Lord Freeman
Main Page: Lord Freeman (Conservative - Life peer)
Lord Freeman
To ask Her Majesty’s Government what is their assessment of the condition of private sector pension funds.
Lord Freeman (Con)
My Lords, I apologise for my sore throat, which I assure your Lordships will improve with the lubrication of my speech. I declare a historical interest in the subject as the chairman for 20 years—it seemed to go in a flash and has just concluded—of the UK pension fund of a company called Thales, a very large, state-owned French defence and electronics group that is very active in this country.
I am very grateful to my noble friend Lady Stedman-Scott for stepping in at the last minute for my noble friend Lady Buscombe, who is unavoidably detained. I pay tribute to the contributions of my noble friend Lady Buscombe, particularly over this past year, which has been very busy for her. I hope she will be back at work very quickly. I also thank those noble Lords who are taking the trouble to listen to and participate in this debate, particularly my noble friend Lady Altmann, who probably knows more about pension funds than all of us put together. I understand from her that she intends not only to speak but to maintain her very impressive contribution to your Lordships’ Chamber in the future.
The timing of this debate is fortunate because the Third Reading of the Financial Guidance and Claims Bill—its final stage—is planned for consideration in the Commons on 12 March. This debate is very relevant, perhaps not only to informing what will happen in the other place but, in particular, because it has prompted a number of noble Lords to consider the issue.
My starting point is the Green Paper of February 2017, Security and Sustainability in Defined Benefit Pension Schemes. It seems like yesterday that it was published but it is getting on for just over a year. That has triggered a much wider debate on the whole pensions industry, which has been largely well informed and very timely. About £1.5 trillion is held in defined benefit schemes and the average pension provided is £7,000 per annum. There are about 6,000 defined benefit schemes, with, I estimate, well over 11 million members. As a result of very low interest rates for a great number of years, the liabilities of these schemes have been driven up because of the low rate of return on investments. Inevitably, for defined benefit schemes, the obligations increase automatically. Therefore, there have to be substantial deficit contributions. In January 2017, the aggregate deficit of DB schemes was, I believe, of the order of £200 billion—a staggering sum.
The Pension Protection Fund is there as a modest backstop for default but, as noble Lords can see, it has a very daunting task in protecting those schemes. PricewaterhouseCoopers—I declare an interest as a former partner— have warned recently that the deficit could rise significantly. I understand that the government White Paper is due shortly—this year—to give the Pensions Regulator more power to take over DB schemes at risk. This is a most urgent matter. We await the White Paper and hope that it will steady matters. We hope that the Government can give us, in due course, a better indication of timing, if that is possible and appropriate. We await the White Paper.
I turn to defined contribution schemes—that is, where the pension depends on what is invested by the company sponsors and, of course, the enrolled employees. Royal Mail closed its defined benefits scheme to new members in 2008. Apparently, the Communication Workers Union saw that the old scheme was unsustainable. I understand that Royal Mail awaits secondary legislation to introduce a collective defined contribution scheme where independent trustees decide investment policy. I look forward to a White Paper examining such a proposal, the exact role of the Pensions Regulator and the nature of the closure of future accruals.
Turning to other issues briefly—I do not expect an answer on these from the Minister today—the use of the consumer price index, rather than the retail price index, has been discussed in the industry for better protection for pensioners and pensions. That debate continues, and I hope there will be some conclusions on it. Secondly, I turn to cold calling, which came out of pension freedoms—people’s freedom to release their pension pots. The trustees should shoulder more responsibility in dealing with this. It is one thing to provide the freedom; it is another for sensible decisions to be taken.
Automatic enrolment is excellent. It began in 2012 at 2%—shared equally between the employer and the employee—for defined benefit pension schemes and for employees earning more than £10,000 a year. By 2019, I understand that this will have gone up to 8%: 4% each for the employer and the employee. I welcome this very much.
Another issue is the possible merger of the regulators. The Department for Work and Pensions sponsors the Pensions Regulator, and the Financial Conduct Authority, under the Treasury, controls financial advisers. I wonder whether it would be sensible at some stage—it is not urgent—for those two organisations to be merged together.
Finally, still more regulation is to be enacted. The Financial Guidance and Claims Bill, as your Lordships will know, is in the Commons. I believe that Report and Third Reading will be on 12 March, in just a few days’ time. That will create the pensions financial guidance and advisory body, which combines—as your Lordships will know—the Money Advice Service and the Pensions Advisory Service. I hope it will be open for business soon—certainly this year. If possible, some indication of timing in the Minister’s response would be extremely helpful.
Finally, my future wishes—I think I am allowed those in the remaining minute—include a pensions dashboard so that people can look online at an individual’s pension position and an effective ban on cold calling. I mean effective; I know some members of my own constituency have suffered from cold calling, so I have first-hand experience, although I no longer represent that constituency. Finally, I wish for extra powers for the Pensions Regulator. I look forward very much to my fellow Peers participating in the debate and to the Minister winding up.