Pensions: Reforms

Lord German Excerpts

Thursday 18th June 2015 Lords Chamber

[Lord German (LD)]

My Lords, I pay tribute to the noble Lord, Lord Flight, for introducing this debate. He is well known for his commitment to savings. Reflecting on the comments by the noble Lord, Lord Hutton, I must say this is unlikely to be a debate in which there will be a great deal of controversy, but it is a debate in which there will be some need and desire to predict what we might do in the future and to take that step forward.

I congratulate the new Pensions Minister, who has a long and tremendous record as a campaigner and advocate and latterly as the champion for older people. I shall start by quoting her words in the Sunday Times on 31 May 2015. She said:

“I also want to continue the pensions revolution that my predecessor, Steve Webb, so ambitiously started ... we have seen some important changes that will alter the pensions landscape for generations to come”.

I hope she will not mind if I spend a few moments paying tribute to her predecessor Steve Webb who, I understand, was the longest-serving Pensions Minister, certainly in my lifetime—perhaps someone will correct that, but I think that is the case. He recognised that society owes a debt of gratitude to older people for the contribution they have made to making our country a better place through their hard work during their lives. He brought in a pensions revolution addressing some key issues by the legislation he oversaw.

The three factors in that revolution were: preparing people for their retirement; getting people to save more; and making adequate state pension provision—that is so important for lower-income workers and women who depend so much on the state pension. It is worth recognising that the level of the state pension moved, in purchasing terms, from the lowest it had been for almost 30 years in 2008 to the new promised single state pension, which is likely to be more than £150 a week and will be supported by the triple lock. As the noble Lord, Lord Hutton, said, this ambition was shared across parties, but the big changes occurred under the previous Government on Steve Webb’s watch. We on these Benches pay tribute to his knowledge, understanding and drive.

Now we move on—it is time for implementation and to learn lessons, changing and adapting as we move forward putting these ideas and this legislation into practice. I take the point about a savings revolution being needed, so first among all these must be raising awareness and understanding, which the noble Lord, Lord Flight, mentioned. Financial education should start in school. Saving for a pension is not something which crosses your mind when you are getting that all-important first job, but it is important that it does. Later in life, understanding how to make your savings work best for you is a critical judgment, so there is plenty of work for the new Minister, and we on these Benches wish her well with the challenge.

I want to touch on some of the issues that the Government now face. I recognise that in some ways I will be reiterating some of the contributions that have already been made, but perhaps I will be treating them in a slightly different way. On the triple lock, the Government like the concept and have agreed to keep it for the full five-year term of this Parliament. If it is good for the foreseeable future, why not enshrine its use in legislation so that it would take another Act of Parliament to change it? We on these Benches believe that is right, just and a fair answer to raising the state pension. It is a true buffer against a Government making real-terms reductions for a group of our people who can make no alternative arrangements if and when that happens. That is why we would not just keep it but legislate for it.

Auto-enrolment has been a big success so far in the number of people who have been brought into saving. Its rollout to deal with inertia in pension saving has been a success story, but, as the noble Lord, Lord Hutton, said, it has some challenges ahead. With millions of new pension savers now enrolled in a pension scheme, the most encouraging feature so far has been the small number who have voluntarily withdrawn from pension saving. But the most challenging group of companies and people to be auto-enrolled is yet to come, as the self-employed and micro-businesses are brought within the ambit of the legislation. In her response, can the Minister tell us in what ways the Government intend to help this group of people with the bureaucracy that they will face? Will the Government be on hand to help this most difficult segment of our working population into saving?

So far, we have seen no real evidence of companies reducing pay in order to make the employer contributions that the legislation requires. However, as the levels of contribution have to be ramped up, and as wage increases so far have been fairly low, it will take some time to see whether this is happening on any scale and whether there will be a reduction in pay awards in order to make those employer contributions. Yesterday we were told that wage increases are now running at 2.7%, so there is beginning to be a greater possibility that some of that increase may be foregone in order to meet the costs of the employer contributions. We need to be wise to that fact and look out for it.

This issue is closely tied to the increase in contribution levels envisaged in the legislation, and to where we need to go beyond the current legislation. As others have said in this debate, people need to save more for their pensions, and companies will have to match that increase in their contributions. Perhaps the Minister can tell the House what studies of these effects are currently under way and when meaningful results will become available.

A further issue is that of exclusion from saving for lower-paid workers. As the thresholds have risen —now in the £10,000 range, with further rises promised—there is a danger that the earnings trigger will exclude a number of workers from saving who would benefit from being in a pension scheme. Is the Minister contemplating lowering the earnings trigger, so that it brings more lower-paid people into pensions saving?

During the coming months and years, we on these Benches will want to examine tax exemptions on pension contributions. In particular, we will want to consider whether there should be a single rate of tax relief on pension savings—which the noble Lord, Lord Flight, alluded to. We do not want simply to make changes that might create cliff-edges in the way that government investment might work. For example, by simply reducing the tax relief on those earning more than £150,000, you create a cliff-edge immediately.

The issue of charges and fees on pension savings has already been raised in Questions in this Session. We on these Benches will want to examine the Government’s intentions in this matter—not just fee and charge caps but also transparency. In the savings journey travelled between the pension saver and the pension investor, and then back again as savings are withdrawn, there are many tiers of influence, each with the potential to make a charge to the next tier. Savers deserve to know what is happening to their money in each of these tiers, and many of the charges are hidden and not known, so transparency and fee caps will be very much on the agenda for my noble friends on these Benches.

The defined ambition schemes introduced in the last Parliament, providing more certainty of pension outcome than defined contribution schemes, were referred to by the noble Lord, Lord Hutton. There needs to be a genuine debate and examination of the way in which these schemes can be progressed and the take-up of the principle that is outlined within them.

The early evidence on pensions freedom should be available to us fairly soon. We are told that 60,000 people have now withdrawn some of their pension pots, so some early evidence will be available on how the work of this scheme has been for them, particularly their relationship with the Pension Wise scheme. The particular evidence that we want to see includes the inclusion of housing wealth in the assessment, which was, again, something raised by the noble Lord, Lord Flight. With housing wealth being sometimes 10 times the average pension pot of an individual, it is an important factor. We need to assess how important a factor that has been in people’s decision-making about their new freedom and whether that has been fully taken on board in the advice and guidance given by both financial advisers and Pension Wise.

Secondly, has appropriate consideration been taken of making appropriate savings for future retirement? We will also want to examine in depth the effectiveness of the second line of defence recently put in place by the FCA. We need to know what the pensions industry is doing to adapt to all of these changes. It has to adapt because more flexible approaches are demanded by savers as they seek to draw down their money. There is a whole host of new ways in which people take their retirement, and the circumstances in which they do this will also vary. The use of these flexibilities will increase, not decrease.

We are in a new world. Retirement dates are not fixed and people will make choices as they see their future in differing ways. It may be that we will need to consider a more regulated market in this decumulation phase in order properly to protect consumers’ interests. We want to see the evidence of the market and what it is doing. Is it offering appropriate new financial products? We need to examine the early evidence of what the market is offering, and deal with restrictions placed by some companies on people being able to access their money. Also, can and should NEST step in where there are gaps in the market offering?

The Government may have some money in hand in order to support some of these matters because they expect to get tax receipts as the pension freedoms kick in. Tax paid at the marginal rate on the average £17,000 draw-down, reduced to tax on under £12,000 after the 25% tax-free sum is deducted, will not meet the extra £12 billion-worth savings in welfare that the Government are looking for, so they should put some of this extra tax into supporting a better savings culture in our country—an enhanced savings strategy. Noble Lords may wish to consider how that is to be determined during the course of this Parliament, but it is, as both of the previous contributors have said, a significant factor in the way that we need to move forward.

This has been a bit of a canter around the pensions landscape; each item is worthy of a debate on its own. To return to my opening remarks, the legislative foundations are in place, but there is a need to examine the many points of implementation. We look forward to working with the Minister on these matters, and where necessary challenging the Government on their approach. But that is for the future. We wish the Minister well today. I am sure that she recognises the challenges ahead of her. We look forward to her maiden speech and to working with her in the coming years.