Small Pension Funds

Lord Patten Excerpts

Tuesday 27th November 2012 Lords Chamber

[Lord Patten]

My Lords, the noble Baroness said that there are 1.1 million people with a pension fund of £5,000 or less. That is 1.1 million very admirable people. I greatly admire those who from small incomes, little bequests and savings over the years have decided to save for a pension. That is an admirable and a good thing. Compare and contrast them with others who may have exactly the same, albeit small, resources from income, bequests and savings, who choose to spend it and rely entirely on the state. The 1.1 million people to whom the noble Baroness referred are the deserving savers, which is why I share her hope that the Government may find ways in which to help deserving savers to get a better deal from those who give advice and those who invest.

It must be very lonely for someone who is of pensionable age, has that small sum of money and does not know which way to turn. However, if there were ways of grossing together all those people, imagine the purchasing power and the purchasing strength that 1.1 million people with £5,000 or less in their pensions would have in negotiating good advice or, indeed, negotiating a better deal when they invest.

The noble Baroness suggested that there should be a round table to deal with this as one way of looking at helping these people. Despite the rather austere framework that we are in at the moment, there may be market-driven opportunities here because I understand that those 1.1 million people have more than £2 billion to invest between them. It may be possible for those in the market to think of setting up a vehicle which would help, by pooling resources, to get a better deal for pensioners, strictly regulated though it should be. Therefore, I would like to put before your Lordships and, indeed, before my noble friend the Minister, an idea which I hope the Government will not stand in the way of: someone trying to set up such a body whereby the purchasing power of small pension holders could be pooled and used to their advantage. I have no interest to declare in this matter, by the way.

Let us look at each of the two areas referred to in the noble Baroness’s excellent Motion: “access to good advice” and maximising people’s retirement incomes. Access to good advice is critical. In the past, the world of the independent financial adviser and others has been a very peculiar one, suggesting to people, who often had small sums of money, that they should invest in this or that because there was a trail commission going back to someone. Under those circumstances it is natural, I guess, that people very often have said, “Go to this fund. Go to that fund—this bond fund, that equity fund”, because a commission is involved. That has all been stopped, which is a thoroughly good thing because I think that it was as close to being corrupt as you could get. But at the same time the unintended consequence is that people are now being told they will have to pay for the advice that they thought they were getting for free but was actually coming from commissions trailing back to suppliers.

It should be possible to think of ways in which individuals with small pensions, banded and grossed up together, could have much more purchasing power, first, to get better advice but, secondly, to get better investment returns. Let us take not £5,000 a year but £10,000 a year—forgive me, I can do that arithmetic. At present rates of about 3.5% returns, you get £350 a year to add on, which is a lot of money to people on small incomes. The trouble is that you go to a fund which promises 3.5% and very often that fund—say one called East European Opportunities Fund, to make up a name—then itself invests in other funds investing in funds of funds, and each of those has their layer of charges. Before you know where you are, a combination of slowly growing inflation and a multiplicity of charges has abolished any possibility of real growth in that pensioner’s income. People often talk about the magic of compound interest but the tyranny of high hidden charges directly on pension funds is very destructive of wealth.

Who does someone living alone turn to? They cannot afford advice so they look at what a Sunday newspaper says—“Invest here, invest there”—and what happens after that is very often a diminution of those people’s wealth, not an addition to it, which they have notably saved for, which I think is to the common good, rather than their just relying on the state. Therefore, I urge the Government to keep an open mind on new market entrants who would be strictly regulated by the great panoply of regulators that we have at the moment that regulate absolutely everything in the City after the events of 2000 and 2008. If private sector people are willing to invest on behalf of such pensioners, and they can see that they can make a reasonable amount from doing so, I urge the Government to make it possible for them to do that.

I do not think that the state should provide funds to do this. My noble friend will be relieved to hear that I make no request for extra government money, as I think that would be wrong. The new normal, we are told, is bumping along the bottom until 2017-18. Everyone is suddenly austerity-aware, and people who used to think that there were free lunches and free dinners now know that we live in a pretty austere world. I do not expect my noble friend to reply to the suggestions that I am about to make but I ask her to undertake in her wind-up that she will pass them on to the Treasury and to the right honourable gentleman the Chancellor of the Exchequer, whose policies I greatly admire. A time of maximum austerity is the time to get rid of a lot of perks for well-off pensioners which they do not deserve and do not need. The better sort of better-off pensioner makes a point of not claiming them. All those TV licences, all the cheap travel, all those winter fuel arrangements—

[Baroness Hollis of Heigham]

Higher rate tax relief?

[Lord Patten]

I am making my speech. The noble Baroness barracks splendidly but I am picking on the three things which go to pensioners from government expenditure. I do think that now is the time for my right honourable friend to get rid of these things. There will be no political backlash at all. People think that it is bonkers and barmy to provide these benefits. I certainly do. I think that it is wrong and we should not be in that position. The Chancellor, half way through the Parliament, way ahead of a general election, with the full and stalwart support of my noble friends the Liberal Democrats in every Division on every single occasion in your Lordships’ House, should seize this opportunity and all will be well.