Pensions: Reforms

Lord Flight Excerpts

Thursday 18th June 2015 Lords Chamber

Moved by

[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.

--- Later in debate ---

[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.

Motion agreed.