cash and no barriers must be put in their way”, but of course that cannot be right either, and we need a measured debate on this matter. The Government are right to require individuals to take advice in certain circumstances, such as when seeking to transfer substantial defined benefits or protected rights into cash. The risk from pension scams is growing.
It is right that people take time to consider their options, because choices taken can be irreversible. We want providers to behave more responsibly. It is difficult to compel providers to provide certain products, and one would not want to compel the inefficient ones simply because of the debate that is currently taking place. We know that some employers and trustees are reluctant to provide access to choice through their workplace schemes. They are concerned about their own liability. Some fear associating with poor decision-making by savers or assisting access to products in case there is a mis-selling scandal. They are waiting to see how the market evolves.
Providers are setting their own access processes and requirements for customers wanting flexible access. Some face problems. As Martin Wheatley at the FCA observed, the timescale for delivering the freedoms and design products was challenging, and providers struggled to complete due diligence testing on their products. Many have had to significantly change their business model, systems and procedures. For some, that remains a big challenge. Some providers may also be cautious because they fear the risk of mis-selling. When advice should or should not be required is an example of the struggle between public policy and what the market feels it wants as its operating model.
The issue of the ease and cost of transferring from one scheme to another so that people can access their freedoms becomes of increasing importance, as the Government are now discovering. However, we know that there are real inefficiencies in facilitating ease of transfer between one pension scheme and another.
Much of the recent debate is focused on the post-55s, significant numbers of whom were in good occupational schemes. They may not be reliant solely on their DC pots; they may have other incomes, such as from DB schemes, but over time this will change. The savings of future generations may all be DC. Greater freedom and irrevocable decisions put more risk and responsibility on to the individual.
The Minister wishes to promote greater financial awareness and understanding, and the decision to provide guaranteed guidance was a welcome step in that direction. However, the need for guidance over a working life will grow as the personal responsibility to make provision for retirement and other needs increases. Access to advice at a cost that is reasonable, particularly for those on moderate incomes, will not be readily available. People will be left with limited support if there is no source of independent and impartial guidance. People need guidance from a trusted source, delivered by an entity that has no commercial interest in the customer’s next steps. This allows the guidance to be personalised and gets closer to the boundary of the advice—without stepping over it—that can be delivered by a commercial organisation that has a vested interest.
Guidance should be offered at the main life event touch points, such as student loans, childcare costs, changing employment and starting to save. If the future is greater personal responsibility, the provision of support and guidance needs to be more radical. The noble Baroness has been radical in the past and I am sure that she will be so in the future.
Perhaps I may conclude by making a personal plea to the Minister: could she please pay full regard to the position of women in pension reforms? We now face a situation where a little over one in three of the people who are auto-enrolled are women. In part, the problem has evolved because of the earnings trigger—the level of earnings that you have to achieve before your employer is obliged to auto-enrol you into a pension scheme. Fortunately, after several years of argument, the Government have frozen the value of the earnings trigger rather than relentlessly tracking the income tax threshold. I fear that there is a loss of focus on the need for the private pension system to work for women as much as for men. At the moment, two in every three of the people being auto-enrolled are men. I hope that the sororal commitments of the Minister, which have been ably and warmly demonstrated in the past, are not diminished by ministerial office.
Lord Kirkwood of Kirkhope (LD)
My Lords, it is always a pleasure to follow the noble Baroness, Lady Drake. She is an expert and the House is lucky to have access to her experience. I support most of what she has said, but I would underscore her last point about the importance of the entitlement of women in the past and in the future. It was one of the issues that Steve Webb dealt with best, and my noble friend Lord German has paid a substantial and appropriate tribute to him. We are all agreed that we need to be solicitous of women’s rights and entitlements in the country’s future pension provision policy.
I declare an interest. I am the chairman of the General Medical Council’s superannuation DB scheme. It has been a source of education for me on some of the complexities of investment policy and will inform some of the things I have to say. I applaud the noble Lord, Lord Flight, not only for the debate today but for the keen interest he takes in this issue. We are on different sides of the park on some of the economic arguments but no one can take away from him the fact that he has been dedicated to trying to get people to consider a savings policy. He, too, has great knowledge from which we benefit.
I welcome again—I will keep welcoming her for a long time to come—the noble Baroness, Lady Altmann, to her ministerial role. I am going to offer her some quite gratuitous advice: she should refuse to resign. If over the next five years she is threatened with a ministerial reshuffle, I hope she will promise to come and tell some of her friends on all sides of the House that that is a possibility because we know where the Prime Minister lives and how to give people a really hard time. It is stark-staringly obvious why I say that. One of the reasons Steve Webb was a successful Minister is that he was not one of 14—he was in place for five years. If the noble Baroness is given a full term, I am confident that she will make a positive contribution. If the ministerial role is chopped and changed it will be to no one’s advantage. We will be solidly behind her when she refuses to resign. I hope she will take that piece of advice.
I would also advise the Minister to do nothing, take no steps and make no changes until she is absolutely sure that the department has given her the full brief on winners and losers in both the long and short terms. I do not need to tell her that. It is important that we recognise the significance of some of the changes that may be made for ordinary people and the political ramifications of those changes.
As a Scot, perhaps I may remind her that quite a bit of the industry is based in Edinburgh. There is quite a lot of politics going on in Scotland at the moment as well. If she were kind enough to visit Edinburgh, I would personally organise the pipe band. There is a serious point to be made about the other parts of the United Kingdom as well because this is a UK-wide policy area. A lot of it is—and should be—based in the City but there are other parts of the kingdom furth of London. I do not think I need to tell her that, either.
This has been a very good debate which will repay careful study. I want to support some of the things that other noble Lords have said. I am sure the Minister knows already that the game has changed. Thinking about pensions needs to be done entirely differently in the future. I was encouraged that, in his important remarks, my noble friend Lord German referred to the need to look after low-paid households and low-paid members of schemes—particularly DC schemes. I agree with what the noble Lord, Lord Hutton of Furness, said about the significance of DC schemes and the decisions we will have to take about them. I support—well, half support—what he said about the need for a new commission.
Will the Minister go back to the department and ask for the papers about the Pension Provision Group to be dug out? The group was set up by Harriet Harman in about 1992, and a splendid Scot called Tom Ross chaired it. The group was independent and had access to specialist departmental support staff. It did an analysis of the waterfront and came up with the recommendation that eventually led to the Pensions Commission. That valuable contribution from the noble Lord, Lord Turner of Ecchinswell, was therefore spawned by the work done by Tom Ross’s group.
The plea from the noble Lord, Lord Hutton, to have a full-blown rerun of the commission—which I would support—falls on deaf ears because it is too complicated or would take too long. Perhaps I may recommend an alternative. It is not as good, but it would do. It could be done within 18 months and would produce a SWOT analysis which I think the Minister would find very useful. This would be a small, independent group which would look at where the gaps are. As other noble Lords have said, all the reforms that have been put into place have rightly been made with all-party support. We are grateful to be in this position. We should also be grateful for the quality of the industry that we have behind us. We are global leaders in this area.
Although the situation is urgent and needs attention, we should not forget the industry in our deliberations. I think it was really fed up and ticked off by the announcement in Budget 2014 that all these changes would happen “just like that”. I understand why that was done. Some information is market sensitive and some things have to be announced in ways that protect it. However, we must give the industry an honest chance to participate in some of our thinking about the future. We need to be looking at how the pieces of the jigsaw fit together. There are gaps and I think that the Minister will be driven to address them. It would be better if she anticipated them and started thinking about them before they happened.
A total savings culture change is necessary, and I was very interested to see that Mr Martin Wheatley of the FCA said the other day:
“You can no more live in modern society without finance than you could without housing or water”.
Coming from the chairman of the FCA, that is a pretty powerful statement, and I absolutely agree with it. It is the sort of thinking that should underlie all of our policies in the future. In the long term the culture will change, and I am sure that the Minister’s experience will serve her well in driving the agenda.
I agree wholeheartedly with the noble Lord, Lord Flight, when he says that we should promote the Minister to a senior role in the Treasury. If my experience is anything to go by, she will find that the ideas she may have in the future will be blocked by people along the road. This agenda needs to be driven by someone who is in the middle of the spider’s web. I know that she will be in the middle of her own spider’s web, but she needs a bigger web. She needs Treasury support to do what she needs to do, and I think she probably knows that.
In the short term, running repairs are necessary, as is identifying the gaps. A Pension Provision Group analysis would help in that. I concur entirely with the noble Lord, Lord Hutton of Furness, in what he said about occupational schemes. Come 2018, we will need to be vigilant about what is happening to these schemes. I am very worried about this. If I have read the data from the auto-enrolment declaration of compliance report correctly, at the moment there are as many people—5.2 million to 5.3 million—outside auto-enrolment as are inside, and that is only looking at bigger employers. The next phase of auto-enrolment will involve smaller employers. The effect of earnings of £10,000 triggering access along with job definition and self-employment restrictions means that we are leaving a whole lot of people outside the scheme, and that is even before we get to the version of the problems described by the noble Lord, Lord Hutton. He is right to remind us about that. Indeed, he made a powerful speech in the debate on the Queen’s Speech which I read with interest; he has persuaded me about this.
I shall make a quick point about the triple lock. My noble friend Lord German said that there are some savings to be made, and he is correct. Her Majesty’s Government are making huge savings over a 50-year or 60-year schedule, as the Institute for Fiscal Studies has pointed out, by suppressing the accrued rights of S2P from maturing in the future. They are also making huge changes in terms of extending the state pension age. I agree with the noble Lord, Lord Flight, that within reason it is a sensible thing to do, but people need time to plan for it. So any attack on the triple lock, certainly in this Parliament, should not happen. Colleagues should remember that the triple lock can still exist and be cheaper because all you need to do is change the definition of earnings or reduce the increase from 2.5% to 2%. Those are the factors. I would not put it past the Treasury to do this if things get tough later on, but if it happens, I can tell the noble Baroness that she will meet stout resistance from, I suspect, all sides of the House. If the Government do try to do that, we will start to look seriously at the savings they will be making over the long term in terms of SPA and abolishing S2P rights. She will have a fight on her hands if that is tried, so I am warning her of it right now. I will say it only once, because it is important.
Finally, I think that the Pension Wise service is wholly correct, but wholly inadequate. I said earlier that I learn an enormous amount as the chairman of a defined benefit scheme. It is a struggle, although it has a really supportive sponsoring employer who could not do more to support the trustees in trying to defend the interests of the scheme members. It is now fantastically complicated trying to stay ahead of the curve, given the volatility of the asset market and gilts. The noble Lord, Lord Flight, knows more about those than I do. Investment rates and contribution rates over a 40-year period are nearly impossible for individuals to work out, a point made by the noble Baroness, Lady Drake. It is almost impossible for ordinary people to comprehend during a 40-minute Pension Wise interview. They need continuous help.
As the chair of a small superannuation fund, I get fortnightly briefings about the state of the market to try to stay ahead of the game. If ordinary people who know nothing more about the pensions industry than the man in the street do not get enough help, then I am not surprised that they get into ISAs. Maybe we should be thinking more carefully about that, which is another important point made by the noble Lord, Lord Flight. Right now, I am certain that while the guidance guarantee was correct, it is inadequate. It really needs to be substantially beefed up if it is to be safe.
In conclusion, I say to the Minister that I wish her well. I am sure that she will be successful and that she will be in her role for five years, because if she is not there will be more to-do about it, in my view. She is part of a one-nation Government who are contemplating £12,000 million of cuts, if the Chancellor is to be believed. We will also be looking to her to fight the good fight within government, to make sure that low-income families in particular, who are trying to save and to make proper provision for an adequate retirement income, are properly protected by this one-nation Government over the course of these cuts. I wish the Minister well.
Lord Stoneham of Droxford (LD)
My Lords, I, too, congratulate the noble Lord, Lord Flight, on initiating this debate and on his remarks. I have known him for nearly 50 years, and I can honestly say that I have never agreed more with one of his speeches than the one he made today. I also join in welcoming the noble Baroness, Lady Altmann, and I look forward to her maiden speech, particularly given her experience at the consumer interface. I hope that one of the things she will concentrate on as the new Minister is that area of pension policy. I and my colleagues on these Benches, my noble friends Lord German and Lord Kirkwood, saw the legislation through the coalition Government from these Benches. It is good to see that this was actually one of the most successful parts of the coalition Government.
I join in thanking Steve Webb today for all the work that he did in the coalition. That team effort was built on his very successful working with Iain Duncan Smith and the noble Lord, Lord Freud. This produced reforms that in my view would not have happened with a single-party Government. It built—and this is another lesson for pension policy—on the reforms initiated by the previous Government and the foundations prepared by the Turner commission, whose membership included the noble Baroness, Lady Drake. Turner’s vision was of a simple state pension that adjusted to life-expectancy improvements, with automatic enrolment into private pension savings and with the full back-up of the state-sponsored scheme that is now NEST. The coalition’s achievement was really to review and then reform the structure of pension policy, which is now simpler and more coherent. However, as has been raised in this debate, we still need to cope with how to raise the actual level of saving.
Steve Webb brought huge experience of pensions and expertise into government. I was very proud to have been associated with Steve in the pension review which our own party carried out in 2003-04, which set out the case for a citizen pension. This has effectively become the higher state pension and is set at the level of pension credit. It was in our manifestos in 2005 and 2010, and it included a commitment to the triple lock. Despite the restraints on public spending that we had in the last Government, it is good that both those measures—the triple lock and the introduction of the higher single state pension—were supported.
Steve Webb had to fight hard in government to get that, particularly the single state pension, especially in the middle of the Government between 2012 and 2013, and it is right that he should be proud of that legacy. He has effectively restored the Beveridge commitments that there should be a basic state pension approaching 20% of average earnings to provide a minimum standard of living while at the same time acting as a platform on which private pension savings would be built. The triple lock stops the withering away of the relative value of that state pension, which has been going on since 1981.
A couple of other reforms were important in the coalition Government. We undertook a review of public pensions, which was conducted very thoroughly by the noble Lord, Lord Hutton. It has not been mentioned in the debate. It was not a popular thing to do, but it had to be done. The coalition, and the consensus that that report helped to introduce, helped the introduction of those reforms, which are ongoing.
Although auto-enrolment had been envisaged by the previous Labour Government, it was reviewed by the coalition. It has been well introduced and we have had success so far, but as the noble Baroness, Lady Drake, warned us, there are issues that we will need to follow up. I hope that the Minister will give us some of the latest figures on auto-enrolment, as the figures that I have seen have not been updated since last year. Contributions are still too low, but the introduction of auto-enrolment has to be phased in. It is a start, and what we need now is stability of policy-making.
Two other reforms were introduced by the previous Government. Steve Webb was always concerned about charging. He imposed a cap on the auto-enrolment schemes, which was welcomed. The Government then got into the issue, which again I support, of providing choice and the ability for people to use their pension funds more flexibly. That was almost inevitable once people began to question the returns they were getting from annuities, as the noble Lord, Lord Flight, said. We need to encourage more saving. Frankly, if people feel restrained and do not have that choice, that in itself will be a deterrent to saving.
Looking to the future, there are a number of priorities that the noble Baroness, Lady Altmann, could look at. As people have said in the debate, there is a need for stability: people need certainty that these policies will now be bedded down and continued with. I think Steve Webb mentioned this recently: if there is one area where the Government could have done more it is improving communication and education. People need to save more, and if they are to be encouraged to do that they have to have a better understanding of and confidence in the policy, which needs greater stability.
I hope that we will use the digital facilities to help them. I will give one example. In the previous Government we tried to have better communication with people who were about to take their state pension, because there is very little communication with them. I suspect that this is the experience of others: every year I get a letter about my winter fuel allowance, telling me that it has been paid into my bank account. Frankly, that money and that communication should be used to prompt people either when they are undercontributing or when their pensions are not adequate to meet the requirements of their retirement. Just as endowment policy companies have been forced to write to people where their policies clearly were not delivering what they were meant to deliver, we should look at improving communication with regard to state pensions. It can be done more easily and cheaply digitally than by a letter through the mail, which I still get for my winter fuel allowance.
Now that the structure is in place for policy, clearly we have to look at other means of improving better saving. I support the views of the noble Lord, Lord Hutton, that we must look at the defined contribution alternatives and particularly the defined ambition schemes as a way of widening the debate to deal with the issues and people’s concern as they look at their savings and the poor returns that they could be getting from their defined contribution schemes.
Providers will be the key in the future. The confidence which consumers and potential pensioners have in the providers of their pensions is essential. There is still a lot of distrust over charges, because they are misunderstood and often hidden. If we are going to get into the whole issue of freeing up draw-down options, we must deal with the fact that every time we have had a reform in pensions and financial services, it has provided an opportunity for further fraud and mis-selling. If we introduce these things too quickly and before proper regulation is in place, we will have difficulties, and that will undermine confidence in savings. If there was a criticism, it is probably fair to say that the opening up has been done too quickly, which leads to the possibility that we will have more problems in the future.
We could have done with a few more years of Steve Webb in charge. However, I am sure that the noble Baroness will contribute to the ongoing debate in this important area, and I know that Steve Webb will be contributing to the debate outside Parliament. We on these Benches salute Steve Webb’s achievements in government and we hope that the noble Baroness, Lady Altmann, will defend and develop his legacy and that of the coalition in government.
Lord Bradley (Lab)
My Lords, I also congratulate the noble Lord, Lord Flight, on initiating this wide-ranging and thoughtful debate. I was particularly struck by his statistic on the average age of the House. Having recently reached state retirement age, I am pleased that I still fall below the average age in this House. I also welcome the noble Baroness, Lady Altmann, to her new position as Pensions Minister and, like all noble Lords, I look forward to her maiden speech at the conclusion of this debate. As has been rightly said, we know that she has tremendous expertise in this area, which everyone in this House will benefit from. She is warmly welcomed.
In the limited time available to me, I will concentrate on the issue that I believe is currently foremost in the public’s mind—that is, how the pension freedoms flowing from the Taxation of Pensions Act and the Pension Schemes Act, which came into force in April of this year, are being implemented and how they are impacting on customers. I said at Third Reading of these Acts that implementation was barely nine weeks away, that I remained deeply concerned at the speed at which changes were being introduced and that the issue,
“will be closely scrutinised both inside and outside this House to ensure that the public’s interests are properly and fully thought through and protected”.—[Official Report, 5/2/15; col. 797.]
It is clear that this remains our number one priority, although I recognise from the very thoughtful contributions to this debate that there are a number of other important issues, such as the single-tier pension, the triple lock and auto-enrolment, which we must return to in future debates.
Let me be clear again that Labour supports the introduction of greater flexibilities in how people access their defined contribution pensions, as we believe that it is right for people to choose how to use the money that they have saved. However, we have said that there are three tests for the reforms. The advice test—is there robust advice for people providing for their retirement and measures to prevent mis-selling? The fairness test—the new system must be fair, with those on middle and low incomes still being able to access the products that give them the certainty in retirement that they want, and the billions that we spend on pension tax relief must be available across the board. The cost test—the Government must ensure that this does not result in extra costs to the state, either through social care or pensioners falling back on means-tested benefits, such as housing benefit. We will continue to monitor the implementation of the reforms against these tests.
In the run-up to the introduction of the reforms, we called for the FCA to introduce a second line of defence, requiring providers to give information to those looking to access their pension pots. We were pleased that during the passage of the Bill the Government accepted that call from this side of the House.
We also called for the Government to consult on developing a charge cap for income draw-down products, with a focus on those offered by a saver’s own pension provider, on the assumption that these customers may have taken the least active approach to choosing a new product. At that time we highlighted the research from Which?, and I quote from it again:
“Based on a scenario of someone with the typical pension pot of £36,000, drawing down £2,000 a year, we calculate that a cap of 0.5% would leave someone in our scenario around £10,300 better off than with charges at 2.75%. A 0.75% cap would mean that they have a total of around £8,800 more over their retirement and a 1% cap would give them around £7,500 more”.
So obviously it is pleasing that the Government are now consulting, through the FCA, on these caps. As we have heard in the debate, though, these charges and the consultation must be transparent, and we must come to a sound but quick conclusion to ensure that customers do not continue to be ripped off by high charges.
During the implementation phase, in the wake of consistent concern about fraud, we asked the Government to take action to give savers greater protection. We suggested that a Labour Government would introduce a new cross-government task force on tackling fraud and scams, overseen by the Pensions Minister. We also suggested a new kitemark so that savers could recognise regulated pension products, and a cooling-off period so that savers had the time to make a final decision about their pension pot to protect them from handing over a lifetime’s savings to potential fraudsters. I am sure that the new Pensions Minister will want to reflect on those proposals in her new role.
Let us consider a little further what has happened in the three months since the introduction of the flexibilities. Already, in the wake of their introduction, many concerns have been reported about fraud and, as my noble friend Lord Hutton mentioned, restrictions on the public’s access to their savings. First, I turn to fraud again—I think it is a very important matter. There remain persistent concerns that companies offering fraudulent or poor-value products will use the reforms as an opportunity to persuade savers to part with their cash. The Daily Mail reported on 23 May this year that:
“Pension savers are being warned to be on their guard against fraudsters who pass themselves off as working for Pension Wise, the Government-backed pension guidance service—but whose aim is to con you out of your savings”.
Research from the consumer group Which?, published six weeks after the pension reforms came into effect, found that one-third of over-55s who are not yet retired have already been contacted by someone looking to sell them a potentially poor product. The Minister has suggested that tackling this kind of fraud is one of her priorities in her new role as Pensions Minister. What action are the Government taking now to monitor the levels of potential fraud in the market, and how are they ensuring that, alongside the prevention of fraudulent products, savers are protected from products that may offer a higher degree of risk than they realise they are taking on without full knowledge?
Secondly, there is the difficulty of accessing savings. The Daily Telegraph has been running a campaign highlighting the difficulties that some savers face in accessing their pension savings in the way that they want to. There are two main issues: first, providers do not yet offer the type of income draw-down products, or options for taking some of their savings as cash, that the savers actually want. The ABI has been robust in defending pension providers’ behaviour in this context and highlights the fact that these reforms have been introduced at speed. A Financial Times report on 13 June quoted Huw Evans, chief executive of the ABI, who said that the industry said that it had been set an unrealistic timetable to implement the changes announced by the coalition Government in the 2014 Budget. He went on to say:
“So much has been done at the last minute … The first thing we need is absolute regulatory certainty about what providers can do and what they can’t do”.
I would be grateful if the Government would comment further on what they are doing to look at that issue.
The third issue that I want to highlight is advice, which several noble Lords have mentioned, and which is a crucial part of public confidence in the new system. Let us consider providers requiring savers to access advice before accessing their pension pot. Several providers require savers to access advice before taking out their pensions as cash or in an income draw-down scheme. This highlights two problems. First, some providers see a lack of regulatory clarity around their responsibility if savers take up options that prove not to be of best value, or indeed detrimental to their finances. The FCA has published guidance to providers but says that it will review it this summer. Providers argue that this could be seen as a consequence of the rushed nature of the reforms. Secondly, there is a lack of affordable advice to those with smaller pension pots. Pension Wise can offer only guidance, not regulated advice. I would be grateful if the Minister would clarify the circumstances in which the Government believe that people should take advice before accessing their pension pot, and set out what they are doing to ensure that affordable services are there for all those who need them.
Most importantly on the question of advice, what action are the Government taking to monitor the take-up of Pension Wise and advice from citizens advice bureaux, and the level of customer satisfaction with the service? I put down some Parliamentary Questions on this matter but, unfortunately, to date they have not been answered—otherwise, I might not have had to press the Minister on those points today. There also appears to be an absence of any plans for the collection and publication of data on Pension Wise usage. This would be an important measure, providing basic user feedback on the service itself, its quality and whether it was helping people to navigate the new pension freedoms.
What action are the Government taking to monitor the type of products that people are accessing, and the implications of this for access to means-tested benefits and further cost to the Government as a consequence? What current assessment have they made of whether the increase in tax revenue that they were predicting in 2014 from the freedoms will be realised? Are the Government enabling people to sell annuities that they have already purchased in exchange for a cash sum? What progress are they making on that reform?
As I said, time is very limited and these are extremely important issues for us to debate. I commend all the contributions that have been made. I am sure that all of us across the House seek to ensure that the consumer’s interests are always protected and that the public remain confident that the new freedoms being rolled out are in their best interest. I know that we will receive a very thoughtful response in the maiden speech of the noble Baroness, Lady Altmann, to all the issues raised in the debate. I welcome the Minister to the Dispatch Box.
The Minister of State, Department for Work and Pensions (Baroness Altmann) (Con) (Maiden Speech)
My Lords, I am proud and honoured to stand here today as a Member of this House and thank my noble friend Lord Flight for initiating this debate and for the many important and interesting points he raises, which I look forward to discussing with him. I also thank other noble Lords for their kind words. I must say that I am finding this such a friendly place. I am enormously grateful to my two supporters, my noble friends Lady Wheatcroft and Lord Freud, and to the doorkeepers and all the wonderful people who make this great House work so well.
I am particularly pleased to be among so many notable experts—especially all the noble Lords who have spoken so eloquently today—who have a deep knowledge of the UK pensions system. As someone who has studied and advised on pensions policies independently, I am excited to have joined the Government, with the opportunity it gives me to work inside this House to try to deliver the important pension reforms already under way, and initiated by my esteemed predecessor Steve Webb.
In the past 15 years or so, I have worked really hard to help ordinary pension savers. I have been involved in a number of campaigns trying to achieve justice for those who have lost out in our pension system, and it has been a privilege to have been able to make a difference to so many people’s lives. That is what motivates me. I earnestly hope that, in my new role, I will be able to help many more—time will tell. I thank the many noble Lords who have already shown me such warmth, kindness, support and friendship since arriving in the House.
As this is my maiden speech, I hope I may share with noble Lords a few words about my background. My mother, a wonderful woman, well liked by everyone, tells me that I always had a strong sense of social justice, helping others wherever I could. Even at school I would stand up for those who were bullied. I remember my parents being proud of me for defending my friend one day and telling me, “Don’t stand by, stand up, stand strong”. I often think of those words.
My parents and their families were refugees from eastern Europe who arrived here with nothing. All my grandparents were so grateful for the freedoms and opportunities they enjoyed in this wonderful country of ours. I have been asked why I chose Tottenham as my “place”, and can assure noble Lords that this is not because I have a hidden talent for playing football. Actually, my father’s parents lived at their small shop in Tottenham—the Hale Bargain Store. I have many fond memories of serving in the shop and then walking to football at White Hart Lane, holding hands with my father and granddad in the Tottenham Hotspur glory days. As I am the last member of my family of Altmanns, I have chosen Tottenham as my “place” as it holds so many special memories of my time there.
Sadly, my father passed away in his 50s and never reached retirement. This is quite poignant for me given that my career has focused on helping people prepare for, and enjoy, retirement. After reading economics and studying at Harvard, I completed a PhD on pensions and later-life poverty at the London School of Economics. I then worked in the City and spent many interesting years managing institutional assets, mostly pension funds.
I took time out after having my third child and then returned to corporate life as an independent consultant, working on pensions and investment policy. I advised the Treasury and the No. 10 Policy Unit, while also working with many top international firms on pension investment, risk management and member security. That work led to public recognition as a pensions expert and consumer champion, which is ultimately why I am here today, among such distinguished company.
Turning to the subject of today’s debate, I first express my gratitude for the important work done by the Pensions Commission in generating the momentum that has brought us to the point we have now reached. The commission’s excellent analysis showed that any system of private pension saving needs to be considered against the background of the state pension and, rightly in my view, concluded that means-testing must be reduced; state pensions should be flat-rate with the widest possible coverage and should rise in line with earnings; and that private saving must be facilitated. That is why the delivery of the new state pension, rolling out auto-enrolment to all employers and ensuring that customers are treated fairly in the new pensions landscape will be major priorities for me as I do my utmost for the pensioners of today and the future.
The reforms put in place so dedicatedly by my predecessor in the last Government—I echo the many tributes paid to Steve Webb—are now reaching a critical stage. I am well aware that the real tests for success are still to come, notwithstanding the encouraging trends so far. I am also actively aware that, as the noble Lord, Lord Hutton, mentioned, maintaining a consensus is vital. I think there is broad agreement that a base level of state pension is essential. The value of the basic state pension as a proportion of earnings had been in almost constant decline since 1978. However, with the introduction of the triple lock, the previous Government helped to ensure that today’s pensioners now receive the highest share of basic state pension relative to earnings in two decades, so that pensioners are protected even in tough times. I repeat the Prime Minister’s commitment that this triple lock will be maintained during this Parliament.
As many noble Lords have said, the current state pension system is one of the most complex in the world. State pension provision has undermined private pension saving as too many pensioners just ended up on means-tested benefits that penalised their private income. The new state pension introduced by my predecessor—I echo the remarks of the noble Lord, Lord Stoneham, in that regard—will significantly reduce pensioner means-testing. People therefore have a better chance of knowing what to expect from the state pension, so they can plan any additional personal retirement income they may want or need on top. Unfortunately, the new state pension has not yet been properly understood. This is mainly because of the complexity of contracting out, and we need to communicate this more clearly. I absolutely agree with the noble Lord, Lord Stoneham, about the importance of communication. This is an area on which I have already spent an enormous amount of time in my new role. I reassure my noble friend Lord Kirkwood that among the plethora of briefings that I have requested from my team, I have already asked for submissions on winners and losers and will now add to that ever-growing list a request regarding the Pension Provision Group. I should also let him know that I hope to be in Edinburgh in the middle of July and look forward to the band.
Rising longevity means that successive generations are spending longer and longer in retirement. This is, of course, pretty good news. However, we all know that there are also huge cost implications for state pensions, which is why we will have an independent review of the state pension age by 2017. I want the review to consider not only rising life expectancy but wider social, occupational and gender factors. I reassure the noble Baroness, Lady Drake, and the noble Lord, Lord Kirkwood, that I am acutely aware of the disadvantages faced by women in our pension system.
Let me now address the pension freedoms. There are some who say that the financial industry or the Government know best what people should do with their private pensions and that most people cannot make sensible decisions for themselves. I disagree. Yes, some may be reckless and most will certainly need protection, guidance and even advice but the new pension freedoms are right, in my view. I have long been an advocate of trusting people with their own money. I was acutely aware of how the one-size-fits-all approach of the past meant that too many people—unless they had very large pension funds—were forced to buy annuities that were often not suitable for their needs. I am most grateful for the support for the new pension freedoms, in particular from the noble Lord, Lord Bradley.
The previous system most benefited the wealthy but we have now offered more choice and flexibility for the majority of savers as well. I should like to stress an important point: the reforms are particularly helpful in that they use the tax system to incentivise people to keep money in their pensions into later life. By taxing lump sum withdrawals, removing the 55% tax on death and allowing pension savings to pass to the next generation free of inheritance tax, there are strong reasons for people to keep pensions rather than spend them too soon. Most importantly, these reforms will also encourage more people to save in pensions in the first place.
Of course, we must also make sure that customers have good value options to choose from. The pensions industry needs to help individuals to act as they would like to and as the law now allows but, so far, too many firms are not offering many of the new options to their customers, or they are imposing hefty charges, lengthy delays or exit penalties on those wishing to transfer to other providers. This is most disappointing.
My right honourable friend the Chancellor of the Exchequer announced yesterday in another place—this was welcomed by the noble Baroness, Lady Drake—that we will be launching a consultation next month, asking the industry, consumer groups, media and individuals to submit evidence of the reality facing customers in this new landscape. We need the evidence to inform any action that might be required to ensure that the market works as intended and customers are treated fairly. We must not allow consumer rights to play second fiddle to the interests of large financial firms. So far, it is clear that competition has not always addressed consumer detriment but, ultimately, it is in the interests of providers to look after their customers well. Their long-term success requires a new approach, and I assure noble Lords that I am at least as concerned about this as they are. I intend to take action to drive fair treatment of customers. I am also concerned about the transparency of all fees and charges for pensions and savings products. The noble Lord, Lord German, rightly mentioned this. I share the sense of urgency expressed by the noble Lord, Lord Bradley, and I reassure him that I will reflect on his other remarks.
It is also important that the pension freedoms have been accompanied by the creation of Pension Wise. I am grateful for the support of many noble Lords, including the noble Lord, Lord German, and the noble Baroness, Lady Drake, for this service. Pension Wise has already been used by thousands of people. Its free and impartial guidance helps pension savers understand the options available to them and the risks and costs associated with each. People also need to be alive to the risk of scams and we must keep working hard to raise awareness of this important issue. I can tell the noble Lord, Lord Stoneham, that I have also already had conversations with the FCA about this issue, financial advice and the difficulties faced by advisers and their customers in accessing affordable advice. In addition, we need to improve financial education, as the noble Lord, Lord German, rightly said. Public understanding of the long-term savings and investment market is currently inadequate.
As well as problems with pensions, I have, for many years, been concerned about the looming crisis in social care funding. The ageing population means that there will be an enormous surge in the numbers needing to rely on care in coming years, and there is simply no money set aside to pay for this. There is still much more to be done to incentivise saving for later-life care, whether as part of pension provision, separate care savings plans, a widespread insurance system or a combination of all these.
Turning to auto-enrolment, the coverage and adequacy of pension saving had been in rapid decline for many years. Unfortunately, the rising costs and risks of defined benefit pension provision led, as we have heard today, to employers closing traditional defined benefit schemes. I have great sympathy with the many employers who have been struggling with ever-increasing pension liabilities in the current, exceptionally low interest rate environment. Pension provision is clearly moving towards defined contribution, which employers are using to replace defined benefit. It is encouraging, however, that automatic enrolment has so far been successful and that opt-out rates have been really low, especially among young people, so that coverage of workplace pensions is once again increasing.
I can inform the noble Lord, Lord Stoneham, that as of last week 5.25 million people have been automatically enrolled, 44,757 employers have met their automatic enrolment duties and the number of eligible employees participating in workplace pensions has increased by 900,000, to 11.7 million. But we must not be complacent: half of all employees have been automatically enrolled but this accounts for only 4% of employers and contributions are low, as the noble Lord, Lord Hutton, rightly remarked. The hardest work is just starting, as there will be many challenges in ensuring that the huge numbers of remaining employers manage the auto-enrolment process. In particular, I am conscious of the situation of micro-employers and I reassure the noble Lord, Lord German, that I am actively engaged in ensuring that auto-enrolment for the smallest employers is successful and that they are given an easier way to manage this issue. I have already had many meetings on this topic.
Of course, a major factor in people’s retirement income is how much and for how long they save into a pension but, as life expectancy keeps rising, it is also imperative to help people stay in the labour market in later life, including beyond the state pension age if they choose to do so. As my noble friend Lord Flight rightly said, we need to retire the traditional concept of retirement. In that vein, I was amused by and grateful for the remarks by the noble Lord, Lord Kirkwood, about my possible retirement from my new ministerial role, even before I have made my maiden speech.
In conclusion, my aim as Pensions Minister is to try to make pensions work better for people. As I explained to your Lordships at the start of this speech, I have been involved in all aspects of pensions for my entire career. In this work I have always believed that pensions are not just about money. Ultimately, they are about people. We all hope to have a pension one day to help us enjoy our later life. Pensions are precious and need to be nurtured. So many of us have taken them for granted. As the Prime Minister announced to the press when asking me to join his Government:
“What we are doing is taking the country’s leading expert on pensions, on savings, on financial education, and … she will be at the heart of Government, making sure we complete this great revolution where we are giving people much more power to save, to access their pension, to pass their pension on to their children, because we want to create a real savings culture in our country for everybody”.
I realise that my new role in government and as part of this House is a huge responsibility. There is much to do. I have had the privilege of working with a large number of noble Lords from all sides of this House over the years, and I hope I can count many as friends. I would like to get to know and work with more of your Lordships in a spirit of co-operation and consensus rather than confrontation.
These are national and social imperatives in which we all have an interest, and I will try my best to make policy work better for people from all walks of life. With that in mind, I look forward to working with the House on the challenges ahead.
Lord Flight
My Lords, I congratulate my noble friend Lady Altmann on her speech, which was very helpfully down to earth and displays that she has already got her feet more than under the table in dealing with a lot of what must be dealt with. I am sure we all wish her success.
I thank the noble Lord, Lord Hutton, for his kind remarks and for what he has contributed, particularly his work on the changes to public sector pensions. This was difficult and sensitive territory, and a workable compromise emerged. I just make the point—which I think the noble Lord, Lord Hutton, was perhaps making—that it concerns me that the gap between the pensions available to those working in the public sector and those working in the private sector is wider than I wish it were. There is a somewhat miserly DC arrangement left in the private sector, and there is the DB arrangement left in the public sector. I am not quite sure what the noble Lord, Lord Hutton, was recommending, but he asked: is just DC pension provisioning sufficient? I have a rather unthought-out vision of whether there could be a pooling arrangement that amounted to more of a DB scheme and where longer-term risks could therefore be taken in the way investments are made. There is a need, certainly in large organisations, for employer co-operation. It is very sad that we had the best pension system in the world with our DB system, which was able to function because it could take a long-term view of the management of its assets.
Whenever I have asked the Government why they do not do something about IFRS 17, which has made a mockery of DB pension liabilities, the answer I have always received was, “This is for the profession, and not the Government”. I am aware, however, that when the same issue arose in the US, Congress rightly did not stand for such nonsense, and used its power to stop an accounting standard damaging pension arrangements.
I also thank the noble Lord, Lord German, for his kind remarks. He made some very useful points, to which my noble friend Lady Altmann responded. The question of what tax relief should be is important, and, strangely perhaps, we are in agreement that it should really be set at a universal level.
I thank the noble Baroness, Lady Drake, for her very well thought-out contribution to this debate. She raised a lot of sound intellectual questions about what needs to be looked at. My only concern about more involvement by the FCA is that it creates yet more complexity. As many noble Lords will be aware, the whole issue of why the industry is perceived as not having responded adequately to the changes has been largely the result of what it is obliged to do under FCA requirements.
There is not time to go through other contributions, but this has been an extremely valuable debate, with many very constructive contributions made across the House. I find it very encouraging that the spirit of consensus is here and looks as though it is staying.