Queen’s Speech

Baroness Drake Excerpts

Wednesday 25th May 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the gracious Speech heralds yet another pensions Bill, and recent Budgets have been characterised by intense speculation prior to yet more changes to the savings regime. There has been so much change but so little clarity on the long-term objectives of government savings policy. People are not sure where the Chancellor is going, and they certainly do not know what will happen next. The behavioural response of employers, consumers and the market to these changes is not fully considered. Freedoms and choice exercised in a market where the consumer side remains weak and conflicts of interest prevail results in ever more regulation and complexity, yet there has been a limited attempt to build a consensus.

Pension policy has a 30-year incubation period. It is a responsibility to be shared by Chancellors across the generations. No one can claim to have delivered the answer, as they can never be around to see it to fruition. There has been much comment about the lifetime ISA and whether it will compete with savings under auto-enrolment. My concern is less with that risk and more with what that decision trails for future policy. What is a sustainable and fair level of tax relief for long-term saving is an important issue and a legitimate question. However, I fear that the Chancellor may proceed to snatch defeat from the jaws of the auto-enrolment victory. There needs to be a more open consensus about the impact of any change, not only on today’s fiscal deficit but on the impact over the longer term.

Auto-enrolment gets people saving through harnessing inertia, but employers and their contributions are key to its success and the overall level of savings. Yet the Government’s consultation document on tax relief made no reference to the employer role until the penultimate paragraph. The emphasis was all on the individual voluntary incentive to save—a very significant shift in policy thinking but with little evidence of the analysis of the behavioural implications.

Auto-enrolment has seen millions start to save, but their savings need to be held in institutions that are fit for purpose. Workers in master trusts represent the biggest group of new pension savers: some 6 million. However, these trusts require no licence to operate, there are few quality standards for market entry, and unsustainable players are putting savings at risk. Some 59 master trusts are used for automatic enrolment. They cannot all achieve the necessary scale to survive. Yet there is no infrastructure or legislation in place to support the wind-up of such a trust and protect workers’ savings. The proposed tougher regulation announced in the gracious Speech is long overdue.

Individuals are required to take increasing responsibility for their own financial planning, so the Government’s intention to introduce a pensions guidance body and a money guidance body providing access to guidance on debt and on money is welcome. However, pensions guidance needs to be impartial and provided by guiders who have a depth of knowledge and expertise. Without that expertise, guidance becomes merely an information service. It does not add value; it simply replicates what providers routinely offer and does not fill the market gap. People have low levels of knowledge, and the presenting question is often not the issue. The diagnostic of the customer’s issues is key to adding value from the guidance, and, without those elements, it will not deliver what people need.

The Bank of England chief economist, Andy Haldane, speaking recently at the think tank New City Agenda, suggested that even advisers do not understand pensions, admitting that he too cannot make sense of the increasingly complex pensions market. He also referred to providers having made financial products difficult for the public to understand and more complex than necessary, with consumers charged a premium for buying them. He suggested that such complexity is a desperately poor basis for sound financial planning and that the problem is becoming more acute because more of the risk associated with financial decisions is being shouldered not by the state or companies but by individuals.

However, guidance and financial education can achieve only so much. We keep coming back to the profound need to change the behaviour of the providers in the market. For example, achieving transparency of disclosure of transaction costs on savers’ assets is still unfinished business, but I assure noble Lords that resistance is alive and well. Which provider will be the first to break rank and release their costs if they think it is to their detriment? There are so many costs outside those that the saver is told about. Many of the implicit costs are hidden in the change in the market value of assets. However, as the Transparency Task Force observed recently, it is actually even worse—some costs or revenues do not show up anywhere. Without further action by government on compelling disclosure, the desired transparency will not be achieved and the markets will remain unfair.

Finally, I too congratulate the right reverend Prelate the Bishop of Newcastle on her maiden speech. Her passion for the people of the north-east shone through and she certainly did them proud.