Pensions: Occupational Pensions

Lord Hutton of Furness Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord Hutton of Furness]

My Lords, probably for as long as most of us in this House can remember, successive Governments in the United Kingdom have been wrestling with three unpalatable facts about occupational pensions. First, fewer and fewer people are saving for their retirement. When they are saving, they are almost certainly not saving enough to cover the extra years for which we are living. For perfectly good and understandable reasons, the previous Labour Government, of whom I was proud to be a member, introduced a series of reforms to the state basic pension which have served to make the system much more complicated and reliant on means-tested benefits. The consequence is that we might have done some damage to the principle of personal responsibility for saving.

So we have three very difficult problems to wrestle with. I endorse all the comments and concerns of my noble friend Lord McFall and many of those introduced to our debate by the noble Lord, Lord Freeman. If those are the three problems that we are wrestling with, I am glad to say that successive Governments have found within themselves the ability to reach a reasonable consensus about how we deal with them. The noble Lord, Lord Turner, did the country a huge favour in 2005 with his report which the previous Government took forward and the current Government are now taking forward in a sensible fashion.

My advice to the Minister is not to tinker with the framework. That has been one of the enduring problems with pension law and pension law reform; we have never allowed the dust to settle on any of the reforms that we have introduced. That has created the problem that both noble Lords have referred to: the lack of confidence and trust in our pensions saving system.

It is too early to judge whether these reforms are likely to be as successful as we all in this House and outside want them to be. We are heading for a very difficult place. It cannot be right that the price that our society pays for increasing longevity—rising life expectancy, which is a great prize in our community—is increasing levels of intolerable poverty among that rapidly growing age group. We have it in our grasp, with the reforms that the noble Lord, Lord Turner, outlined a few years ago, to prevent that outcome, but we have to guard against the law of unintended consequences. It was perfectly right to set the contribution levels for NEST as they were. It is a very big change for many employers, particularly smaller employers, now to have to make pension contributions, and we must guard against the consequences in our labour market of going too far and too fast. I think that we all understand that. We must be mindful that NEST, although a step in the right direction, could have negative consequences for existing saving products, particularly in the defined contribution sector.

There is a way out of this conundrum. Living longer does not have to mean the end of the world as we know it. On occupational pensions, I think that we have a reasonable direction of travel. I support what Ministers are trying to do with the state pension, which is to make it more generous and more universally available to get us out of this very difficult space we are in with the current means-tested rules around pension credit. If we can find a way to ensure that there is a decent platform on which people can save without worrying about whether it is in their interests or not to save—whether any of those extra savings will be clawed back through lost pension credit and so on—we will have done the country a big favour. We will have reinforced the principle of personal responsibility for saving, with which we must not interfere or blur. If we do that, we will leave future generations with bills that I very much doubt they will be able to pay.

Both noble Lords have basically raised all the points that I wanted to raise. That will not stop me from raising them in my own terms. We face two fundamental problems right now, given that, sadly, defined benefit schemes in the private sector are now clearly on the way out and are not coming back. That is a consequence of a number of factors of which we in this place and elsewhere will be very well aware. It means that defined contribution schemes will have to do most of the heavy lifting when it comes to breaking through into the sunnier uplands where more people are saving more for their retirement, allowing those savings to stretch for the extra years for which we know that people are living. We have to find a way through that.

The Pensions Regulator issued an important consultation document last year about reform of regulation for DC schemes. Like other noble Lords, I hope, I look forward to the outcome of the consultation. The regulator has identified many of the important issues to do with improvements in governance and oversight in DC schemes, which will not go away. We have to find a better way through to ensure that DC schemes produce better results for those who are saving in them than they are currently. I am not saying that regulation is the only way through; we must be mindful of the consequences of overregulation, but the Pensions Regulator has identified issues which, I hope, will result in more concrete proposals.

The second issue, which is of much greater concern, is what Europe is planning to do on defined benefit schemes. It is impossible to exaggerate—although we all exaggerate as a profession, as politicians—the danger that lurks behind the proposals from the European Commission. They would mean the end of defined benefit in the private sector. I want defined benefit schemes to continue in the public sector, and I believe that there is a way to do that, provided that reforms are made, but we should not sit back and welcome the demise of DB in the private sector, because that is what will happen if we move to Basel III-type insolvency regulatory frameworks for DB. That is the wrong regulatory tool. I understand why the European Commission wants to guard against the dangers and hazards, but good intentions do not always make good regulation. The Government are right to resist those proposals very strongly, because they would be a step backwards.