Small Pension Funds

Lord McKenzie of Luton Excerpts

Tuesday 27th November 2012 Lords Chamber

[Lord McKenzie of Luton]

My Lords, we should be grateful to the noble Baroness, Lady Greengross, for the opportunity to discuss, albeit briefly, issues of access to good advice, particularly in relation to small pension pots. The debate touches upon just one of the issues which are part of the challenging backdrop to the current UK pension system, which has an aging population but with working-age people still not saving enough to meet their expectations of income in retirement.

Our discussion this evening has mostly been around private pension provision, be that personal pensions or workplace pensions, but the state pension has cropped up—the noble Lord, Lord Stoneham, and my noble friend Lady Hollis referred to it. We should not forget that advice in relation to the state pension may be appropriate as well for people who do not have a full contribution record—advice on how they should deal with that and advice on whether they should defer their pension and, if they do, whether they should take the lump sum or the extra annual amount. So not only private pensions are involved.

My noble friend Lady Hollis, in particular, referred to proposals to create a single-tier state pension and the benefits that that would have in relation to rewards for saving. I certainly agree with that. The White Paper which was issued last week states that the reforms will be introduced in the next Parliament, that the new rules will apply to future pensioners only and that the Government will publish more details on their plans for single-tier shortly. Can the Minister expand on how short is “shortly” and whether we might expect the legislation in this Parliament even if it may not be introduced until the next Parliament, if that is a matter for the coalition’s determination?

We know that too many people do not save for a pension outside of the state provision because they do not trust the system. ICM research shows that 56% of savers lack confidence in those who manage their investments; 60% of private sector workers are not saving for a pension at all; and old DB schemes are available to fewer and fewer private sector workers. That is why the introduction of auto-enrolment in October this year, developed under a Labour Government but with cross-party support, is so important. It turns pensions inertia on its head: you are enrolled unless you positively opt out. It is to be hoped that auto-enrolment will be part of the route to restoring trust and confidence in the pensions system.

If people are to have more secure retirements, that confidence must not just be about decumulation; the issues run throughout the pensions life cycle. They relate to contribution levels, investment strategies, default funds and, of course, to charging. We know, for example, that an annual management charge of 1.5% can reduce a final pension pot by 22%, while a 0.5% charge—the NEST equivalent—will reduce the pension pot by 9%. Greater transparency and more straightforward charging structures are essential. The noble Lord, Lord Patten, spoke with some passion on this matter.

The provision of financial advice has been affected by the upcoming implementation of the retail distribution review. While this will raise standards in the advice sector and change the way people pay for advice, unless further action is taken an unintended consequence, referred to by a number of noble Lords, is likely to be that those on modest and small incomes and pension pots will be excluded from or priced out of the advice market—and this at a time when the number of small pots is set to grow as auto-enrolment draws more into pension savings and a changing job market means that, on average, an individual will change jobs 11 times over their lifetime, and with the prospect of the abolition of short-service refunds. The noble Lord, Lord Kirkwood, said that he appreciated fully the extent of what that change may bring.

We know that small pension pots are costly and inefficient to administer, and can be difficult for individuals to keep track of and convert into pension income. We therefore support the Government’s attempts to address the inertia preventing consolidation by some form of automatic transfer. The current proposal is that the pot will follow the individual. Perhaps the Minister can give us an update on progress on the thinking around that. Further, can the Minister say whether it will apply to existing pots or just future pots that are created? The logic would seem to be that pots can follow individuals into NEST. Can the Minister confirm that that is going to be the case?

The current landscape was the subject of a retirement income summit hosted by the International Longevity Centre and the actuarial profession in June this year. I think that the noble Baroness, Lady Greengross, is a distinguished board member, and I believe that the noble Lord, Lord Kirkwood, was at the summit. It saw the immediate challenges as the advice gap, too few savers exercising the open-market option, insufficient focus on the type of annuity purchased rather than the annuity rate, and information overload. What is of particular concern from the analysis is that only 2% of annuitants who did not take advice bought an enhanced annuity, although up to 50% are thought to be eligible. This means that thousands of people will miss out on hundreds of pounds of income each year. The National Association of Pension Funds estimates that half a million people a year fail to shop around for the best annuity, losing in aggregate £1 billion a year in income. The failure of married couples to include a spouse’s benefit can lead to significant hardship for a dependent spouse on the death of the policy holder. Clearly, these outcomes could be improved through access to proper advice. My noble friend Lord Lipsey said that £1,000 a year may not be a huge sum for some in your Lordships’ House but that for some it means the difference between surviving and going under.

The ABI code of conduct on retirement choices may assist in this, and the recent government White Paper points out that the open market option review group is currently developing an evaluation test for the code. Can the Minister tell us whether the evaluation is actually under way and what further steps might be contemplated in the light of it? A brief from the Society of Later Life Advisers, referred to by my noble friend Lord Lipsey, states that while the cost of advice is an issue, and while government action on improving transfers and dealing with small pots is welcome, what really prevents people taking advice is that they do not know where to go or whom to trust. Raising awareness of the benefit of advice is important, but in itself it will not overcome the hurdle of lack of trust.

There is of course no lack of information and guidance from providers and organisations such as the Pensions Advisory Service, referred to by my noble friend Lady Hollis, the Money Advice Service, to which the noble Lord, Lord Kirkwood, referred, particularly on the volume of queries it is getting and likely to get, and the Pension Service itself for the state pension. But that information and guidance must be distinguished from advice, and indeed it can be part of the problem of information overload.

The noble Baroness, Lady Greengross, made an important point about clarity on the distinction between advice and information. Noble Lords, and in particular the noble Lord, Lord Kirkwood, will recall the debates we had on auto-enrolment about what employers had to do and whether it was information or advice: it was, of course, the former. The retirement income summit proposed that the regulator should work with the pensions industry to develop a solution for those with small pension pots. In particular, the FSA should develop guidance for providers on how to implement simplified advice models safely and in the consumer’s best interest. It is impossible to disagree with this proposition but it is not easy to deliver.

In conclusion, I echo the comments of my noble friend Lord Lipsey: poor people should not have to put up with poor advice.

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[Lord McKenzie of Luton]

Perhaps the Minister might write on another point: whether or not the automatic transfers—be they legacy pots or otherwise—could be transferred into NEST.

[Baroness Stowell of Beeston]

I will certainly write to the noble Lord about that matter as well.

The noble Lords, Lord Stoneham and Lord Kirkwood, referred to the Government’s Reinvigorating Workplace Pensions strategy. As they acknowledged, the Pensions Minister, Steve Webb, announced a range of proposals to restore people’s confidence and trust in pensions and to encourage savings. The most significant, in terms of scale, is the defined ambition scheme. I absolutely acknowledge the point made by all noble Lords tonight that there is a serious issue about lack of trust and confidence in pensions and savings; that is something on which the Government are very clear. For me, however, perhaps the most important point made in that strategy—indeed, it is one specifically raised by the noble Lord, Lord Stoneham, although others mentioned it too—was the Minister’s call on industry to use plain language when sending information to its members. As a new reader on this topic, I absolutely share people’s view that the jargon around pensions can create a real barrier.

I have very little time left but would like to say in response to the proposals from the noble Lord, Lord Patten, about perks—as he described them—for well-off pensioners that I will of course highlight to my right honourable friend the Chancellor what has been said. However, if I may beg the indulgence of the House, as my mum will definitely be watching on a matter such as this, I would be doing her a great disservice and be in huge trouble if I did not say that many of her friends, as pensioners, make the point to me on many occasions that they feel passionately about their bus pass. I want to mention that for my mum.

In conclusion, the number of stakeholders who have engaged with the Government in developing all these policies is indicative of common goals and a real drive by all to ensure that consumers can engage with the choices that they need to make about their retirement income. In the future, the FSA will be closely monitoring the impact of the RDR on consumers’ engagement with the market through its post-implementation review. An evaluation strategy will be agreed for measuring the success of the open market option package of measures, including the code of conduct. More generally, the Government remain committed to ensuring that everyone has the information and tools that they need to make responsible and informed decisions at retirement. I will of course follow up this debate with any letters to cover the issues that I have not been able to cover today.