Economy: Personal Savings

Baroness Altmann Excerpts

Thursday 12th July 2018 Lords Chamber

[Baroness Altmann (Con)]

It is a pleasure to follow the right reverend Prelate, and I, too, congratulate my noble friend Lord Leigh for initiating this debate on the important issue of the fall in the savings rate. I also offer my congratulations to my noble friend Lord Lilley on his brilliant maiden speech. We all look forward to hearing many more words of wisdom from him in the coming years.

This is a debate about the role of savings in economic growth, building a stronger and fairer society, and promoting personal savings and the savings habit, which is surely an element dear to the hearts of most of us Conservatives and, indeed, most of us in this House across all parties. I congratulate my noble friend the Minister and the Government on some of the excellent initiatives that have been introduced to promote and build up a savings culture once again. Many of us have been concerned that that savings culture has been lost or damaged in recent years, partly due to the Bank of England’s emergency measures of quantitative easing, which have driven interest rates down so low, and have caused serious problems to pension schemes in this country.

The introductions of auto-enrolment and the pensions freedoms have been excellent opportunities to increase the coverage of pensions and make them more user friendly. In addition, we have had the Pension Wise service, which will be merged into the single financial guidance body, which is something that we could and should have had years ago—a national scheme that will help individuals better understand how to manage their money and pensions. Indeed, it will include debt, too.

The charge caps on default funds in pension schemes, after so many scandals with excessive what we call “rip-off” charges for so many years, are again extremely welcome. I also welcome the increase in ISA allowances, but I shall come back later to express some concerns about the overall ISA framework.

On exempting savings interest from tax, every little bit helps when interest rates are so low. That is certainly to be commended. The Help to Save scheme, which a number of noble Lords have mentioned, will I hope be an excellent initiative. And then there is help with debt generally, in controlling excessive charges on high-cost credit. All these things are to be commended, but many areas still need improvement.

I shall focus on some of the ways in which issues such as saving and debt are causing problems in the economy, and some of the possible resolutions, before finishing with some of the longer-term issues for savings and investment. From the point of view of the Lords Select Committee on Financial Exclusion, it was clear that there are real problems across the country, with 31% of the population reporting signs of financial distress. Twenty per cent of 18 to 24 year-olds are having problems with credit scores, which will lead to a rise in debt levels and in the use of high-cost debt, which are a significant cause for concern. The Bank of England’s analysis responded to concerns about the extreme rise in debt levels across the country, suggesting that they were not of such concern because increases in borrowing rates had been matched by rises in the value of financial assets. That did nothing to assuage my concerns or those of many others because, of course, most people who have high debts do not own financial assets, and therefore are negatively affected.

We are seeing this in the workplace. I declare an interest; I am advising a social enterprise that is trying to help workers manage their high-cost debt in the workplace through salary deduction and consolidation at lower rates. We know that financial worries exacerbate stress and mental health issues. These are already the biggest causes of sickness absence from the workplace, with 17.5 million working hours lost as workers take time off due to financial stress. Barclays did a study in 2014 which suggested that 46% of employees worried about finances. In 2017, the CIPD suggested that 25% of employees said that financial problems affected their work performance. Indeed, in the public sector for some reason that was 30%. So clearly there are issues. If employers can see the clear self-interest in helping their staff reduce debt costs and manage their debts, using programmes such as salary finance, which enable employers to deduct debt repayment from their staff’s salaries so they do not have to keep worrying about juggling debts and about where and how to manage repayments, it could be a win-win by improving productivity, staff well-being and the financial resilience of our population, which is so important as we move forward. We have had some years of very reasonable economic performance, but we cannot expect that necessarily to continue, so if we are able to build up financial resilience, that can only be of benefit to society as a whole.

I cannot properly speak in this debate without mentioning the exciting and brilliant topic of pensions—at least, I think they are exciting and brilliant. As the noble Lord, Lord Palmer, said, this brings us to the important issue of the difference between savings for a rainy day and investment for the longer term. Too often I feel that the public—and indeed sometimes policy—confuse the two and think of it all as savings, whereas there is a fundamental difference in terms of long-term investment. Pension saving by its nature is long term. We have hundreds of billions of pounds built up in pensions in this country. I know that we keep reading headlines about the pensions crisis and that there is not enough in pensions, but there is a huge sum of money in pensions, and we perhaps have an opportunity to focus on using those assets productively.

There is an attempt, on which I commend the Government, to use more of the assets of local authority pension schemes to invest in infrastructure. Consolidating the schemes, we could use pension assets for social housing and environmentally and socially responsible investing. There is an opportunity in the workplace with auto-enrolment. Will the Minister comment on the opportunity to engage in particular young people but workers of any age with what their pensions are invested in and to educate them and enable them to understand investment? So many people fail to understand the first thing about pensions, despite the fact that, with the pension freedoms, they are the most brilliant product. They are user friendly and can be used in ways in which we did not use them before. As we spread auto-enrolment across the whole workforce, this is increasingly important.

I shall just mention some notes of caution and ask the Minister to comment on some of them. First, as has been mentioned, it is vital to help consumers. A proper ban on cold calling is long overdue. All the scandals I have seen in pensions have started from a cold call. We worked hard across the House on the Single Financial Guidance Body and on the Bill that has just gone through to try to introduce a proper ban on cold calling that would require the FCA, the regulator, to prevent and disallow providers using leads from unregulated lead generators that started with a cold call. That is work in progress and has not yet been achieved.

There is also an issue with the ombudsman. A report has been issued today, I believe—I do not know whether my noble friend has had time to see it—on some of the failings of the Financial Ombudsman Service. There is great merit in helping consumers by merging some of the activities of the various consumer services that are there to help the public. The Pensions Ombudsman does not deal with all pension complaints. The Financial Ombudsman Service deals with some of them, the Pensions Ombudsman with others. Would it not make sense to have every pension complaint dealt with by one ombudsman?

My noble friend Lord Lilley mentioned pensions tax relief. I have long believed that most people do not have the first clue how much they get from pensions tax relief or what it is worth, yet we spend more than £40 billion a year on it. If we could rebadge pensions incentives as a flat-rate top-up, a bonus that you get for saving in a pension that is contributed to by the taxpayer, people would start to understand it and value it.

One could get even more radical and suggest that auto-enrolment, once it is bedded in, becomes compulsory. That would mean that the Treasury might not need to spend any of the money it spends currently on tax relief on auto-enrolment pensions, saving the taxpayer a fortune. The value of the pensions tax relief is tiny compared to the value of the employer contribution, which is a major incentive. Going on from that, it would be possible to have more generous incentives, funded by the taxpayer, to encourage people to build on more than the minimum under auto-enrolment, which I think most of us would agree will not give you a huge pension. It will give you a bit extra, above what the state can give you.

There is a scandal in the pensions system at the moment which I am very concerned about. I have raised it in the House several times and I implore my noble friend to take this issue back and ask for urgent action. It concerns what are called net pay administration schemes. There are millions of low-paid workers—this applies only to workers earning below £11,850—who are auto-enrolled into a pension administered in such a way that they cannot get the 25% bonus of tax relief that they are due. Most people do not know about it. I do not want most people to need to know about it. I urge the Government to deal with it so that these people, who are surely those who need most help with pension saving, end up with the money they are owed. I do not want another big scandal on this.

The other issue that concerns me is the lifetime ISA. In my humble opinion, it is dangerous, confusing to the individual and a huge mis-selling risk. Most people who go into it will need financial advice—but not necessarily a financial adviser—because they will not understand the penalty of at least 6% that they will pay if they take the money back. If we want to incentivise house purchase, we should do so directly, rather than confusing people with something that masquerades as a pension but has completely the wrong behavioural incentives. With pension freedoms, pensions are brilliant, because there is now more reason to keep them into your 80s, and that is what pensions should be about: lasting for the rest of your life, not giving you a pot of money to spend at age 55 or 60.

That brings me to my final point, which is that we must address the issue of saving for social care. Nothing has been done on this. We spend £40 billion incentivising retirement saving in just one product—the pension—yet a pension is not enough to see people through 21st century retirement. I recently had a response from the Government to a Written Question which identified that the over-65s—just the over-65s—have on average almost £40,000 in ISAs. There are millions of people with this money; it is not earmarked for anything. We know that the baby boomers are criticised for having savings, pensions and houses, but we should be harnessing that and celebrating it. If we look forward 10 or 15 years and they start needing care, but they have spent all that money, we will have a problem. However, if we have encouraged them to keep some of the money they have saved for care, we will have the beginnings of some kind of resolution to the care crisis, which makes the pension crisis pale into insignificance.

There is not a penny set aside for the future funding of social care—not by individuals, or the Government, whether national or local—and this cost is coming. Perhaps we could have a care ISA allowance. People could rebadge the ISAs they have, and maybe we could incentivise that by making them inheritance tax-free. That would not cost the Government much at all right now, but it would mean that people could save for later life. We could maybe allow people to take money out of their pensions tax-free if it were used for care in later life. Anything we can do to help people—the baby boomers, in particular—keep their ISAs and pensions for later life would be commended. I would be most grateful if the Minister would comment on that. I congratulate my noble friend again on raising this important debate.