Pensions: Occupational Pensions

Lord Stoneham of Droxford Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I am pleased to take part in the debate initiated by the noble Lord, Lord McFall, whose work on the Workplace Retirement Income Commission was timely. I thank him for his immensely valuable input to this debate. I agree with pretty much everything that has been said by the previous speakers. That underlines that real progress on pensions comes when there is genuine cross-party co-operation. The work of the Pensions Commission and actions initiated by the previous Labour Government and now taken on by the coalition, are the ones that will have lasting value.

I hope that this generation, benefiting from the last of the direct benefit pensions, will help prepare the next generation for the pension problems that they will have. Clearly, over the next five years we will have to concentrate on the introduction of auto-enrolment and NEST to attract the 6 million to 8 million people whom we want to bring into pension coverage. I think that it was the noble Lord, Lord Hutton, who said that stability is now absolutely essential. The one opportunity that this big change will give is that it will raise the profile of pensions and the need for us to make the case for people to save for them. It is important that we concentrate on doing this well, but there remain a number of ongoing problems that we need to look at for the future.

The pensions system remains incredibly complex with the two-tier state pension and all the constraints and conditions of auto-enrolment—the phasing in and the exclusions. Initially these will not help; they will confuse people, and we are going to have to work very hard to explain them. I hope that the Government will progress with their proposal for a single higher-rate basic pension, not least because 9 million to 10 million people will miss out on auto-enrolment. There has to be a greater understanding of the need for people to provide more for their retirement. We must plan ahead for the review of auto-enrolment in order to simplify it once it has settled in—removing the caps, looking at the thresholds and easing the transfers into NEST.

One fundamental problem with the system that we are going into is that the contributions are simply too low to provide adequate pensions for people entering retirement. We will soon have to examine ways of gradually raising, through phased increases, an auto-escalation of the contribution rates. We cannot do this initially but it will be important for the future.

Another problem is that we are introducing this at a very bad time. The impact of the recession, all the changes associated with student loans and the ability to raise the deposit for a house will all delay saving for retirement and make it much more difficult for people to prepare for their retirement. As a result, we are going to require far greater experimentation and flexibility in relation to savings vehicles to encourage flexible saving to support pension provision.

Governance and risk in occupational pensions is one area that we will need to look at very carefully. We can argue about what has caused the death of the defined pension scheme but the consequence is that it has weakened, and will continue to weaken, employer interest in pension provision. It is already having the effect of weakening contributions. I suspect that it is going to weaken interest in the governance of defined contribution schemes, and there is going to be less joint employer/employee interest in these schemes. Employers will be outsourcing it, if they can.

It will be very important for the Government to do everything they can to encourage experimentation with pension schemes. The end of the defined benefit scheme has meant that we have become very polarised: now, the employer is not prepared to take any risk and has handed it all to the employee. In some respects, that polarisation has gone too far. We need to move back to a middle way of experimentation where there is a sharing of risk in pensions.

The role of employers remains terribly important in pensions. Certainly, they have to provide a countervailing power if we want to get competitive rates for annuities, if we want to get the general level of charges down and if we want to take advantage of the benefits of scale in pensions. The role and interest of employers in the management of pensions is absolutely essential. We must not downgrade the importance of the employer.

Finally, there is the outstanding issue of tax incentives. I am sure that there will be an ongoing debate about reducing the inequities of the current tax incentives, which see the majority of the £28 billion of tax relief going largely to higher earners. There is an inequity here which certainly Liberal Democrats have been committed to ending. Some of this money could be better used in attracting more lower earners to the idea of starting the habit of saving for retirement, as well as paying for the higher state pension.