Pension Schemes Bill

Brian Binley Excerpts

Tuesday 2nd September 2014 Commons Chamber

[Mr Peter Hain (Neath) (Lab)]

In noting the interesting points that the hon. Member for Amber Valley (Nigel Mills) raised, I particularly commend his colleague, the hon. Member for Cities of London and Westminster (Mark Field), for drawing to the attention of the House the fact that the average pension pot is just £17,700. That is a miserably small amount, and underlines the dire predicament that far too many pensioners face, and which the Bill does nothing significant to address.

The hon. Member for Amber Valley makes interesting points, and some valid points, about lifestyle changes as people get older, but they apply in the main to professionals and middle-class people. For a lot of working-class people who have worked in manual, low-paid service jobs for most of their lives, those choices do not exist in the same kind of way; I caution the hon. Gentleman about that.

I commend my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) for his expertise and very authoritative critique of the Bill, which I guess he will follow through in Committee.

The Government are introducing in this Bill the biggest reform to pension tax rules in nearly a century. Of course citizens, especially those with small pension pots, welcome the choice to take lump sums that may be more beneficial to them—by, for example, enabling them to pay off a mortgage or loan, or fund social care support—rather than eking out a living on what, for far too many, will be very small monthly payments. The kind of annuities that most people have are not inflation-indexed, so their value erodes every year. Most neither cover a partner nor offer protection against illness or infirmity. Most do not allow people to leave a legacy if they die young; nor do they let them benefit from good future investment returns or rising interest rates. For all those reasons, there has been widespread public frustration about the inflexibility of annuities, especially in the past few years of low interest rates and because, as people live longer, a retirement can be as long as 20 or 30 years. To buy an annuity 30 years ahead when savings could continue to accrue as investments makes less sense than previously.

So far, so good, as far as the Bill is concerned, but there are massive dangers as a result of destroying good annuities, which has been going on for a few decades and is bequeathing a real nightmare that the Government’s policies are nowhere near capable of addressing, let alone preventing. A rapidly ageing population is dumping a huge additional burden on the young, many of whom are leaving university with already massive debts thanks to the Government’s dysfunctional policies. Now they will be saddled with subsidising through their future taxes older people who are being encouraged to live for today, not to protect themselves for tomorrow. My right hon. Friend the shadow Chancellor was right to voice fears in March that widening choice away from annuities could mean individuals spending all their savings within a few years of retirement and then becoming dependent on the welfare state, at a significant cost to taxpayers. There is a serious prospect that pensioners who cash in their lump sums could be plunged into poverty, leaving future taxpayers to grapple with the consequences.

It is therefore incredibly important that pension reform is not carried out in isolation, although the Bill risks doing that, because it is one of many ways, albeit not the only one, in which we can give peace of mind to people planning for or approaching retirement. It is imperative that reform happens in the context of a comprehensive policy for retirement and ageing in the UK, especially with regard to health and social care for the elderly, on which my right hon. Friend the shadow Health Secretary has rightly insisted that we need whole-person care in what amounts to a national care service to complement the national health service. Mainly because of their obsession with cutting public spending, the Government continue to fail abysmally to face up to this huge challenge and duck the reality that there will have to be much more significant public support to deal with this urgent social need. They continue to pass the buck to future Governments and taxpayers, and to ensure that there is a future in which infirm and frail elderly citizens and their families see their savings and inheritances disappear as they are engulfed by horrendous care costs.

Our changing demographic profile means that baby boomers—people such as me who were born between 1945 and 1965—will form the big bulge in the active ageing category. That change presents immense problems, not least in preparing for the future. Ironically, as our society gets older, pensions should increasingly become a young person’s issue, because the ratio of workers to pensioners has started to tip towards crisis levels. In the next 50 years or so, the number of people over pension age will increase by more than half, and there will be only two people working for every one person in retirement, compared with four working people for every retired person today. A hundred years ago, there were 10 working people for every one person in retirement.

I remember only too well having to confront that serious situation when I was appointed Secretary of State for Work and Pensions in 2007. The cost implications for future generations of such increasing longevity are deeply alarming. People are expected to be active for longer in retirement and need the resources to fund that. I welcomed the Government’s delivery, through the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013, of measures that I introduced through the Pensions Act 2008, but I see no sign at all that they have any intention of taking the necessary decisive action to ensure that most people get decent pensions, whether private or public. They are certainly not doing that through the Bill. The decline in private sector occupational pension provision since the late 1960s is serious and, in the face of increasing costs, employers have been abandoning their defined-benefits—that is, final-salary—schemes, whose active membership numbers have fallen from 8 million in 1967, to 5 million in the 1980s and 1990s, to fewer than 3.5 million today.

There is a chronic problem of under-saving, with perhaps as many as 7 million people not saving enough to fulfil their aspirations in retirement, and some low earners not saving at all. The Bill does not tackle the problem, meaning a chasm will grow between the income that they need and what they actually receive in retirement. There are many reasons for people not saving. Many on low incomes or with broken working patterns do not have access to a workplace scheme. Some will be put off by the complexity of pensions while others will simply live for today. Others will lack confidence in pensions. The Bill does nothing to address that.

Of those of working age, around three quarters say that they will need more than the state pension to live on, yet only around 40% of those who have not yet retired are saving into a private pension; 60% are not. We must get to the point at which saving becomes the norm and a savings culture is embedded in society in general and in the young in particular. In that respect I welcome the Government’s decision to raise the level for tax-free ISAs and premium bonds, but such initiatives deal only with the tip of an iceberg; the Bill does absolutely nothing to deal with it.

Sixteen per cent—one in six—of 20 to 24-year-olds are saving for a pension, compared with about half of those aged over 35. Less than half of moderate to low earners with incomes from £5,000 to £35,000 are saving towards a pension, compared with three quarters of those earning more than £35,000. The requirement for automatic enrolment into a qualifying pension scheme introduces for the first time a bias towards saving, which is welcome. Evidence suggests that automatic enrolment is one of the most effective ways to combat people’s tendency not to act when faced with difficult financial decisions. It also has the greatest impact among groups where participation rates are the lowest. On the other hand, nobody should pretend that most such schemes will deliver the kind of living standards in retirement that people today expect. Most will not—and the Bill does not.

The plight of those who lost their pensions because of the collapse of their occupational pension schemes was both a national scandal and a personal tragedy for all the individuals concerned. Through the Pension Protection Fund, the previous Labour Government legislated to ensure that such a scandal could not be repeated in future: it safeguards more than 10 million people in eligible defined-benefits occupational pension schemes throughout the UK. We also established a more powerful Pensions Regulator. I was able to deliver late in 2007, through the financial assistance scheme, a fair and just settlement for 140,000 people who were robbed of their occupational pensions as a result of employer insolvency before the Pension Protection Fund was created. All those affected received 80% of their expected core pension.

When Labour came to government, many women were prevented from building a state pension entitlement in their own right. Our Labour Government made significant headway, legislating for a simpler, fairer and more generous state pension system, so that about 75% of women who retired in 2010 received a full basic state pension like men. As a result, by 2025 more than 95% of men and women will retire with a full basic state pension. This Government have also made improvements, but there are still anomalies they have not resolved, especially for women today in their late 50s. The Bill does not address that and there is no sign that it will do so.

In 1997, carers were similarly mistreated by a system predicated on a 19th-century view of working lives and social relationships; millions were without access to occupational pensions; and the mis-selling of private pensions, overseen by the previous Conservative Government, was a national scandal. Meanwhile, the exceptional equity returns of the 1980s and 1990s allowed many defined-benefits schemes to ignore the rapid rise in the underlying cost of their pension promises.

That was compounded by botched policy such as the minimum funding requirement introduced by the current Leader of the House, then the Minister responsible, which failed to encourage employers to fund their pension schemes properly. In the 1980s and 1990s, many firms, despite rising liabilities, took the decision to take contributions holidays, believing that a bullish equity market would be a long-term trend. The Conservative Government believed that too—indeed, they encouraged it, as demonstrated by Nigel Lawson’s decision effectively to cap pension fund surpluses in 1986. As the Pensions Commission noted:

“The deep dip in contributions seen in the period 1988-91...almost certainly reflects the impact of this policy.”

[Mr Brian Binley (Northampton South) (Con)]

I am listening with interest, as I always do, to the experienced right hon. Gentleman. I understand many of the points he is making, and, as a pensioner myself, I have some sympathy with them. However, I wonder whether he has sympathy with me, in that when he paints a picture of all that has gone wrong, would he include in that picture the work done by the former Chancellor of the Exchequer who later became Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), in taxing the private sector pension schemes almost to the point of destruction? Does he agree in retrospect that that was not the cleverest move?

[Mr Hain]

I have great respect for the hon. Gentleman despite our big political differences. I anticipated this question, he might be intrigued to know, and I looked into it. In fact, he is entirely wrong and that Tory charge is entirely misplaced. Let me explain why. The stock market fall reduced the basic market value of pension scheme assets by some £250 billion between 1999 and 2002. The effect of the package of tax changes for which he and the Conservatives seek to pin the blame on our Government and Chancellor was entirely marginal. The problems that occurred in the new century were due to the stock market downturn, not the tax change, which was minuscule compared with pension fund turnover. Let me remind him that in 2007 the respected and extremely independently minded economics commentator Anatole Kaletsky wrote in The Times:

“How could the removal”—

by the Chancellor, that is—

“of a £5 billion annual subsidy suddenly reduce a pensions industry with more than £1,000 billion in assets from the ‘healthiest in the world’ to one that was nearly bankrupt? The answer is that it couldn’t and it didn’t.”

That rather puts into perspective the hon. Gentleman’s impudent and irrational question.

It was no Tory utopia in pension holidays in the 1980s; it was a Tory fool’s paradise, with the Government behaving irresponsibly, recklessly and complacently in encouraging employer pension holidays. I quote from the 2004 Pensions Commission report:

“When the fool’s paradise came to an end...companies adjusted rapidly, closing”

defined-benefits

“schemes to new members. A reduction in the generosity of the DB pensions promises which existed by the mid-1990s was inevitable.”

So the Tory party bears a heavy responsibility for the closure of defined-benefits schemes and the shift towards defined contribution, and this Bill nowhere near compensates for that.

To be fair, though, this was not a UK-only phenomenon, and certainly not one brought about by changes made by the previous Labour Government—very far from it. Accelerated further by record demographic changes, it was a worldwide phenomenon—a product of the neo-liberal orthodoxy gripping Governments from the era of Margaret Thatcher and Ronald Reagan. Sadly, this Government remain in the grip of that, and the Minister’s former Liberal party colleague, John Maynard Keynes, would be turning in his grave to see a Liberal Democrat participating in it. In the US, for example, the number of defined-benefit schemes halved in less than 30 years, while defined-contribution schemes tripled. Australia, also worshipping neoliberalism, saw an 80% reduction in the number of workers covered by defined-benefit schemes from the 1980s.

Whereas this Bill does very little, if anything at all, to tackle pensioner poverty, Labour led the way in responding to the challenges that our pension system faces. First, we tackled pensioner poverty. In 1997, some 2.7 million pensioners were living in poverty, many facing the indignity of living on as little as £69 a week, as I am sure you will recall, Mr Deputy Speaker.

Thanks to the pension credit, winter fuel payments and a 9% real-terms increase in the basic state pension, we lifted more than 2 million pensioners out of absolute poverty. The measures in the Pensions Act 2008 took protection even further, with a new settlement for women and carers and a restoration of the earnings link that had been removed by the Conservatives in 1980.

We also took decisive action to tackle the loss of confidence in the private pensions market. One reason for that loss of confidence was the pensions mis-selling scandal that our previous Labour Government inherited. In 1997, less than 2% of pensions mis-selling cases had been satisfactorily resolved; by the end of 2002, under Labour, more than 99% of consumers with mis-selling claims had been compensated, with total compensation reaching £11 billion. That £11 billion was the bill for Tory incompetence and Tory injustice over pensions mis-selling.

I make these points because they are an essential background to this Bill, whose implementation will itself raise important problems. A key one is that people might spend all their pension savings at the point of retirement, dooming themselves to poverty later in life. Having saved into a pension fund, received tax relief for many years and reached retirement with a pot of money, they might be tempted to just blow the lot all at once—perhaps on the Minister’s Lamborghini—meaning they would never have the benefit of extra income as they get older. If that happens, the tax relief they received will not have funded a pension; the employer contributions they may have received along the way will just end up funding immediate consumption, rather than providing a long-term income.

We know that some people will do that; we do not know how many and we hope that the number will be relatively low. The Government assume that very few will do so, but a survey by the respected pensions expert Ros Altmann—whom the Government appointed in July as their business champion for older workers—suggests that currently about 7% say they would spend it all. The truth is that it is impossible to accurately predict this. I expect that people with small sums would be most likely to spend the whole lot, but that the tax system itself will act as a disincentive to others to take the money and run. However, if too many people do it—the rising cost of living will put pressure on them to do so—there will be increasing numbers in poverty in future, which will also be a drag on the whole economy as the baby boomers get older and have less and less money to spend.

The new flat-rate state pension mitigates some of the risk of people falling back on the state having spent all their pension savings, but there will still be about 20% of pensioners on means-tested benefits even after the new system starts. That is partly because many people will not receive the full state pension during the early years, and also because there are other means-tested benefits aside from pension credit. Those who do not own their own home would still be potentially entitled to means-tested benefits in retirement, via council tax benefit and, of course, housing benefit.

People might try to game the system by taking all their pension money and then recycling it into a new pension fund, getting more tax-free cash and another lot of tax relief. That would be of most benefit to those who are reasonably well off with high incomes in later life, and it could be costly in terms of extra Exchequer spending on tax relief.

The new system could cause great confusion for people. These points have been made by Members who have spoken before me. If people are suddenly faced with new choices at retirement, they may not know what to do and end up at the mercy of pushy salesmen selling unsuitable products. In the old system, people pretty much had to buy an annuity unless they had substantial amounts of pension savings—perhaps £100,000 or more, but certainly at least £50,000. That meant there was no choice to be made, and there was no guarantee of receiving a secure income for life: the annuity may have given people very little, it might have been the wrong type of annuity for them and usually had no inflation protection. That was partly because insurers did not treat customers fairly and were left to regulate themselves, without having to offer suitable products or good value, but with the chance of taking about 2% of each customer’s pension fund without their realising.

Few dispute that the old system clearly did not work for customers, and the Financial Conduct Authority and the Financial Services Consumer Panel uncovered some disgraceful practices that were very detrimental to consumers. I recognise the Minister’s sincerity in seeking to address some of those problems.

Annuities were not value for money. In fact, someone retiring last week with savings of £100,000 and the intention of buying a pension annuity that kept pace with inflation could expect to be paid only about £3,600 annually. Assuming they are 65 years old, they will need to live to the age of 93 to get their money back; 15 years ago, they would have received much more.

That was partly a market issue, and it should perhaps have been possible to reform the market without the draconian retreat from annuities that this Government are proposing in the Bill. Would it not have been possible to insist that insurers were obliged to treat customers fairly by ensuring that they would be liable if they did not carry out suitability checks to identify which type of annuity was best and if they did not offer a good rate? Would it not have been possible to reform the way annuities worked, and to allow more but not complete freedom?

What protections will be built into the new system to ensure that unsophisticated consumers are not left at the mercy of product providers offering poor product choices or higher risk products that people do not understand and on which they will end up losing significant sums? The FCA needs to be on top of that right from the start. Judging by past form, can we be confident of that? I have very serious doubts.

What will the Government do to ensure that people are given proper, impartial and professional help before they make their retirement decisions? Half an hour of free guidance will not be enough. Such guidance must be delivered by those who are qualified and can be relied on to ensure that people ask the right questions before they buy a product or make a decision that, for lots of them, will be a life-changing one.

Ideally, guidance to help people to make a financial plan should start to be given well before retirement. We have underestimated the complexity and confusion that people face compared with what was faced by their predecessors, who were simply in an annuity scheme that came and went with their working life. Although it might be hard for the very young to take such advice on board, would it not still be worth expanding some of the guidance for potential savers?

If the guidance is delivered by product providers, they are liable to entice their customers into poorer-value products. Experience shows that they will do whatever they can to try to keep customers’ money, or to give them poor value and make extra profit. The annuity market has worked poorly for years, with rising profits to insurers and reducing value for customers, who ultimately are pensioners. What will the Government do to ensure that the new products developed finally offer good value, and that charges are fair and terms reasonable? The Bill does not adequately address those questions.

Will the Government ensure that people get signposted to full advice as well as just guidance? In the new, more complex world, a much wider array of choices will be on offer and people need to understand them all. They also need to understand the tax implications of cashing in their pension fund, so the guidance must make that clear.

Why did the Government not consult on these radical measures before introducing them as a bombshell earlier this year? My view is that if they had done so, the industry lobby would have been so fierce that their introduction would have become too difficult. Only shock therapy will really wake up the industry.

Now that all or a substantial part of a person’s savings can be taken out on the day of retirement, a pension plan is more like a golden handshake for leaving work. Let us say that a person reaches their late 80s and finds that they are fast running out of money. Where is their safety net, except to fall back on the welfare state, which is certainly not the Chancellor’s favoured outcome, even for those already in desperate need? Choice is good but structured choice is better, especially when the issue at stake is people’s hard-earned futures.

We need a pension system that works not for the market, but for pensioners and taxpayers. According to the RSA, most people want to

“give their money away to someone whom they can trust will use it wisely to generate an income when they retire”.

We need a comprehensive private pension system. That is not something that exists in the UK, but it must exist in the future. That point is not addressed seriously by the Bill or any of the Government’s policies.

There has been a lot of talk about the Dutch model of mega-funds. In Holland and Denmark, people put money aside each year and receive a pension in retirement. That seems simple and it is. However, if a typical British pensioner and their Dutch counterpart each had the same amount saved, had the same life expectancy and retired on the same day, the pension that the Dutch saver received would be 50% higher than that of the British pensioner—that is half as much again. With the same amount of money saved, there is a huge increase in peace of mind and quality of life.

The Pension Schemes Bill will enable employers to offer collective defined-contribution schemes—versions of mega-funds—at their discretion, but few employers have expressed enthusiasm. According to the Minister, CDC schemes offer higher and more stable returns by pooling risk. Employees will all pay into one common pot, instead of braving market risks on their own, so that years where losses occur can be offset by those that see a profit.

The Government are right to legislate to permit collective defined-contribution pensions, but I urge Ministers not to over-hype the benefits. In principle, such schemes ought to be better for employers than traditional final salary schemes and better for workers than traditional defined-contribution schemes. In practice, they still suffer from market and actuarial risks. Ros Altmann points out that lower earners might subsidise higher earners and that younger members might subsidise older members. The new pension freedom provided for in the Bill to take most, if not all, of the pension pot in a lump sum might also mean that people will prefer pure defined-contribution schemes that they can access in retirement if they wish to, because collective defined-contribution schemes usually mean that people cannot just take the cash, which might well make them less attractive to members.

My challenge to the Minister is, rather than leaving the private pension system to market providers and their whims, to build a new system that works—a system with longevity that savers will understand and find confidence in. A lack of confidence in the Government’s approach to pensions is something that I imagine savers and I share.

There seems to be some ideological confusion within the Government about the structure of pension reform. On the one hand, the Bill allows pensioners to withdraw their savings in a lump sum at retirement, doing away with annuities, which may be flawed, but which are important for older people and especially for vulnerable people who need to ensure a continuous income stream. On the other hand, the Minister has championed the idea of allowing employers to offer Dutch-inspired collective defined-contribution schemes. It is the individual versus the collective—which is it? The two ideas are not entirely incompatible, but they are far from ideological bedfellows. The Chancellor’s plan has serious appeal to providers of pension products, who until now have been limited to annuities, but who will now diversify and probably profit hugely from the move, as they usually do, at the expense of pensioners. It would be interesting to know whether the Chancellor consulted his City friends ahead of the policy announcement.

As my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East argued, the biggest long-term issue with the end of compulsory annuitisation is efficiency. The returns for savers will be lower because pension funds will have to assume that an individual will exit the scheme at 55 and, 10 years before that exit date, will have to move the individual’s pension savings into low-risk, low-return assets—that is, bonds—to ensure that there is no possibility of a reduction in the size of the pension pot in the run-up to exit. That is known as a lifestyling investment strategy and it is standard.

Before the taxation of pensions Bill, the fundamental critique of individual DC pensions was that they prevented savers from getting the higher returns that come from pooled investment, where greater risks for greater rewards can be taken because there are enough assets to hedge against those risks. The Government now risk making the problem even worse by ensuring that the shift to low-risk, low-return assets takes place even earlier in the pensions savings cycle, at age 45 rather than 55 as now. While the Chancellor’s right hand further fragments and individualises pensions, the pensions Minister’s left hand legislates for collective defined-contribution pensions. Why should any employer move to that collective system when they can see the Treasury going down precisely the opposite route? I doubt, sadly, whether many will do so.

There are other issues such as the nature and provider of financial guidance, who foots the bill for it, and the impact on eligibility for means-tested benefits and social care. The issue of efficiency, however, is fundamental: greater freedom might come at the expense of bigger pension pots.

In conclusion, I have considerable concerns about the Bill, and do not think the Government are doing anything like enough to face up to the time bomb of our ageing society, and the required pensions and social care needed to underpin the new life rapidly overtaking us. The whole Government philosophy of leaving private pensions to the market, and saying to the citizens, “You are on your own”, has failed abysmally in the past, just as—sadly—I believe it will fail abysmally in the future, at terrible cost to us all.