Small Pension Funds

Baroness Hollis of Heigham Excerpts

Tuesday 27th November 2012 Lords Chamber

[Lord Patten]

My Lords, the noble Baroness said that there are 1.1 million people with a pension fund of £5,000 or less. That is 1.1 million very admirable people. I greatly admire those who from small incomes, little bequests and savings over the years have decided to save for a pension. That is an admirable and a good thing. Compare and contrast them with others who may have exactly the same, albeit small, resources from income, bequests and savings, who choose to spend it and rely entirely on the state. The 1.1 million people to whom the noble Baroness referred are the deserving savers, which is why I share her hope that the Government may find ways in which to help deserving savers to get a better deal from those who give advice and those who invest.

It must be very lonely for someone who is of pensionable age, has that small sum of money and does not know which way to turn. However, if there were ways of grossing together all those people, imagine the purchasing power and the purchasing strength that 1.1 million people with £5,000 or less in their pensions would have in negotiating good advice or, indeed, negotiating a better deal when they invest.

The noble Baroness suggested that there should be a round table to deal with this as one way of looking at helping these people. Despite the rather austere framework that we are in at the moment, there may be market-driven opportunities here because I understand that those 1.1 million people have more than £2 billion to invest between them. It may be possible for those in the market to think of setting up a vehicle which would help, by pooling resources, to get a better deal for pensioners, strictly regulated though it should be. Therefore, I would like to put before your Lordships and, indeed, before my noble friend the Minister, an idea which I hope the Government will not stand in the way of: someone trying to set up such a body whereby the purchasing power of small pension holders could be pooled and used to their advantage. I have no interest to declare in this matter, by the way.

Let us look at each of the two areas referred to in the noble Baroness’s excellent Motion: “access to good advice” and maximising people’s retirement incomes. Access to good advice is critical. In the past, the world of the independent financial adviser and others has been a very peculiar one, suggesting to people, who often had small sums of money, that they should invest in this or that because there was a trail commission going back to someone. Under those circumstances it is natural, I guess, that people very often have said, “Go to this fund. Go to that fund—this bond fund, that equity fund”, because a commission is involved. That has all been stopped, which is a thoroughly good thing because I think that it was as close to being corrupt as you could get. But at the same time the unintended consequence is that people are now being told they will have to pay for the advice that they thought they were getting for free but was actually coming from commissions trailing back to suppliers.

It should be possible to think of ways in which individuals with small pensions, banded and grossed up together, could have much more purchasing power, first, to get better advice but, secondly, to get better investment returns. Let us take not £5,000 a year but £10,000 a year—forgive me, I can do that arithmetic. At present rates of about 3.5% returns, you get £350 a year to add on, which is a lot of money to people on small incomes. The trouble is that you go to a fund which promises 3.5% and very often that fund—say one called East European Opportunities Fund, to make up a name—then itself invests in other funds investing in funds of funds, and each of those has their layer of charges. Before you know where you are, a combination of slowly growing inflation and a multiplicity of charges has abolished any possibility of real growth in that pensioner’s income. People often talk about the magic of compound interest but the tyranny of high hidden charges directly on pension funds is very destructive of wealth.

Who does someone living alone turn to? They cannot afford advice so they look at what a Sunday newspaper says—“Invest here, invest there”—and what happens after that is very often a diminution of those people’s wealth, not an addition to it, which they have notably saved for, which I think is to the common good, rather than their just relying on the state. Therefore, I urge the Government to keep an open mind on new market entrants who would be strictly regulated by the great panoply of regulators that we have at the moment that regulate absolutely everything in the City after the events of 2000 and 2008. If private sector people are willing to invest on behalf of such pensioners, and they can see that they can make a reasonable amount from doing so, I urge the Government to make it possible for them to do that.

I do not think that the state should provide funds to do this. My noble friend will be relieved to hear that I make no request for extra government money, as I think that would be wrong. The new normal, we are told, is bumping along the bottom until 2017-18. Everyone is suddenly austerity-aware, and people who used to think that there were free lunches and free dinners now know that we live in a pretty austere world. I do not expect my noble friend to reply to the suggestions that I am about to make but I ask her to undertake in her wind-up that she will pass them on to the Treasury and to the right honourable gentleman the Chancellor of the Exchequer, whose policies I greatly admire. A time of maximum austerity is the time to get rid of a lot of perks for well-off pensioners which they do not deserve and do not need. The better sort of better-off pensioner makes a point of not claiming them. All those TV licences, all the cheap travel, all those winter fuel arrangements—

[Baroness Hollis of Heigham]

Higher rate tax relief?

[Lord Patten]

I am making my speech. The noble Baroness barracks splendidly but I am picking on the three things which go to pensioners from government expenditure. I do think that now is the time for my right honourable friend to get rid of these things. There will be no political backlash at all. People think that it is bonkers and barmy to provide these benefits. I certainly do. I think that it is wrong and we should not be in that position. The Chancellor, half way through the Parliament, way ahead of a general election, with the full and stalwart support of my noble friends the Liberal Democrats in every Division on every single occasion in your Lordships’ House, should seize this opportunity and all will be well.

[Baroness Hollis of Heigham]

My Lords, who are we on these Benches to contest such a magnificent final flourish? I wish only that we could have persuaded the noble Lord to extend his shopping list of things to be remedied from higher rate tax relief to some of the other perks that presently go to incentivise the rich to save, as opposed to those who most need help—that is, those who are worse off.

I come back to the topic of the Motion of the noble Baroness, Lady Greengross. A key aspect of small pension funds is stranded pots. It is that which I want to talk a little about tonight. A Norwich hairdresser coming up to retirement has £20,000 in one pension pot and two other pots, one eight years old and one perhaps 12 years old, with £2,000 in each—total savings of £24,000. That hairdresser can annuitise her £20,000. She cannot access her two pots of £2,000. She cannot commute them into cash because she is over the trivial commutation limit and she is too late for the 2009 changes on triviality. She cannot annuitise those two small pots because they are too small. At the moment she cannot transfer them into her main pot because the companies do not want her business. They are orphan assets. So this woman, with her £24,000 of pension savings, cannot touch, and has actually lost, £4,000 of her £24,000 savings. It is a scandal, and with the help of the Pensions Advisory Service, TPAS, of which I declare I am a board member, we have been tabling amendments on this subject for the past five years wherever possible, which is why we are especially grateful that tonight the noble Baroness, Lady Greengross, has introduced her Motion.

As I am sure colleagues know, TPAS provides free independent information and guidance from technical specialists and a national network of 400 voluntary pension professional members to those who, for the most part, cannot afford or cannot access private information and guidance in their own right. Our website receives about 2.5 million hits every year, some 12,000 written inquiries a year and some 40,000 helpline inquiries a year for individual guidance.

A high proportion of that is fielded by volunteers. We have satisfaction ratings in the upper 90th percentile. TPAS is therefore especially aware of what pension issues are coming up in the lift as it offers information guidance day in, day out, hour in, hour out. About a third of our inquiries are about state pension and pension credit issues and the interlocking of benefits with small occupational pensions, which we hope very much will be addressed by a forthcoming Bill on the new state pension. Another third are on occupational pensions, including a growing number of inquiries on auto-enrolment—inquiries which I am sure will expand as the small and medium-sized enterprises coming later into the system are embraced. Thirteen per cent of our inquiries are on personal pensions, including SIPPs. Relevant to this debate, about 10% of our queries and problems are associated with small pots—how to trace them, how to access them and how to commute them.

Steve Webb, an admirable Pensions Minister, has told us that without action there will be 60 million small pots floating around by 2050—small pots orphaned out there, and for many people inaccessible. Why has this become a growing scandal? Pensions do not work for the main holders of those small pots, who are women. Pensions conventionally assumed a man in a 40-year job with a 40-hour working week, backed by a DB scheme and a dependent wife. If he held on to his job and she held on to him, his and her pensions were secure in retirement.

Now men have nine job changes and women have something like 11 job changes in their working life. If they have a pension—two-thirds of those in the private sector now do not—it will be DC. These DC pots have lower contributions from employers, who promptly halve their contributions when they go from a DB to a DC scheme with lower costs, passing both high charges and high risk on to those least able to cope—the employees. Those pots also receive lower contributions from the lower-paid and increasingly female part-time workers, as they continue to care for children and elderly parents alike.

This problem of small pots is compounded by what is happening in the pension industry overall, by what is happening to the labour market and by the problems that women have in caring not just for children but increasingly for older relatives and members of their family. The problem of small pots will be greatly magnified by auto-enrolment.

As my noble friend will know, I tried hard when NEST was introduced to allow small pots to be transferred into it. This was batted away because of the self-interested howls from the industry, which feared it would lose money under management, in much the same way as it has batted away early access to a slice of pension savings, which would also help transform the savings culture for women, and poorer women in particular. The industry was wrong—disastrously wrong in my view—on both counts, as it is now perhaps slowly beginning to realise, but much damage has already been done.

Pensions reflect the labour market. They were constructed decades ago by pale males with dependent wives for other pale males with dependent wives. They have never worked for women. Now, with people living longer and needing to save harder, with flexible labour markets, with auto-enrolment into low-contribution DC schemes, with half of all older women aged between 45 and 64 by 2020 to 2030 being unmarried and therefore needing a pension of their own, those low-paid part-time women especially, as they are in and out of the labour market, will collect a portfolio of small pots—hard-earned savings—some of which will be inaccessible to them at retirement as the situation now stands. Those pots will go AWOL and be inaccessible—frankly stolen from them by the structure of the pensions industry that we, all together, have constructed and inherited.

It is a problem that is simple to rectify. We expect two pensions Bills next year—one for public sector pensions and one, I hope very much, for the single state pension that Steve Webb has done so much to promote. Allowing employees to transfer small pots—otherwise potential orphan assets—into their larger pot would be an easy way to remedy this, provided we have the political will to overcome the short-sightedness and self-interest of some of those practising in the industry.

Without such speedy action, auto-enrolment could become a mis-selling scandal of orphan pots that will destroy any residual trust—and there is not much of that around—in the pensions industry. For all our sakes, including the Government, but above all on behalf of the poorest paid, poorer women, in some cases the self-employed, perhaps black and ethnic minority women, and men who find themselves churning between employment, unemployment and self-employment—for all those we have to rectify the problem of small, stranded pots which they will otherwise lose, to the distress of themselves and to the shame of us all.

--- Later in debate ---

[Baroness Stowell of Beeston]

My Lords, one of the great advantages of being a Government Whip is that we get to learn about lots of new areas of policy that we may not have been exposed to before. However, it also brings the great responsibility of sometimes having to respond to debates where those who have participated are far more experienced and provide greater expertise on the matter than the Minister in charge. That is particularly so in this debate. I congratulate the noble Baroness, Lady Greengross, on securing this debate and pay tribute to her for all her work in the world of pensions for so many years.

I reinforce and share the views of my noble friend Lord Patten. I, too, am very concerned about people who have done the right thing and saved hard for their pensions. This is one of the reasons why I am pleased to be here tonight and to participate in this debate. I also note the important point made by the noble Lord, Lord Lipsey: we are talking about people with small pots and, to many people, the small amounts of money that we are talking about make big differences. Like the noble Lord, Lord Kirkwood, I acknowledge that the topic of pensions does not lend itself to politics, and nor should it. However, the Government want people to be able to get the maximum benefit from their pension savings and we recognise that people can, understandably, find making decisions about their pension and the process of securing an income in retirement complicated.

We need to be clear that professional financial advice is not, and never has been, free, as has been acknowledged by many noble Lords tonight. Even though many people may have thought in the past that the advice that they were receiving was free, the cost of paying for advice may outweigh the benefit of receiving it. This is particularly important for those with small pension pots and we should not assume that paying for financial advice is the right option for everyone. It is important that consumers can make a decision about whether approaching a financial adviser represents good value for money. To do this, they need to understand how much it will cost and that the adviser’s interests are aligned with their own. The Government support the Financial Services Authority’s retail distribution review—or the RDR as it is commonly called—which seeks to bring transparency to consumers on these issues. In response to the point made by the noble Lord, Lord Lipsey, and repeated by the noble Lord, Lord McKenzie, that poor people should not receive poor advice, one of the added benefits of the RDR is that financial advisers will be required to have a higher level of qualification to ensure that the quality of their advice is better.

We also need to bear in mind the basics of what people need to know to make these decisions. As has been mentioned, understanding the options available and the language alone can be overwhelming. That is why, as the noble Baroness, Lady Hollis, made clear, the free, generic information and advice offered by the Money Advice Service and the Pensions Advisory Service are so valuable. The advice that is available from those two services, and particularly the Money Advice Service, includes helping people to think about whether professional advice is appropriate for them, because it may not necessarily be necessary.

Clearly it is important that professional financial advice is available for those who have decided that it is appropriate for them. However, we should be wary of overstating the problem about access for those with small pension pots. A recent survey by the FSA revealed that 63% of advisers are planning to continue to offer advice to those with savings and investments of between £20,000 and £75,000. A further 38% of advisers plan to continue offering advice to those with less than £20,000. I will come back a little later to the point made by my noble friend Lord Patten about pooling and whether it is possible to pool in order to access advice.

People have big decisions to make at retirement. I am pleased to say that this Government have already taken steps to ensure that people have more flexibility and better information to support those decisions. Of course those with pension savings below £18,000 have an additional flexibility in their options, which is that they can take their savings as a lump sum. For those who want to be able to guarantee an income for life, from 1 March next year the process of buying an annuity from an ABI member will include making customers consider their options for both the type of annuity that they need and which provider to purchase it from. This is what is known in the jargon as the “open market option”, which, as several noble Lords have said, is all about helping consumers to shop around.

The new ABI code of conduct, as part of the package of measures announced by the OMO review group in March, provides a real step change in the requirements placed on providers and in assistance to annuitants. The package has been developed to ensure that people approaching retirement will receive much greater support to get the best possible retirement income.

The noble Baroness, Lady Greengross, asked whether the Government would set up a forum to discuss the issues that have been raised in this debate. The noble Lord, Lord Kirkwood, in his usual colourful way, wanted me to be sure that there was cross-party working on this area. There is already a group similar to that described by the noble Baroness, which is alive to the issues raised. That is the aforementioned jointly led DWP-Treasury open market option review group. The group includes representatives from industry, consumer organisations, regulators and the Government and has met to discuss these issues since 2007. That has prompted a laugh from the noble Baroness, Lady Hollis. I have noted that.

The group has collaborated to deliver a number of key outcomes over the past five years, including the package of measures announced in March. It was responsible for the joint letter that was sent to the ILC on these matters earlier in the year. The OMO review group is now in the process of agreeing an evaluation strategy for this package. This will include assessing both the impact and success of the new measures but will also aim to consider the extent to which there are issues that remain to be addressed.

Of course, the decisions that someone can make at retirement will always be limited by what they have done and how much they have saved before retirement. That is why the Government have taken steps to encourage a culture of saving. The introduction of automatic enrolment will hopefully see between 6 million and 9 million people newly saving or saving more into a pension. The Government have also established NEST, which has been referred to, as a high-quality, low-cost pension scheme to support this. However, our work continues.

For example—the noble Baroness, Lady Hollis, spoke very passionately about this—people change jobs and will tend to leave small dormant pots behind them in their former employers’ schemes. The Government believe that as individuals move jobs their pension pots should follow them, as far as is possible. Consolidating pension pots helps to drive down administrative costs and boosts engagement with saving for retirement. The DWP is working with the pensions industry to develop an automatic transfer system for these small dormant pension pots. The aim is to develop an efficient and cost-effective system that minimises the risks to individuals and works to drive down charges.

This is probably an appropriate point at which to respond to the idea put forward by my noble friend Lord Patten about whether the Government would support an industry initiative to pool pensioners’ assets and increase purchasing powers. The Government welcome innovations to the industry that meet the needs of consumers, so my noble friend’s idea is certainly one that we would want to consider further.

The noble Baroness, Lady Hollis, and the noble Lord, Lord McKenzie, asked in relation to small pots whether legacy pots are yet in the scope of automatic transfer. They are not at this time, but we have not ruled out the option that they will be brought into scope in future. In addition, as of April 2012, up to two small personal pension pots of £2,000 or less can be taken as a lump sum by those aged 60 or over, even where people have other savings.

[Baroness Hollis of Heigham]

I was looking earlier today at the 2009 regulations, which may be what the noble Baroness is referring to. She may wish to follow this up by letter, but my understanding is that those pots have to have been earned in the previous three years. The problem with legacy pots is that they could have been earned 20 or 30 years before. I realise that this is a policy issue currently under discussion and that the noble Baroness will almost certainly wish to take advice from colleagues, but it would be hugely helpful to all of us if the Government could find a way to bring those legacy pots that are not covered by the 2009 changes into any future system, so that people do not find that some of their smaller pots remain inaccessible.

[Baroness Stowell of Beeston]

On a matter such as that, I will have to write to the noble Baroness.