Pensions: Occupational Pensions

Lord Freeman Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord Freeman]

My Lords, I congratulate the noble Lord, Lord McFall, on securing this debate on a very important subject. I am bound to say that I agree with a great deal of what he has said, not only in the past but to your Lordships tonight. There is a wealth of experience from those who are to contribute to this debate. I see in his place the author of a very important report on the pensions industry, and we look forward to hearing the noble Lord, Lord Hutton.

My contribution comes from my experience as chairman of a very large pension fund, as referred to in the register. Although I speak for myself and not for my fellow trustees, my experience obviously comes from my business background and from looking at the impact of the problems of our pension fund, and indeed of other pension funds in the private sector, on the well-being of British industry.

The position is serious. The latest estimate of the actuarial deficit of British pension funds is of the order of £750 billion. It has got a lot worse in the past three to four months. For funds with an actuarial valuation date of 31 December, the position is that the stock market has fallen since the middle of the year, and due to quantitative easing, the yields on gilts and more generally have increased the liabilities because the discounting factor is much less than it would have been in the past. It is a very serious position for British industry.

As the noble Lord, Lord McFall, said, defined benefit schemes have been closed at an increasing rate. In the FTSE 100, not a single defined benefit scheme is open to future members—they are closed to new members. However, the deficits remain. The schemes may not be taking on new members but the historical legacy of the pension funds and the benefits—very generous benefits, in certain circumstances—have contributed to the serious deficits. I will quote only one example—not a FTSE 100 company. I believe that the Royal Mail is still in a 25-year recovery period to pay off the existing deficit. The introduction of mandatory indexing of the pensions of those still left in defined benefit schemes is understandable, but I should point out, as the Minister well knows, that indexing is capped in only one country—in Holland. That, of course, assists the viability of an existing pension fund.

From my personal experience I would like to congratulate the diligence, efficiency and helpfulness of the regulator, who has to look after the Pension Protection Fund. He is looking over his shoulder to make sure that not too many burdens are placed on that fund. However, the regulator’s willingness to consider longer recovery periods, and his understanding of the current problems of some pension funds, is to be applauded.

I have two concerns and will put two points to the Minister. If he does not have time to answer them in his winding-up speech, perhaps he will be kind enough to write to me. First, I echo what the noble Lord, Lord McFall, touched on: we need to increase the awareness of employees of the likely shortfall of proper provision in retirement. We need an awareness campaign, which I think only the Government, the Department for Work and Pensions, can lead. Clearly the regulator cannot do it alone. We need to appreciate that if you have a personal pension plan in addition to your defined benefit or defined contribution scheme, that may not provide enough in later life. For example, if in addition to your scheme, you save £100,000 over a lifetime of working, when it comes to drawing a pension, that may mean only £3,000 per annum. That gives you an example of what meagre addition might be entailed. We need an awareness campaign and, perhaps, even to relax the draw-down provisions in legislation to permit people to draw more money.

Finally—this is a rather radical proposal—we need to revisit trustee governance. That is an immensely complicated subject: the provision of pension funds and the advice that is given. In my experience, even with the training now provided in many pension funds for their trustees, it is becoming too complicated and we may need a new model, which is to permit trusts to wholly contract out advice. I look forward to hearing the contributions of more experienced Members than I around your Lordships' House.