Small Pension Funds

Lord Stoneham of Droxford Excerpts

Tuesday 27th November 2012 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I am very glad to follow the very informed contribution of the noble Baroness, Lady Hollis, whose remarks I completely agreed with, and the cross-party consensus of my noble friend Lord Patten, with whom I also thoroughly agreed. I congratulate the noble Baroness, Lady Greengross, on the timing of this debate—coming the week after the Government published their consultation document Reinvigorating Workplace Pensions. It is refreshing to have in government a Minister—my colleague Steve Webb—so committed to pension reform and with the confidence to pull the right levers in government.

One important lever has been to build on the cross-party strategy of the Turner commission, which has helped this Government to add to the Labour Government’s initiatives and to bring in the start of auto-enrolment, the restoration of the earnings link for state pensions, the abolition of the default retirement age and, of course, the commitment to the single state pension. As we start auto-enrolment, however, we have a huge problem of raising understanding and commitment to increased pension provision.

The noble Baroness, Lady Greengross, is right to raise the need for good advice for people with small pension funds. I agree entirely with what she so wisely said. However, I would like to widen the concern to three themes. Those themes are the need for much greater simplicity; the need for more education, ongoing communication and advice; and, most important of all, the need for trust.

Simplicity is essential to improve the understanding of pensions. The single state pension will do away with the confusion of pension credits, and restores incentives to save. The important power of inertia is being exploited through auto-enrolment and it will help to raise saving but, as the noble Baroness, Lady Hollis, was saying, the automatic rollover of small pots is essential to individuals needing to keep track of their savings to ensure that they do not lose out from duplicated high charges.

We have to recognise that the move to more defined contribution pensions increases uncertainty and the chance of misunderstanding on the eventual pension income that individuals will receive. They put additional burdens of decision-making on individuals who will not have the guidance of trustees. Somehow we have to demonstrate the underprovision for pensions when the actual pension outcome is so uncertain, compared with defined benefit schemes. The efforts of the Pension Minister to promote the concept of defined ambition pensions to provide more certainty and to encourage more risk-sharing is an important initiative. We also have to recognise the ongoing reliance of housing investment and ISAs on individual provision for pensions. It is wise for individuals to make provision through a number of means and we should encourage whatever individuals understand best and whatever they feel comfortable with.

Education was my second theme. A prime task is to get people to make greater provision for their pensions. There are three steps in the need for greater education. We have somehow to get people to recognise the need for pension provision early in their working careers. We have to improve understanding on how individuals can increase their pension income as retirement approaches, and appreciate particularly what fees and charges they are susceptible to. We also have to improve people’s understanding of turning pension pots into retirement income, which is critical.

Communication and advice are key elements in improving understanding. I congratulate the Minister, Steve Webb, on his big drive to make language in the pensions sector more understandable. The department’s own guide to language for auto-enrolment is very helpful. It is not fashionable to say it these days but we need more of the language of the Sun and the Mirror, rather than that of the Telegraph and the Guardian, to improve understanding among those who need the most advice.

Web communications and e-mails from the department, NEST and other pension providers should be targeted at the key stages of the life cycle which are so critical to pension provision—at the early stages of working life and the mid-career key stages, and at those preparing for retirement 10 and five years out, while there is still time to make adjustments. Government must have a big interest in encouraging greater provision because, if it is successful, it will ease the burden of old age on the state.

However, personally I worry about the multiplicity of providers, the ongoing apathy and the lack of understanding among the working-age population. Trust is a key issue. I am also concerned about whether competitive pressures and the habits of the financial services could lead to ongoing threats to trust, which it is so important to sustain. Mis-selling and the underperformance of investments will lead to a serious undermining of confidence and trust in pension provision.

Defined benefit pension schemes had trustees to safeguard pensioners’ interests, but defined contribution schemes are normally governed by contract rather than by a trust deed. In my view, the fiduciary character of the management of pensions should not be affected by this change. We need to strengthen the concept of stewardship and mutual confidence based on trust. The responsibility of agents in pension investment should be defined in a way that establishes and reinforces trust.

The noble Baroness, Lady Drake—I am sad that she is not with us today; normally she would be—and I tried on two occasions to strengthen the Financial Services Bill by proposing that the current FSA regulations should be strengthened to say that investment agents must act in the interests of their customers. It is too weak to say, as the regulations say at the moment, that:

“A firm must pay due regard to the interests of … customers and treat them fairly”.

It is also too weak to say that conflicts of interest must be managed fairly. The fiduciary duties of investment agents now need to be redefined and the recommendations of the Kay review need serious consideration by the Government at an early stage. Simplification, education, communication advice and trust are all essential elements in focusing awareness of pension provision, particularly for smaller savers. However, the greatest element must be trust, as without it we will not get the increase in saving that we need.