Pensions: Reforms

Baroness Drake Excerpts

Thursday 18th June 2015 Lords Chamber

[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.