Pensions Bill

Baroness Sherlock Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for that introduction. This Bill builds on the foundations laid by the Labour Government and, for that reason, we support many of its provisions. I hope that with the Minister we can find some consensus around the major direction of travel. I also hope that he will work with me in seeing what we can do during the passage of the Bill to make pensions interesting. I do not promise that my contribution today will advance that cause greatly, but it falls to all of us, if we want to raise the level of saving in this country, to try to raise the level of interest in it as well. So far, when anyone asks me what I am working on and I tell them that it is the Pensions Bill, I find that they have looked at their watch before I finish the sentence. I look forward to all the speeches, including the maiden speech, and to seeing what we can do to advance “Project Interesting”.

Moving firmly away from that agenda, I may say that one reason why we agree with the idea of a single-tier pension is that it is very much the direction of travel that the previous Labour Government took. However, we have some significant questions about the way in which this Government are doing it and about the decision to go with what is known in the trade as a hard/fast transition. We agree, too, with the need to address the way the state pension age is raised, but we have different views on the best way to achieve consensus around that.

The project of overhauling both state and private pension provision is of crucial importance to the future of our country. We on these Benches will do all that we can to improve this Bill to ensure that it is fit for the job ahead. But that job is a tough one, made harder by the climate of mistrust which obtains at present—mistrust of the industry, which we must all address, and, I regret to say, mistrust of government. People can become cynical, and sometimes have, in the welfare area, when something presented as a reform turns out all too often to be really just a cut. It is popularly assumed that with financial services products the bad news and exclusions are buried in the small print. The same may be true here, of course. Parliament does not yet have the small print, or the regulations, as we call them, but I hope that the Minister can tell us how soon we can get them. But we must maintain an appropriate degree of scepticism until we see what the detail is. That is particularly important in the light of the 13th report of the Delegated Powers and Regulatory Reform Committee, to which the Minister referred, which has a great deal to say about how this Bill uses regulations. So I look forward very much to the amendments that will come forward from the Government shortly.

Before moving on to the detail, I, too, would like to say a few words about the context of this Bill and background. When Labour came to office in 1997, we inherited two challenges in relation to pensions from the previous Conservative Government. First, there were disgracefully high levels of pensioner poverty, much of it among generations who worked hard to rebuild Britain after the last war. The second problem was the degree of mistrust in the pensions industry, some of it caused by the mis-selling scandals of the 1980s and 1990s. Labour addressed both challenges head on. We introduced a minimum income guarantee for pensioners, lifting incomes from £68.80 per week in 1997 to more than £132 by 2010. Under Labour, pensioner poverty fell to the lowest level for 30 years. We pegged pensions to increase in line with earnings and brought in pension savings credit to tackle the 100% marginal deduction rate facing many savers. We brought low earners and carers into the state second pension and introduced legislation for auto-enrolment. I pay tribute to the Government for taking that forward and implementing it. Crucially, we reduced the years of national insurance contributions required for a full state pension from 44 years to 30 years for men and from 39 years to 30 years for women. We also set up the Turner commission, to which the Minister referred. I, too, add my congratulations to the noble Lord, Lord Turner, and my noble friend Lady Drake on the excellent work that they did.

Labour supports the creation of a simple state pension system, and we are committed to the goal of encouraging people to save into private pensions in which they can have confidence. But we believe there are three tests that this Bill must pass if it is to achieve those objectives. First, is it fair to all those who have contributed? Secondly, is it sustainable in the long term? Thirdly, does it create a decent standard of living for all and, within that, will it encourage the private pensions saving that the Government are banking on to ensure decent retirement income? We will apply those three tests to the Bill as we scrutinise it over the weeks ahead.

I turn briefly to each part of the Bill. The biggest challenge to understanding the reforms to state pension provision in Part 1 is figuring out who are the winners and losers. The Minister has graciously allowed us access to his officials so we hope to dig down into that before Committee. However, I wish to lay out some big questions, on which I hope he can come back. First, as the Bill goes through the House, the Minister will need to confirm the precise level at which the single-tier pension will be introduced. The reason for that is twofold. First, the Work and Pensions Select Committee recommended that, given the importance of the principle that the STP is above the level of the pension credit guarantee, the level should be on the face of the Bill. Furthermore, paragraph 3 of the DPRRC report said that the Bill is drawn in a way which means that,

“for the first time, the rate of the state pension will be specified only in subordinate legislation”.

Given that, the Minister needs to tell the House what the level of the STP will be.

Secondly, there is the issue of those 700,000 women born between 1951 and 1953 who will have to wait longer to retire but will not get the new single-tier pension, unlike men of the same age. While a line has to be drawn somewhere, I think the House will want to reflect carefully before concluding that, after a reform of this scale, a twin brother and sister should find themselves in such markedly different positions.

Thirdly, some people who are married or widowed will receive a lower pension because the derived entitlements to which the Minister referred have been taken away. In other words, they would have expected to get a higher pension based on their husband’s or wife’s contributions, and they will now not be able to do so. Although state pension rules of course change over time, this is a long-standing provision around which some couples have planned their retirement income. The Work and Pensions Select Committee recommended that women within 15 years of state pension age should retain that right, so I would be very interested to know why the Government decided not to accept that advice.

Fourthly, the move from 30 to 35 qualifying years could mean that a number of people, especially women and the low paid, are less likely to get a full state pension, and someone with 9.5 years of national insurance contributions will get not a penny in state pension. The House will want to understand more about the rationale for that and the consequences of that shift which reverses a significant Labour reform which reduced the number of years to 30. I would also be grateful if the Minister could confirm for the record what the safety net will be for those who do not have 10 years of contributions.

Then we have the issue of the abolition of the savings credit element of pension credit. We are concerned that that will penalise those who have savings and could discourage saving in future. We will want to understand who will lose out and by how much and whether there is an issue about passported benefits which are currently attached to that. I hope that the Minister can tell us more about that either today or as we go through Committee.

Finally in Part 1, we will want to examine the impact on both public and private sector pension schemes of the changes relating to the ending of contracting out. In addition, when these reforms are implemented, national insurance contributions for contracted out workers will rise, as will those for their employers. The Bill allows private pension schemes to amend their terms to take account of the increase in employers’ contributions but public sector schemes cannot do that, presumably to avoid destabilising the public sector pension settlements. That leaves an unfunded cost on the shoulders of public sector employers. Can the Minister tell the House whether the Government have committed to meeting that cost for those public sector employers, perhaps from the £5.5 billion windfall the Treasury will get as a result of increased national insurance contributions?

In Part 2 of the Bill on pensionable age, the major issue relates to the proposal to have regular reviews of pensionable age, at least every six years. We agree with the need for periodic review, but the Minister is right to say that everything around this needs to be consensual. We agree with the principle but we think that, done badly, this could be very bad and could remove certainty for future pensioners and damage trust in the system, undermining incentives to save for the future. It is vital that the way the state pension age is reviewed is not just fair, but seen to be fair, ideally delivering cross-party consensual support for reforms in which the public can then have confidence. We believe that the best way to do that is for the reviews to be overseen by an independent cross-party panel, including a Cross-Bench Member of this House, and for it to have a broad remit. It should be tasked to consider not just the latest trends in life expectancy and the long-range public expenditure issues but also, for example, differences in life expectancy for different socioeconomic groups and the degree to which health and ageing go hand in hand.

I will return to Part 3 on assessed income periods when we get to Committee.

Part 4 is very interesting, proposing, as it does, a complete overhaul of bereavement support. As I understand it, bereaved people under 45 without children will benefit, receiving a flat-rate grant for one year for the first time, but I think that bereaved parents with children will be the losers. At the moment, they can claim widowed parent’s allowance for as long as they claim child benefit, although in fact the average length of claim is just five years. However, in future their support will last for only a year, and that is a major shift. We have received strong representations from charities which work with families with children, particularly bereaved families, and which are worried about the impact of this reform on bereaved parents. It would be helpful if the Minister could explain the Government’s rationale behind this. Although there may be more investment in the short term, I understand that over the long term the measure will save money, or at least be neutral, and effectively it will therefore redistribute money from parents with children who lose a partner to people who do not have children. Understanding why that choice was made would be helpful.

We are also very concerned about the conditionality requirements. The Minister mentioned that society has changed and that people are expected to work. They are, but early widowhood is not just an ordinary time for someone to go out to work. When families lose one parent, the effect on the other parent can be very severe. I hope that the Minister will think again about the conditionality requirements so that a person will not be expected to go out to work just six months after losing a partner. That would be very difficult.

Finally, I turn to Part 5 on private pensions. The Government have explained to us the numbers coming into auto-enrolment. If we think about this, it is clear that the state owes a very serious duty of care to those who have auto-enrolled into the pension system. If we are going to ask people, at a time of wage stagnation and a cost-of-living crisis, to forgo spending on themselves and their family today in order to invest for the future, they absolutely must be able to trust their pension providers.

This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing.

We propose a number of ways in which the Bill could address the challenge of building a private pension sector that people can trust. The first is to improve pension schemes. We will argue for the full disclosure of all costs and charges, including the costs extracted by fund managers, and stronger trustee-based governance of savers’ pension money, including the extension of fiduciary duties to all intermediaries who handle pension savings and policies, with the aim of encouraging bigger, better, stronger, well resourced and expert pension schemes which are more able to provide value for money for savers.

The second proposal is better management of pension pots when people move jobs. We absolutely agree about the need to make sure that people do not lose track of pension pots when they move to a new job, but we absolutely disagree with the way that the Government have decided to do this. The Government have chosen “pot follows member”, as it is known in the trade, but that raises some really serious questions. The most important are probably, first, the potential for customer detriment if, for example, the new employer’s pension scheme is worse than the one that the person is leaving, and, secondly, the real concerns about administrative complexity and the cost of this way of doing things. We will need to drill down to that in Committee.

Our preferred solution would be for the pot, by default, to move to an aggregator such as NEST, or one of its competitors, rather than to the new employer’s scheme. That is not just a Labour position; it is backed by many key experts, as we will come back to in Committee. In fact, the DWP went out to consultation on this and, even though a majority of respondents preferred the aggregator model, the Government chose to plough on with “pot follows member” instead. I would be very interested to understand why the Government are so set on this mistaken path. I genuinely cannot see why they are so set on it. None the less, we shall seek to improve the Bill in Committee by bringing the aggregator model firmly into play.

Thirdly, pension charges have to be reasonable if people are to have confidence to invest their hard-earned money. I am sorry to say that it has taken the Government a long time to wake up to this issue. More than one year ago, my right honourable friend Ed Miliband raised the issue of pension charges and Ministers accused him of scaremongering. They said that no action was needed because the market was “vibrant”. In another place, the Pensions Minister ignored the evidence presented by experts. He stonewalled the determined efforts of my honourable friend Gregg McClymont as the Bill went through elsewhere to try to do something about pension charges. I am delighted to say that Ministers have now acknowledged that there is an issue and we are promised a consultation and a cap on charges. I absolutely welcome this change of heart. As I am sure the right reverend Prelate the Bishop of Derby will confirm, there is more rejoicing in heaven for the one sinner who has repented than there is for the 99 who have always been there. I welcome the Minister and the Government to the happy place which Labour has happily occupied for some time. However, we will need to drill down on this in Committee. We will need to understand exactly where the Government are going on this, the right level for the cap, whether the cap will include the full range of charges and deductions, and how soon action will be taken.

Finally, there is the means by which people turn their pension pot into an income for retirement—decumulation, in the jargon. Most people use their pension pot to buy an annuity. We are the annuity capital of the world. More than half of all annuities are sold in the UK but the annuity market has some serious issues and is badly in need of reform. Performance is hugely variable, charges are often unreasonably high and the margins are such as to raise serious questions about whether they are value for money for savers. We will seek to amend the Bill in Committee and on Report to ensure that people approaching retirement receive good quality, independent advice, something that is already best practice and available in many of the larger schemes.

In conclusion, there is much to do to improve the Bill but we very much welcome the direction of travel. At heart, pensions are about trust; trust that the system is fair and sustainable, trust for savers that their contributions are safe, and trust that the market is working fairly and in the interest of savers. People in Britain must trust us to ensure that, having contributed to pensions for their whole life, they will have the income to afford a decent standard of living and to enjoy their later years. We hope that the Minister will work with us in Committee and on Report to provide the House with all the information that it needs and help us all to make the Bill the best that it can be. That is what the pensioners of tomorrow expect and it is what they deserve.

--- Later in debate ---

[Baroness Dean of Thornton-le-Fylde (Lab)]

My Lords, as a number of fellow Peers have said, this is a substantial and important Bill. It deals with the state pension fund, but it also covers elements of private pension funds. After buying their home, most people’s biggest investment in their life is their pension scheme. The Bill will be important for the quality of life of the whole nation at the end of their working life, so it is important that we get it right. We have a chance to get it right because it is very much cross-party; the single-tier pension has general consensus. Compliments have been passed. The Minister was generous enough to recognise the work done by my noble friends Lady Drake and Lord Hutton.

So the Bill has a very good start with a lot of cross-party support. I would like to be the first to sign up for the campaign of my noble friend Lady Sherlock to make pensions interesting. They are very important but, unfortunately, when you mention pensions, people’s eyes go to the ceiling—until they find out just what is wrong with their pension. Then, their interest is alerted but it is too late.

What we are considering today is important, but the Bill is inferior in some respects to the Green Paper which the Government issued. The Green Paper said that the changes would be cost-neutral, but the Institute for Fiscal Studies stated that,

“these proposals imply a cut in pension entitlement for most people in the long run”.

I would welcome the Minister’s comments on that when he responds.

The Bill covers a whole range of issues, all of them in their individual ways important, but I shall concentrate my remarks on its impact on women. There is no doubt that the change to a single-tier pension is one of the biggest and best changes to state pensions for women in this country. In my view, the women who will benefit from it do not want to get those improvements on the back of the women whom the Bill does not treat fairly in the transitional stage. That is where my real concerns arise. I hope that we will propose to amend the Bill to deal with those anomalies.

It is established and generally accepted that women make up by far the largest number of those on pensions living in poverty. The number is substantially different; far more women than men are in poverty on pensions. The Bill does not change that for a whole group of women. It is also true that women pensioners have a lower income than men. The Bill does not change that in the transitional period. We must deal with those issues.

For instance, currently, a woman who has been married or in a civil partnership may be able to use their partner’s record to receive a state pension or increase the amount they receive of their own accord. There are some transitional protections in the Bill, but they do not cover everyone. For instance, in the years ahead, some would reasonably expect to receive either a married woman’s pension or a full basic pension, if they were widowed, or would not have had the time before retirement age to make up the contributions. Are the Government going to change the Bill to protect those people?

The Government said that in 2020, there will be between 20,000 and 40,000 married and widowed individuals affected by a pensions loss. I find that unacceptable. Given the magnitude of what we are dealing with, we could amend the Bill to deal with that. I am joined in that view by the Work and Pensions Select Committee in another place. The committee has asked the Government to conclude a solution by allowing individuals within 15 years of state pension age to be allowed to retain that right. That would be a transitional measure and, in the nature of things, would not be hugely expensive. Will the Government accept the Select Committee’s recommendations?

Another group of women has been mentioned in this debate several times: those born between April 1951 and April 1953. Those women feel that they are being subjected to a double disadvantage. First, their state pension retirement age will increase. That is an issue that would have faced any Government. Any Government would have had the unpalatable task of changing the retirement age; I fully accept that. However, this group of women will face a later retirement age but will not go on to the single-tier pension, as I understand it. Will amendments be brought forward to rectify that situation?

Another issue has come up several times. Because an element in the Bill deals with private pensions, I feel able to raise it. That is the issue of part-time workers. We had a long debate on the previous Pensions Bill about the fact that although part-time workers who do not earn up to the national insurance level cannot join a pension scheme, they may have two jobs which, put together, would take them through that barrier and they would qualify for a pension. Those in that category are predominantly women. It is grossly unfair that we are having a major pensions change in this country which, I think, will put it on the right path for the future—although I think that we will have to make further changes later—without dealing with that issue.

Indeed, the Department for Work and Pensions showed in its own analysis that in 2012-13, some 50,000 employees fell into that category of having more than one part-time job but not being able to have a pension cover because both jobs, or three or whatever it was, fell below that level. Of that 50,000 people, again, 40,000 were women. In a Bill which marks a substantial and improved change on pensions for women in this country, there are those anomalies which I believe we should deal with. It will be our responsibility to try and do that. They are all transitional issues, not issues which will last for ever and a day, and we should be about to deal with them in the nature of things.

There are other aspects of the Bill which obviously cause concern. On the bereavement provision, it is a bit cack-handed to withdraw the pension on the first anniversary of the death of the spouse. After the bereavement of your spouse, the first year is always the most difficult. We need to consider what it would be like to be reminded of it. There are also the pension charges. I congratulate the Government on their announcement this week that they are looking at those. It may be that we will have something to discuss on pension charges during consideration of this Bill. I look forward to taking part in debates on this Bill which, if we get it right, will be a landmark for British citizens.

[Baroness Sherlock]

Before my noble friend rises, my Lords, I should say that I realised after I sat down from speaking earlier, with something of a sinking heart, that I had forgotten to draw the attention of the House to my interests in the register. I am the senior independent director of the Financial Ombudsman Service—a remunerated position. In an unremunerated position, I also chair a charity which has employees in pension schemes that could be affected by the Bill. I apologise to the House both for that omission and for interrupting the debate now to have to rectify it.