Budget Statement

Lord Stoneham of Droxford Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Stoneham of Droxford (LD)]

My Lords, this is an encouraging Budget. It is clear that the outlook for employment is improving, business investment is clearly moving forward, and business confidence has substantially improved. It is always the most vulnerable who benefit most from the extra job opportunities. However, exports remain a worry, and I hope that the Government will concentrate, among other things, on looking at more import substitution and home sourcing, particularly in sectors which we know will now grow, such as—I hope—housing. Housing is the great conundrum in our economy and still remains largely unresolved, with a huge shortage of supply and too much demand.

In the current circumstances, it is right that while combining a commitment to correct the financial deficit, the Government should now convert their austerity theme to one of sustainable growth. The best levers they can pull are to continue their emphasis on improving skills and on improving infrastructure helped by low-cost private sector funding, to focus on their industrial strategy to partner improvements in key sectors, and to encourage export growth and import substitution.

I am surprised that few Members of this House have concentrated on the main subject of the Budget: pension reforms. I have worked with Steve Webb since 2002 on determining Liberal Democrat policy on pensions, so I will concentrate on that. I am proud of what the Government have achieved in the pension field. We have built on the work of Adair Turner’s Pensions Commission and the early work done by the Labour Government. The triple lock on the state pension has protected the most vulnerable in the recession, and the basic state pension is now worth a higher share of the average wage than at any time in the past two decades. We are introducing a single-tier state pension to provide a simple, decent state pension, set above the basic means test, so that working people will know what they will get in retirement from the state and can therefore plan accordingly.

We are seeking to reverse the decades-long decline in private sector pensions provision. Barely one worker in three in the private sector paid into a pension at the time the Government came in, and urgent action was required. In 2012, we began the process of automatic enrolment, and 10 million people have already gone into workplace pensions. That has been a great success; more than 3 million workers have been automatically enrolled, and only one in 10 has exercised their right to opt out. A combination of employer contribution and tax relief from the Government makes an attractive proposition to people who were not otherwise making proper pension provision. That has given rise to the biggest rise in workplace pension coverage since figures began to be collected in 1997.

The Government still need to make sure that these pensions savings are invested in value-for-money schemes that will be well governed, and that individuals do not build up multiple-stranded pension pots but follow them when they change jobs so that a worthwhile sum can be built up. Having ensured that the vast majority of workers build up a worthwhile pension pot on top of a simplified state pension, the Budget has taken the opportunity to look at the choices people will face in retirement, reduce complexities for consumers in their financial planning for their retirement and generally encourage more long-term saving.

I was interested to see that Janan Ganesh, a Financial Times commentator, wrote this week:

“Historians of the coalition government will have to work out how Britain came to be governed so radically by such pragmatists”.

It is interesting that we in this Government have achieved the biggest fiscal contraction since the war; the public sector payroll expansion of 13 years of the Labour Government has been undone in one Parliament; we have had multiple public sector reforms in education, the health service and welfare; and now the Budget is throwing all the old pension orthodoxies on to the bonfire. My noble friend Lord Lawson—who, sadly, is not with us today—recently said on the radio that the coalition was now pointless. However, we have to ask, as the FT columnist said, whether the Government have been able to govern more radically than a single-party Tory or Labour Government could have done, particularly in the area of pensions.

The Budget proposals will end the closed market for annuities and open up choice. Potentially, savers can better control their financial planning for retirement, and that will encourage innovation among fund managers to come up with new products. The annuities market has been far too closed, uncompetitive and complacent, as the Financial Conduct Authority has recently shown in its report. The opportunities of this change are matched, however, by a number of dangers, and we must use the next year for proper consultation to get the right safeguards in place for these major changes.

There are a number of things that the Government have to concentrate on. Mis-selling will not go away. As the noble Lord, Lord Hollick, warned us—sadly, he is not in his place at the moment—the last revolution in personal pensions in the 1980s gave rise to the worst mis-selling opportunities of our generation. I well remember, as an employer at that time, resisting employees who were being persuaded by slick salesmen that they should give up their defined benefit pensions for their new personal pensions, which they were being offered by these salesmen.

We have to watch, because, when we make these radical changes, mis-selling will continue. The Government must be vigilant and people should not be allowed to fritter away their pension pots through bad selling. The Government have initially started to provide independent advice; it must be mandatory, and it has to be very well organised. The 400,000 people entering retirement each year need that independent advice. There is also a danger that, if the newly freed pension pots flood into markets such as buy-to-let property, the older generation will add to the burden on the young if prices are simply pushed up further and first-time buyers are more out of reach in the housing market.

We must also remember that tax relief on pensions savings has been justified largely as a reward for long-term saving. However, if it encourages short-term spending, it has to be questioned. There is huge inequality on tax relief on pensions savings. If you cap the lump sum free-of-tax payment, on which the cap has up to now been £312,000—that is the sum that people can take tax-free from their pensions if they have the maximum pension allowance—at average earnings of, say, £30,000, there is a saving to the Exchequer of £2 billion. So there is a huge subsidy there that is going to the better off in society. To contain pension tax relief to the standard rate of tax, which has long been a Liberal Democrat policy, would save the Exchequer £10 billion—so we have to justify that tax relief, and we have to ensure that in a time of austerity the principal beneficiaries of tax reductions are those on average or below average earnings. There will be public anger if it is not concentrated on those people.

Finally, we have to ensure that there are major reforms here. We need reform. It is positive that it is being done, but we have to ensure that we do not simply become an onshore tax haven for the better off because of these new schemes. The Government have initiated a pensions revolution, which we should welcome. The changes will have major long-term consequences. We must use the coming year to ensure that this revolution occurs fairly and efficiently and is not susceptible to any short-term electoral advantage ahead of the election, which could be deeply damaging to society and the long-term cohesion of this country and the economy.