Pensions: Occupational Pensions

Lord Shutt of Greetland Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord McFall of Alcluith]

To ask Her Majesty’s Government what steps they are taking to reinvigorate occupational pensions.

[Lord Shutt of Greetland]

My Lords, before the debate is introduced, I hope I may make the normal point that it is a timed debate. Apart from the mover and the responder, other noble Lords are limited to six minutes. The monitor is dark now but when it shows six, the six minutes are up.

[Lord McFall of Alcluith]

My Lords, I am delighted to introduce this debate on occupational pensions. Last year I was asked by the National Association of Pension Funds to set up a working party looking at occupational pensions. When the report was published, I mentioned that a golden sunset of pensions was giving way to a bleak dawn. Many millions of people will face poverty in retirement—some absolute poverty. That is the inauspicious background to this debate. People are saving less and less and there is less and less trust in the pensions system. In fact, the NAPF confidence index is presently at minus six—the lowest it has ever been since its inception.

I want to look at the issue of risk. The flight from defined benefit to defined contribution schemes means that all the risk is on the saver. In effect, the saver is often left to navigate through a pensions minefield which would puzzle the brain of Albert Einstein. The consumer is short-changed and the voice of that consumer is missing. We need to ensure that that voice and that presence is centre stage in pension provision. In the flight from defined benefits to defined contributions, it strikes me that it is not just the risk which has shifted from the employer to the employee but that the onus is on the employee—the individual—to make critical decisions about their pension which they are ill equipped to do. It is a fiendishly complex matter and they need help and reassurance from scheme trustees who promote good governance. We need good, strong, independent governance. That is central to good member outcomes. We can achieve that good governance only if we have an environment which is conducive to achieving that, and if we have proper structures. We need schemes which are of a sufficient size to enable them to reap the benefits of scale and produce low charges to ensure that we get good governance and high-quality communication.

At present, there are 54,000 separate DC schemes operated by tiny employers in this country. With the average worker now changing job 11 times, we see the proliferation of these tiny pension pots with no portability. These have two critical disadvantages. First, they lack the scale efficiencies of larger ones and have inadequate governance, and, secondly, they tend to deliver worse outcomes at higher costs. There are no compensating benefits whatever.

The Pensions Minister, Steve Webb, has put out a challenge on red tape, as he calls it. That is a welcome opportunity to reinvigorate the pensions landscape, not just by eliminating regulation but by ensuring that we have better and more appropriate regulation. The environment for employers should be one whereby they offer decent workplace pensions with a minimum fuss, while ensuring that members’ benefits are protected. A key area for government consideration is over the risk-sharing between employer and employee. The Government need to ensure that employers who want to assume some risk are incentivised to do so. The questions that need consideration are: how should the Government support and reinvigorate multiemployer- wide schemes? In what ways can they fiscally encourage employers and reward them for taking on some of the risks?

The third aspect is auto-enrolment and NEST. This is welcome because it has the potential to encourage between 5 million and 9 million people to save for retirement in addition to those who have not saved previously—largely those on a low income. First, the Government have to look at the state offering and establish a firm foundation for saving. It will not be worth while for people to save if that firm foundation is not in place. Secondly, I have a simple message for the Government: remove the shackles from NEST. Take the messages that its chief executive Tim Jones and chairman Lawrence Churchill gave to the DWP Select Committee a few months ago. The cap and transfer-in rule are preventing the best outcome for institutional savers and government. The rule stops consolidation of existing pension provision for employers into NEST, and the cap ensures that employers have to run more than one scheme—one for the lower paid and another for higher earners—if they choose NEST.

Lawrence Churchill’s remarks to the committee were telling. He said that 40 per cent of the lower paid are engaged by large employers, so already 40 per cent of those whom he called “our market” will not use NEST because of the restrictions. By impeding the volume of business for longer, the Government’s loan will take longer to be repaid. It is therefore wise for the Government to remove that contribution cap. By doing so, NEST would need £100 million less in taxpayers’ money. It should be remembered that the shackles were imposed because of a 2005 political settlement. Removing the restrictions would ensure efficient organisation, and auto-enrolment would incentivise industry to lower costs and charges.

On the issue of costs and charges, disclosure is inconsistent among schemes and providers. In fact, what is consistent is the opacity of disclosure. We need transparency on the cash impact on pension pots. I welcome the code of conduct that NAPF has established as a result of my committee’s proposals. Let us keep in mind that a 2 per cent fee over the lifetime of a pension, which is not out of line, swallows up 50 per cent of an individual’s pension pot. My message to the Government is: do not wait and see the impact on high charges; use regulatory powers to apply stakeholder charge-capped schemes that are eligible for auto-enrolment.

The UK has the largest annuities market globally—450,000 were purchased in 2009 with a total value of £11 billion, and that will increase in the years ahead. Research since 1957 indicates that for each year of life expectancy, annuity rates have fallen by 0.56 percentage points. What does that translate into? An individual with a £100,000 pension pot in 1957 could have secured a pension of £11,000. In 2009, a similar pot could have secured a pension of £6,200 and, in 2010, £5,200. As the Minister knows, the rates offered can also vary by more than 25 per cent for a similar individual and annuity type. Shopping around should therefore be the default position, and there is a long way to go in that area. The reason that it should be the default position is that it would allow more flexibility for the changing spending patterns in old age.

The issue of Europe has been brought to me through lobbying. Lobbying by companies is very relevant because of the negotiations on Solvency II. The Government have to be vigilant here because if we do not get the right outcome, we will see the death of defined benefit schemes in the United Kingdom.

Lastly, on stability, the pensions cycle is between 40 and 50 years. The political cycle is between four and five years. We are out of sync. Since 1996, there have been more than 800 changes to pensions legislation and regulation—the equivalent of one change per week. I say to the Minister that that does not add stability. What we need to do is think about taking the politics out of pensions. A standing advisory body on, say, longevity and state pension ages, would be a good start, but we need a pension policy that is stable, for the long term and based on political consensus. I therefore suggested in our report, and suggest again to the Minister, that an independent standing commission on pensions should be established to ensure that the interests of the saver are centre-stage for the long term. If we work together in harmony on these proposals, perhaps we can assist in averting a bleak dawn for pensioners in the future.

Welfare Reform Bill

Lord Shutt of Greetland Excerpts

Tuesday 4th October 2011 Grand Committee

[Lord Foulkes of Cumnock]

I was hoping that I was not going to have to get up and that the Whips would immediately get up. I raised at the beginning of the Committee the problems that will be faced by Members of the House with severe disabilities getting down to vote in the Division Lobby if there is a Division in the House. I was assured by the Whip that there would be an indication that some arrangements had been made through the usual channels to ensure that that could be dealt with appropriately.

[Lord Shutt of Greetland]

My Lords, this looks like two bites at the same cherry, because I believe that this has been dealt with. There will be 10 minutes, and the Chairman has discretion to extend that time. I understand that there has been a usual-channels agreement that there will not be voting downstairs today, but who knows—things can change. That, I understand, is the agreement for today. However, if ultimately there were to be a Division, there is the 10 minutes, and there is discretion to extend that.

This would be an extreme position for today only. A paper is about to be brought to the House, prior to the next meeting of this Committee on Thursday, saying that Members with mobility problems who are in this Room will be able to vote in the Room, and the votes will be taken downstairs. But because that paper has not yet gone to the House, today is different. If there were to be a vote today, and there is real need, that 10-minute period would be extended if Members had difficulty in getting down to vote.

[Lord Foulkes of Cumnock]

I am grateful to the Whip for that explanation. I had heard through what I should probably call unusual channels that these discussions were taking place. There are a lot of questions arising from it. Is it just for the consideration of the Welfare Reform Bill in Grand Committee, or will it apply for every Grand Committee taken up here in the future? A number of other questions also arise.

I think it is very difficult to have started the Welfare Reform Bill Grand Committee in this totally inadequate Room, dealing with something that is so important when it should have been dealt with much more appropriately on the Floor of the House, and it is going to create tremendous difficulties not only for people with mobility problems but for all of us with regard to 10-minute Divisions and a number of other things. The Whips, particularly the Chief Whip, who propelled us into these arrangements, should have thought rather more carefully about how it is going to be dealt with in practice before making such statements to the House.

[Lord Shutt of Greetland]

My Lords, this is not the first time that a Grand Committee has taken place in this Room. I recall meeting here on a Northern Ireland Bill, when a Minister accepted an amendment of mine, as it happens. So it is not the first time that we have met here. It is sufficient to the day. I have spoken about what will happen today. Later we will have a paper which I believe will refer to subsequent sessions in this Room. It will be up to the House to consider whether these arrangements apply to other Bills in this Room—I suppose that that is quite likely—but, as I say, it is sufficient to the day as far as that is concerned. As for the general position of using this Room, do not forget that this is a matter that was taken to the House and the House decided that we would meet in a Grand Committee and not in the Chamber.

As it happens, there are 62 places for Members in this Room. I think, unless some more people have crept in, that there are fewer Members in the Room than there were at the end of the Education Committee, which I just witnessed. There is certainly more space for people who need to use wheelchairs and, indeed, more space for members of the public. So as for Grand Committee being held in this Room as opposed to the Moses Room, the general belief among all those who have been consulted and who have seen the position here is that this is a better Room for these meetings. I hope that we can now proceed with the arrangements in this Room.

Amendment 1

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