Pension Schemes Bill

Kelvin Hopkins Excerpts

Tuesday 2nd September 2014 Commons Chamber

[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.

[Kelvin Hopkins (Luton North) (Lab)]

The Minister talks about poor value for money, but essentially is the problem not the private pensions market? A universal state scheme would be incredibly efficient, give much better value for money and could be underwritten by Government. Such a system would make it possible to have defined benefits as well as defined contributions, and would be infinitely better for everyone involved.

[Steve Webb]

I always enjoy it when the hon. Gentleman intervenes to make that point. In a sense, he has been consistent: he simply thinks that we should tax people more to pay higher state pensions. That is an entirely credible left-wing position. It is not his party’s position.

Sharing future state pension rights between the state and the market is sensible risk sharing, which is relevant to the Bill, for the following practical reason. Although the hon. Gentleman may live in a world where Government promises are immutable, and where someone who is 25 is told by the Government, “Don’t worry: I will tax you a lot more to jack up the state pension, and in 40 years it will all be fine because you’ll get a fat state pension”, Governments—obviously not the present one—do rip up pension promises.

I do not think that individual citizens should rely wholly on something that is unfunded. That is what it would be, because such people are essentially hoping that their children and grandchildren will pay them a generous pension. However, by the time those people are pensioners, there will of course be many times more pensioners and many times—relatively—fewer workers. That is a very insecure basis on which to base retirement income.

We are making sure that there is a single, simple, decent state floor—to that extent, I agree with the hon. Gentleman—built on by the ownership of capital assets, an employer contribution, tax relief from the public purse and individual contributions invested in the productive wealth of the economy, so that as the economy grows pension wealth grows. There is therefore a capital right as well as a pension promise from the state, which is how I would want to share my risks.

[Kelvin Hopkins]

I would like the opportunity to answer every point made by the Minister, but let me ask him one simple question. If the economy gets into very serious trouble and the private pensions market gets into a real financial crisis, as happened with the banks in 2008, what will happen then, without Government underwriting?

[Steve Webb]

But the idea that if the economy does very badly tax-funded pensions are secure is implausible. If the economy does badly, public expenditure on benefits must rise, tax receipts will fall, the deficit will rise and the ability of the public purse to pay the generous state pensions wanted by the hon. Gentleman will fall. We need a strong economy come what may, and a strong economy will generate the money for state pensions and for private pensions.