Pensions Bill

Viscount Eccles Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Viscount Eccles (Con)]

My Lords, as we consider the detail of the Bill—many of those who have spoken have made very good points about the detail—I hope we will remember two things. First, a great deal of what actually happens will depend on secondary legislation. In essence, this is a framework Bill, and much will emerge as the regulations are produced. Secondly, as we go through the Bill, I want, from long private sector experience, to think a bit about other things that come on top of state provision.

Along with all other noble Lords, I fully welcome the move to a single-tier pension, which is an excellent thing to do. If I may venture an opinion, I would do it, in the end, with the smallest possible consideration of the difference between people and their experiences. I would eliminate, if I could, the idea that certain things should be taken into account, so that it would be a well established and very simple “that is what we are going to get” pension. As has been said before, pension legislation is a dense thicket, into which we venture sometimes but probably as little as we need to. We do not get very far and come out all scratched without really understanding the detail. Anything that simplifies what is going on out there must be welcome.

The departmental brief took us back to Beveridge and 1942. I remember the excitement when that report was produced. The terminology in Beveridge is very different from the terminology we use today. He referred to want, a subsistence minimum, savings on top and the avoidance of an intolerable financial burden. On that last point, we are probably in some form of denial, in that there is nothing which could be rightly described as an intolerable financial burden. Beveridge also said that we should do nothing that discourages the individual from doing the best he can for himself and his family. He was determined, in what he wrote, to make his progressive, reforming recommendations but, he hoped, without perverse incentives being contained in what was done.

Of course, between 1942 and today, very great changes have taken place. The brief refers, as all noble Lords have, to demography. In Beveridge’s time, 10 years of retirement would have been a pretty long time. I fully admit that this is a very theoretical point, but if we were, 10 years from now, to put up the retirement age to 70, we would probably be looking at more like 15 or maybe 20 years of retirement, which is a very big change. Because life is very uneven and unfair, that is only an average. I fully concede that averages can be very deceptive.

The brief referred to the much increased employment of women, something that has been completely transformed from what applied before the Second World War. However, other things are not in the brief which I think are very important and go to the point on confidence and trust, which has also been referred to many times this afternoon. There is the relative prosperity—real incomes today are probably three times what they were in 1942—but of course, alongside that, financial services have become immensely more sophisticated and much more difficult to understand.

Then there have been the rapid changes to the economy, including the disappearance of enormous industries. I come from the north-east of England, where there is not a deep coal mine left, which is almost unthinkable. ICI has disappeared, which is, again, almost unthinkable. Some of these changes have been created by the incredibly rapid progress of technology. Completely unimaginable things have happened, even in stable, long-running companies. British Telecom, for example, suffered the split from Royal Mail and the Post Office. When we were younger, all the equipment was electro-mechanical, but of course it is now digital and a completely different employment pattern is involved in looking after all the equipment in that business. Even in long-running and apparently very stable businesses, there have been enormous changes in the pattern of employment.

There has also been social change, with people wanting different types of career. The idea was certainly prevalent in the days of Beveridge that you joined a company and there you were: that was your life from coming out of school or university until you retired. That now is the exception and not the rule. In trying to deal with all these changes, we have tended to muddle the distinction between provision by the state and the top-up that Beveridge referred to, which is acquired privately. We have not thought carefully about the limits of state intervention or carefully enough about doing nothing that discourages individuals from doing the best they can for themselves and their family. Instead, we have got into a situation where there is an impenetrable thicket, which is not understood by many people and in which, therefore, very few people have confidence and trust. We desperately need to simplify wherever we can—not only in state provision but in private provision.

I turn to one or two examples. The linchpin of private provision was always the defined benefit system, which related to salary and service. Such schemes are dying on their feet. Company after company has gone out of defined benefit schemes after finding them impossible to retain. The promises made in those schemes were so long that the actuaries were unable to match their view of contributions and assets to the potential liabilities, and they kept getting the sums wrong. That is not at all surprising if you set that against the differences that have occurred in society and in business and commerce.

My own experience is of working for 27 years for an engineering company in the north-east, which was taken over, in a deal brokered by the Government of the day, by another engineering company in the north-east. That was in turn taken over by a big construction company, which was then taken over by a big shipbuilding company based in Norway with lots of other engineering industries. That company went bust. I am a pensioner—I should declare that as an interest—of a closed scheme where there are problems. There is now a separate, independent, ring-fenced company with all the funds that came from those different companies. If I told you all the companies that were in the current ring-fenced scheme, you would be amazed. It is nothing like four, and probably closer to 20. It is very difficult to maintain trust and confidence in schemes that are very long-term, if they are subject to such enormous change.

Moving from defined benefit to money purchase schemes, which of course is the solution in many cases, has also proved very difficult, because of the same sort of considerations. Promises have been made to the people in the defined benefit scheme, which is closed, under the contracts entered into with them, but newly employed people are put into a different mode. That creates two classes of employee. Many people have thought about some of these difficulties, and there are many others.

Just the other day, I was asked by quite a young self-employed person, “Why is it wise for me to have a pension?”. I said, “Is anybody else going to contribute to it or are you going to do it all on your own?”. That is the first question you should ask yourself. The second is: what are the tax advantages of putting whatever you save into a pension scheme, personal or otherwise? If you really think about it, the two reasons why we are so keen on pensions as a method of saving are: first, somebody else is going to contribute as well as myself; and secondly, it gives me tax capacity. For a lot of people, other forms of saving, provided that they have the tax capacity, may well be a better way of going about it than joining schemes.

Finally, I have a thought about fees. Of course, if a system is extremely complicated, I am afraid the fees will be high. They become high for two reasons: first, the complexity means that they will be high; and secondly, if you do not think through your own position as a member of a scheme, you contract it out to somebody else and do not pay close interest. In addition, there could be many regulations and rules. It was no surprise to get a letter from somebody involved in my self-invested pension plan saying, “Given everything that is happening now, you should expect fees of 2.5% per year”. I can tell your Lordships that I have been trying to ensure that that did not happen and it is not going to.