Pensions: Reforms

Lord Hutton of Furness Excerpts

Thursday 18th June 2015 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, it is an enormous pleasure for me to follow the noble Lord, Lord Flight, of Arundel. He brings tremendous expertise and knowledge to our proceedings on pensions and in a sense, although I hate to say this, has made my speech pretty well redundant because I want to echo everything that he said. He made some very important points but that will obviously not stop me, as a former politician, making my own speech in my own way. I hope to avoid repeating all the things that he said but he has done the House a great service. I say that because pensions and retirement saving will be one of the most important issues facing Parliament for the next few years, and the reasons why are self-evident.

Britain is changing; we are getting older and the demographic forces at work will literally change the face of our society in our own lifetime. It is therefore absolutely obvious—I think it has been to us all for a long time—that if we are to manage the effects of that change sensibly and avoid the calamity of the next generation of pensioners finding themselves living a life of poverty, which has been the curse of just about every previous generation of pensioners, then we have to take matters into our own hands. In simple terms this primarily means that, as individuals, we all have to accept more direct personal responsibility for ensuring that we have adequate means in our retirement years to sustain and afford the lifestyle that we want.

This is also a critical point in understanding the reforms of the last 10 years and making sure that they work because, as the noble Lord, Lord Flight, said, we have the best chance of managing this demographic change effectively if we can try to maintain and sustain the consensus about retirement savings and pensions that has existed since the noble Lord, Lord Turner, and his fellow commissioners produced their ground-breaking report in 2005. Sometimes in politics, consensus is not a good thing and you need someone to stand up and say something difficult to change things. That in fact was what the noble Lord and his fellow commissioners did. In the process of producing their report, they established a new common ground between all the main parties. This is one area where we should all strive to sustain that consensus—and, to their credit, the previous Government did that. They took forward auto-enrolment, which is a fundamental pillar of encouraging greater personal financial responsibility for retirement, and implemented those significant reforms. They also took forward a very necessary change to the social security state pension in the United Kingdom. The new single-tier flat-rate pension is an excellent idea. There have been and there probably will continue to be disagreements about aspects and details of those policies. I do not think, however, that there is anyone left standing who does not think that those reforms are some of the essential things that we need to do to encourage more people to save more for their retirement. That is the holy grail that we now have to pursue.

The last thing any of us should want to encourage is a return to the decades of disagreement and division that were the hallmarks of the previous 20 years of pension policy. It will not help us build for the long term, and that is fundamental if we are to encourage more people to save more for their retirement years. A constant chop and change will, by definition, undermine any policy designed to encourage long-term saving. We have to sustain the consensus. We have to maintain it; we have to work at it if Britain is to be a nation of savers. As the noble Lord said, we have an awfully long way to go if we want to be a nation of savers. Our savings rate at the moment is a matter of dispute among economists as to how to best calculate it, but it is probably about 6%. Once automatic enrolment and the reforms that the Turner commission recommended have matured fully, we know that people will be saving around 8% or 9% in the defined contribution schemes in their workplaces. The simple truth is that that will not be enough. It is not going to give people sufficient retirement income for the extra decade or more that they can now expect to live.

I will talk primarily about workplace savings and pensions because these are absolutely fundamental. As I said, we are going to have to take more personal responsibility for our income in retirement, and that is clearly the logic behind the reforms to the basic state pension. The fundamental question that is inevitably going to arise during the course of this Parliament, particularly when we get to 2017-18, when automatic enrolment has matured, is “Are people saving enough?”. It has been a success so far: we have 2 million new people saving in workplace retirement accounts, and opt-out rates have been very low. However, of course people are contributing only about 1% of their salaries today. I do not think many people will notice that coming out of their pay packets. When that starts to creep up to 3% or 4%, people are definitely going to know. Will that increase the rate at which people opt out of these new savings plans? Probably. I think we can expect the opt-out rates to start rising. Therefore, there is going to be a pretty obvious moment in this Parliament when we are going to have to stop and ask ourselves, “Will the current course be sufficient to equip people with the income they need for their retirement?”. I do not think it will be. The question is not “Do we have to look at this issue again?” but “When will we have to look at this again?”. Of course, there are two aspects of this equation—how much people are putting in, and how many are opting out. At some point, we will have to look at both issues.

I welcome the Minister to her place on the Front Bench. As the noble Lord, Lord Flight, said, she is a lady of tremendous status and knowledge of pensions, and we look forward to her time as Pensions Minister with great excitement. To encourage her a little bit, I do not think she needs to start digging around in the undergrowth just yet. It will be important to see what happens in 2017-18, when we get to the point where people are contributing the maximum amount envisaged under the legislation. That moment is going to come during this Parliament. There are some cases of public policy of which we can say, “We tried to encourage people, but they did not take up our incentives. They just went on in the way that they were doing before”. We could do that on this occasion. We could shrug our shoulders and say, “It is all too difficult. We have had 10 years of legislation. We tried to encourage people to save, but they did not”. I do not think we can ignore any evidence that is emerging that people are not saving, or that their savings are not sufficient. We are going to have to do something.

Obviously the question then is “What are we going to do?”, because making people save—removing the right to opt out—is a very big policy step to take. So, too, would be increasing the contributions into these pension plans because, of course, legislation restricts the amount that employers can contribute to 3%. That is a very big step to take. If we get anywhere near that, I would strongly suggest to the Minister that she ought to have another look at the Work and Pensions Committee’s report from the last Parliament and its recommendation that the Government set up an independent pensions commission. I was the Secretary of State who decided not to do that in 2005, so I am holding my hands up and saying, “I am guilty”, but I think that we now need to have another look at this, at the 10-year mark since the noble Lord, Lord Turner, produced his report. We are at this critical juncture, and we may well face some important decisions in the next couple of years about going further, and probably faster, in encouraging more people to save. If we are to take the noble Lord’s advice and maintain the consensus, as I think we should, we must also ask: who and how? What is the best way in which to maintain that cross-party consensus? Would it be best served by the Minister coming to this House and making an announcement, or by bringing together people with knowledge and experience of the industry and the changes that are taking place in society and asking them to report to Parliament on the next steps? There is a precedent, in that we did that a few years ago with the independent Committee on Climate Change, to try to take as much of the politics as we could out of it. There is a useful precedent that the Minister might want to follow. The adequacy of savings will be a major issue in this Parliament and we have to address that before we go any further.

The issue of adequacy can also be tackled from the other end of the telescope. There is the question of what we do with the legislation on auto-enrolment, but there is another debate that the previous Pensions Minister, Steve Webb, opened, which was long overdue, on the adequacy of defined contribution as a savings platform. I think that DC is a good thing and an inevitable thing, as the noble Lord said, because employers were leaving DB and they are not going to come back. There has to be a better savings platform for people in the workplace, and defined contribution will do all the heavy lifting in the decades to come. But it is pretty clear that the track record of defined contribution has been pretty patchy, and there are a lot of concerns about whether it can do all that heavy lifting. The debate that the former Minister opened up on defined ambition pensions is a very worthy one, which I hope that the Minister will find it within herself to prosecute.

I am particularly not a fan of collective defined contribution schemes, not because I have anything in principle against them but because I do not think that they can be grafted on very neatly to the UK pensions savings system. I hope that I am wrong, but I do not think that I will be. Employers are not really showing any signs that they want to share more of their longevity or interest-rate risk with their employees. I do not think that that is going to happen. But there is a lot to be said for the writings of the leading US pensions thinker, Robert Merton, and I hope that the Minister has had the opportunity to read them, or will have shortly. Robert Merton won the Nobel Prize for economics with his work on financial instruments. He has a very clear view of the inadequacy of DC and the fact that it is focused on the wrong risk. We are managing volatile assets and trying to focus on that, and we look at the pension pot and try to grow that, but there is no one really managing the risk that the income that the saver might have when retiring on a DC plan is going to be inadequate. Of course, the wonderful thing about defined benefit plans is that you will know pretty well all the way along what your retirement income is going to be; it will be expressed as a fraction of your earnings, whether it is a career average or final salary. So you will know what your retirement income is and you can plan accordingly. That is a great comfort and peace of mind to savers. Unfortunately, in the switch from defined benefit to defined contribution, we have completely lost the fundamental and important language of income. We talk about assets and the value of those assets, but no one can really talk about income to someone saving on a DC plan: “What is the retirement income that I can expect to see?”. I hope that that will be looked at in the department and, if the Minister is so minded, the department will task a new independent pensions commission with responsibility for looking at it. This is an issue that needs to be explored more fully—a fundamental, almost do-or-die issue. If defined contribution is going to do the heavy lifting, we must keep our focus on DC as a savings platform, in addition to being concerned about whether people are saving enough or at all.

The noble Lord also drew our attention to the other significant reform of the last Parliament—the change to the rules about annuitisation. It is absolutely right that in today’s times people should have more control over their money. We do not want to be treated like idiots or children. At a time when annuities do not look like a good deal for a lot of savers because of the historically low rates of interest, it is right that they have more choice. That is particularly true if that saver also has the benefit of some legacy DB in their savings plan, as they might have accumulated a few defined contributions pots because their jobs have moved and they have changed.

So I have no objection in principle to the reforms, but it is important that the Government are doing something to monitor this and make sure that they know what is going on in the marketplace. They must know what people are doing. I do not see that they have any means at their disposal at the moment for collecting that information. and they need them. They need to bang heads. One can disagree with a policy—people can think it is a good or a bad thing—but, it having been legislated for, it is unacceptable for financial service providers to block people’s access to their pension pots if they want to cash them. If that is what is going on, Ministers need to act.

The Minister has an enormous agenda. I wish her the very best. She has the good will of everyone in this House behind her in tackling some of the enormous responsibilities that she has been charged with.