Pension Schemes Bill

Anne Begg Excerpts

Tuesday 2nd September 2014 Commons Chamber

[Steve Webb]

I am grateful to my hon. Friend for that question. The number is substantially higher. I had to apologise to the Select Committee in oral evidence recently that we had grossly underestimated the success of our policy. We had thought that the staying-in rates for workplace pensions might be as high as two thirds, but in reality the number of people who, having been automatically enrolled, are staying in is touching nine tenths. Even so, with each passing month, as new figures come out, the sceptics keep saying, “Oh, as we get to smaller firms, the opt-out rates will shoot up,” but we are certainly seeing no evidence of that so far. I think there is a sense that people knew that they needed a pension and knew the value of an employer contribution and tax relief, and when we remove the barriers for them they are delighted to accept it.

[Dame Anne Begg (Aberdeen South) (Lab)]

May I be very clear that both the Select Committee and the Opposition welcome auto-enrolment and are very glad that it has been so successful, because one of the good things the coalition Government did was carry on the policy legislated for by the previous Labour Government? Perhaps some credit should be paid to them.

[Steve Webb]

The hon. Lady will be aware that there was a decade between the first stirrings of the Turner report and the implementation of automatic enrolment. She will also be aware that there is a risk—this is an important point and although I would not accuse the hon. Lady of doing this, perhaps it is relevant to her more partisan colleagues—of rewriting history on this issue. Had we implemented automatic enrolment as envisaged by the Opposition, it would have crashed and burned. Let me explain why I say that, because it is very important.

Had we auto-enrolled people into schemes without any prospect of a charge cap, they could have been exposed to something the Opposition call rip-off pension charges. When in government, the Opposition proposed no consumer protection on charges. Secondly, they would have auto-enrolled people the second their earnings were a pound above the threshold, so people would have been enrolled into pension schemes into which literally pennies were being put by employers and employees. That would have created derision and undermined auto-enrolment. Thirdly and crucially, auto-enrolment was envisaged without any reform of the state pension, so we would have had a state pension of about £5,000 a year and a means test of about £7,000 a year. Therefore, the first £2,000 a year of private saving would have been largely clawed back by means- testing. There would have been stories in the press of mis-selling and of people saying, “Why did I bother saving for a small pension?” I still remember a national newspaper journalist telling me that only when we reformed the state pension did we remove the fundamental objection to auto-enrolment for people on a low wage.

We would, therefore, have had rip-off charges, nugatory amounts going in and means-testing of savings; if we had not addressed those things, auto-enrolment would have failed. I believe that the coalition made that policy work and were right to do so.

As well as making sure that we have mass membership of workplace pensions, we have had to address a number of other crucial issues, including, as I have mentioned, scheme quality and ensuring that people do not face excessive charges. From next April, default funds for auto-enrolment schemes will be capped at 0.75%. Certain forms of charges over the coming years will be banned altogether. The so-called active member discounts, which mysteriously increase charges when someone is no longer an active member of a pension scheme, and commission charges and consultancy charges are all banned by this coalition Government. We are putting in place new measures to ensure quality governance of schemes—not just trust-based schemes but contract-based ones—with independent governance committees acting in the members’ interests for the first time.

This is a huge, positive agenda, but there are two big areas where further work is needed. The first is the move from defined benefit to defined contribution—a long-term, decades-long trend transferring risk from being wholly on the employer to being wholly on the individual. We remain concerned that that transference of risk causes problems for individuals and that we need to enable, encourage and foster risk-sharing models, and that is what this Bill does.

Secondly, what happens at the end? What happens when someone has accumulated a pension pot? What can they do with it? Again, the previous Government failed to address the fact that, all too often, people with a pension pot defaulted into an annuity with the provider they had already saved with and did not get the best value for money—they made a once-in-a-lifetime retirement choice that all too often resulted in poor value for money. That is why the Chancellor’s groundbreaking Budget announcements, which the Opposition are still fundamentally ambivalent about at best, were so important. They gave people freedom and choice in what to do when they have accumulated a pension pot. This Bill and the amendments that will follow provide for guaranteed independent guidance for people making those choices, which is something that far too many people do not have at present.

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[Dame Anne Begg (Aberdeen South) (Lab)]

It is a pleasure to follow the hon. Member for Cities of London and Westminster (Mark Field). A number of the companies that would be affected by these reforms are in his constituency.

One of the issues around pensions is complexity. The coalition Government, following on from what Labour had started with the Turner consensus, were beginning to simplify things and make them more understandable and to make pensions something that younger people talked about, as well as people who had already reached pension age and therefore had a direct interest in the money they were receiving each week or month. However, my concern about the more recent proposed changes both in the Budget proposals and this Bill is that they are adding more complexity back into the system and making it even more confusing for consumers. While it may on the surface be a great thing that there is going to be pension liberalisation and that people will not automatically have to buy an annuity, there are also certain risks in that.

The hon. Member for Cities of London and Westminster mentioned some of the concerns, as did the shadow Minister. If people found pensions too confusing and did not always know with surety that they were buying the best product, how will making even more products available and taking away some of the constraints on what they can choose make things easier for them? There are fairly major dangers of mis-selling and of products being offered that are not fit for purpose unless the governance is right and the regulation is correct. That is a very real fear, and I certainly have that fear about the changes that would allow people to access their pension pot more easily at an earlier age without putting any constraints on how it might be invested. The hon. Gentleman made the point that, in building up that pot, most have enjoyed tax relief on their subscriptions, and the understanding was that that tax relief was to encourage them to make sure they had retirement savings. However, if they turn their retirement savings into just savings, why would those savings get an extra allowance in the form of tax relief? Future Governments might be tempted to look at that whole area of tax relief.

The Minister said that we had a binary model at the moment, and he is absolutely right. We have either defined-contributions schemes or defined-benefits schemes. The Bill will introduce an extra layer. If we ask people whether they would like to share the risk, they will say yes. Even companies might think it a good idea, but it is open to question whether companies will take advantage of the provisions in the Bill to set up a defined-ambition scheme. The Minister said that there was an appetite for this kind of reform, but I am not so sure that people are clamouring at his door—or at anyone else’s—saying that they are desperate to have collective, defined-contribution schemes. I concede that, from a consumer point of view, the members might want such schemes, but it will be the employers, not the members, who will be setting up the pension funds and schemes.

The Minister admitted earlier that it was unlikely that those affected by the legislation would be small and medium-sized enterprises, and that it was more likely to affect bigger companies. We know, however, from the roll-out of auto-enrolment that most of the bigger companies are already enrolled in the auto-enrolment scheme, and that the SMEs have still to enrol. They are the ones that have more choice, because they are having to set up the scheme from scratch. Perhaps this legislation has come a bit too late for the people who wanted to take advantage of this offer. I am still puzzled as to who the Minister envisages taking advantage of it. Perhaps he will tell us when he winds up the debate.

I am still not 100% sure how all this will fit in with auto-enrolment. I am still unclear as to how it will work in practice. I also do not understand how, in a scheme with collective risk, we can work out what people would get if they wanted to take their pension pot with them under the liberalisation arrangements. I am not clear how the two would fit together, although I have raised these matters with the Minister in the past.

There is an inherent tension between the different parts of the pensions system, and it has been introduced by the Government, even though they were on the right track and things were going quite well. The Minister was quite dismissive when I suggested he pay tribute to the last Government for accepting the Turner recommendations and for legislating for auto-enrolment. He suggested that that had not been good enough and that his Government had done all sorts of other things, but what we did was part of the process. He said that there had been no reform of the state pension, even though that had been part of the Turner proposals that the last Government were introducing, but who can say what another Labour Government might have done?

Other matters that the Minister mentioned had been recommended by the Select Committee. I would love to take credit for those recommendations on behalf of the Committee, and I would like to think that they have had some influence on the Minister, particularly with regard to protecting consumers from high costs and charges. I hope that any other Government would have made a similarly sensible decision, so let us not suggest that only the coalition could possibly have introduced such measures, given that they did not fit in with the consensus that had been built up. So far, so good: things were getting simpler and easier to understand, but the proposals in the Budget threw everything up into the air again.

It was interesting to hear what the Minister said about the need for a single regulator. The Select Committee has made that proposal on a number of occasions. The Minister’s admission that he is coming round to that view, and that he had not wanted to introduce the proposal because the Government had only just set up the Financial Conduct Authority, suggests that the last reform of the regulator was perhaps a bit botched. As a result, we cannot get what we need—namely, a separate regulator. There is absolutely no doubt that if we go ahead with defined-ambition schemes and collective defined-contributions schemes, it will be imperative that people know who is regulating which bits of their pension. This is an incredibly complex area, but it is important for people to know who they can complain to.

Governance will be an important matter, and I, too, was dismayed to discover that there were no details of it in the Bill. My hon. Friend the shadow Minister said that those details would be introduced through secondary legislation. Governance is important in all pension schemes, but it is even more important in this instance. The fact that there are no details for Parliament to scrutinise is particularly worrying.

Another matter that I find particularly worrying is the absence from the Bill of information on the guidance guarantee. I had expected such details to be in the Bill by now but they are not, which worries me even more because the Government are obviously still working them out. My concern is about this coming later in amendments. We are already on Second Reading and I worry whether it will be worked out properly by the time the Bill goes into Committee for proper scrutiny. I wonder what the difficulties are—I suspect there are a lot, as a result.

As a result of all that, the Bill is vague, in an area that does not need to be or should not be vague—it is too important for that. Although the principle of defined ambition or collective defined contribution schemes is a good one, and I think we would all welcome the sharing of risk, it is hard to see who is going to be supplying these products and who will sign up to them, because at the moment it is much easier for people to understand the binary model, of which the Minister was critical.

I received a communication from the Law Society of Scotland, which has some concerns and questions about the Bill. I wonder whether I might mention them now, so that by the time the Minister sums up he might have some replies. I do not know how difficult the questions are but I will go through them, as the LSS has obviously sought clarification on certain points. Is it the intention that shared-risk schemes will cover existing schemes or only new ones? That should be an easy enough question for the Minister to answer. The definition of a pensions promise in the context of shared-risk schemes refers to factors “other than longevity”, so does that mean that these promises with an element of longevity are exempt, or does the promise have to be entirely based on longevity? Guaranteed annuity options or rates are based on longevity but also on factors such as long-term gilt yields. Is it the intention that the annuity quotes are included under the definition of a pensions promise? The definition of shared-risk schemes talks about promises made

“at a time before the benefit comes into payment”.

Does “come into payment” mean when an annuity is set up or when the first payment is made? Would third party promises include an arrangement whereby the insurer, as opposed to the scheme, made the promise? If the LSS is asking those questions, I suspect they may be ones that others also want answered.

Most of the briefings we received from various organisations and companies were generally supportive of the principle of defined ambition, but we all accepted and agreed on the principle of universal credit, and look where that has got us. The Government should not necessarily say, “Oh well, everybody supports it in principle, so everything is all right.” It is part of the role of a Select Committee to look at this. I know the Minister will be appearing before us at some point—perhaps he does not know this yet—certainly before November, to talk about the progress on auto-enrolment. One key thing for both the Government and the Select Committee is the success of auto-enrolment; it has to succeed simply because it is too big and too important for it not to do so. At that time I hope he will be able to answer some of the questions I have raised about the interplay between auto-enrolment, defined ambition and the changes introduced by the Treasury on pensions liberalisation, as well as the other questions we will have. I look forward to the Minister’s appearance before us in due course.

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[Nigel Mills]

That is a helpful clarification, but we have still had the bizarre situation in which the Pensions Regulator is responsible for auto-enrolment even though most of the schemes into which people are enrolled are not regulated by the Pensions Regulator. I sense that we are introducing further uncertainty into what schemes there are and people need to understand exactly what is going on.

Trying to create a new form of pension that can try to stop the bleed away from defined benefits is the right direction in which to travel. If we are to have a credible pensions industry, we need to ensure that people can have certainty or at least confidence that if they keep paying into their pension funds with their employers at the rate that they are they will have some idea what they will get rather than a vague hope that they might at some point get something suitable. That is the thing that does most discredit to the pensions industry. People end up getting so much less than they thought they would, despite what they thought they were paying and would be entitled to, that they decide the whole thing is not worth doing at all.

That question takes us to a fundamental part of pensions policy. We are spending a lot of taxpayers’ money on tax relief for pensions and if we end up with just a glorified savings vehicle with no direct link to pensions, we must wonder whether we will be distorting the investment market quite horribly. We need a clear and confident link, so that people know that the money they are putting away is meant to get a retirement income that they are happy with and is not just a super-glorified pre-tax income ISA, which I fear we might be drifting towards.

The Work and Pensions Committee considered the principle of collective schemes briefly in our inquiry on a pension governance a couple of years ago. The idea that we can somehow share risk between the generations, smoothing things out so that if there is a market crash just before someone expects to retire they do not suddenly have their pension income destroyed in a way that they cannot possibly recover from—clearly, that can be smoothed out by reducing the risk profile of investments, as is done now—looks to be a perfectly sensible and attractive way forward. I am a little intrigued about how we can go from having none of those schemes to having them in place, having enough people in them and having enough confidence that people will continue to join them to ensure that the intergenerational thing can work. Some European countries have had such schemes for 60 years and we can see how they work, but the question is how we go from zero to having three generations of people without the first lot thinking that they are taking all the risk for no advantage, although perhaps if their grandchildren join it might all be okay. I am sure that the industry will work out how to devise schemes in a way that will get people involved.

Let me turn to greater flexibility in the pension world. I can see that if we say that we do not think people are sufficiently engaged with pensions to join a scheme we must ask how we can be confident that they are sufficiently engaged to make even more difficult choices when they retire about what they want to do. There is a big difference. I might not be too bothered about pensions when I am 30, as I might have more pressing things to think about such as buying a house, paying for my children or sorting out other stuff, but perhaps when I am closer to retirement age and thinking about what my income will be in six months’ time, a year’s time or perhaps even a little further away, I will probably be much more engaged in the best choices for me and will perhaps be more inclined to go out and look at the various options.

One issue that we have had until this point has been that the option has been to have some kind of annuity that is lower than I would like. If I try to shop around, I find differing levels of things I do not like. That is not a great motivation to go shopping. If I know that I am not going to want to buy any of the things I am offered but I have to, I might as well just default to the first thing I get. There does not seem to be any advantage to shopping around.

[Dame Anne Begg]

Does the hon. Gentleman agree that often when there is too much choice people are paralysed and end up grabbing at the first thing that comes along rather than the thing which is best?

[Nigel Mills]

Yes. Some data suggest that the optimum number of choices is four. If there are 20 choices in a mobile phone shop, people walk out without buying one. If there are not enough, they do not ever have a phone. We need enough choice to see a difference, but not so much that we are completely baffled by our options.

I think that we are hoping that the market will innovate certain things that will mean it will not be a choice of annuity into which we will opt for life that will give the same amount for the rest of our lives or some kind of draw-down in which we keep spending our pots and hoping that they will last. I suspect that we will end up with people taking some kind of fixed guaranteed income, so that no matter how long they live they will have the quality of life that they want, but they might be able to choose to use some of the rest of their money to fund travelling in early retirement, paying off the mortgage or doing something for their children or grandchildren. Perhaps we could have an annuity that varies, which is higher at the start, dips and then goes up at the end when people need care fees.

I think that we are hoping that most people with a small or medium pension pot will not be faced with a blizzard of hugely complicated financial products, but that there will be options that they can match to their personal choice for their retirement. That is where high-level guidance is important.

People need to understand that there are different things out there for them to look at. I suggest that they do not just immediately accept the annuity offer that their pension provider makes. They should at least think about what would suit their lifestyle, what their existing financial position is and what they and their spouse want to do. That is where guidance is very important. It is very different from financial advice, which might be, “Take out this annuity with this provider, on these terms.” I suspect there is no way to get such specific guidance, and we should never want such specific guidance. That would be a horribly expensive programme, which would only be appropriate for a relatively small band of people.

Those who retire with huge pension pots should already be taking such advice and can afford to pay for it. Those with small and medium pots will not have that advice and, I suspect, in many cases will not need to spend thousands of pounds getting advice; it would not be a worthwhile use of their money. It is people in the band in the middle who perhaps could really benefit from expensive financial advice. How we get that guidance to work, and when people receive that guidance, is very important.

I think that we shall see a move away from retirement at one’s 66th birthday, or another fixed date. People may gradually step down to working four, then three days a week. They will have small amounts of income coming in from different sources. Lifestyles will vary, and they will start varying, perhaps, in people’s mid-50s. Some people will work full time right into their 70s. Possibly, they will not want advice at the age of 65 and a half or 66; they will need to think, “Do I want my pension fund to start de-risking my investments now, at age 55, or would I rather they did that for part of my pension fund, so that I know that I will get something when I am 66 but I will keep some higher-risk investments to get a higher yield for a few more years?” When we make that guidance available, and when people can choose to receive it, will be a key aspect; otherwise, people will end up in a default fund that does not suit what they plan to do with their own hard-saved income.

It is clear that the change is a very positive step in the right direction. If people are responsible enough to save for their retirement, I cannot see them frittering the money away on the proverbial Lamborghini when they hit 66. This flexibility will give people the chance to have the retirement that they want without being ripped off by the annuity market.

Some of us had wrestled with the question of how we could fix the broken annuity market. I had come up with the suggestion of splitting the pension fund industry and the annuity market, which did not meet with much approval in the industry. But what the Government have done is far more radical. An annuity may be the right thing for many, many people; but for many, it will not. Now there will be no compulsion or expectation for people to take out an annuity when they hit retirement age. That has to be the right answer, and I fully welcome the Bill.