Savings (Government Contributions) Bill (First sitting)

Kelvin Hopkins Excerpts

Tuesday 25th October 2016 Public Bill Committees

[James Cartlidge]

Q Obviously if someone gets on the property ladder with a capital repayment mortgage at the age of, say, 25, in theory when they retire they should not have any housing costs—that was the old idea. So we should remember that there is an extra benefit in this. There are many other benefits to home ownership and many aspirations, but I take your point that we have to have the advice in such a way that anyone making the choice knows what the choices are. That, as always, will be the challenge.

Yvonne Braun: I think there is an additional point that it is important not to overlook. We know that the earlier you start retirement saving, the less effort you have to make later. If you start at 20—the rule of thumb always is that it is about half your age when you start saving—it will cost you an awful lot less and it will be an awful lot less painful to save for retirement than if you start at 30 or 40. That has to be in the equation for people. Actually, at the moment opt-out rates are lowest for young people, so automatic enrolment has worked very well for young people especially, and it is important that that success story does not get stopped.

Carol Knight: I think that is absolutely right. When you look at the savings culture in this country, a lot of savings go into cash and a comparatively small percentage go into investment. It is difficult for people to understand the investment cycle, and they are scared of it because it is not easy to understand. In something like auto-enrolment, it is done for you. It is a nice, easy way to enable people to move into that market. If you can inculcate a savings habit at an early age, it gives them a really good building base to go on. Auto-enrolment does provide people with that platform to get into an investment environment that they may be a little wary of going into individually. That is why we think that the lifetime ISA is complementary rather than “instead of”, because you have to choose that actively, whereas auto-enrolment is there for you if you are in that cohort of people who are caught.

[Kelvin Hopkins (Luton North) (Lab)]

Q I am concerned about the whole idea of persuading people to save when they are young. Is it not the sensible way forward to have a compulsory state scheme for everybody based on income? Young people with either high rent or a mortgage or children are constantly up against it financially—even those with an income better than £23,000 a year, which is a tiny amount for mortgages in particular. Is it not time to say that the Government have got it completely wrong, that all these complicated schemes will not actually benefit the people who really need help—those on low incomes with high expenditures they have to meet—and that replacing all those schemes with a compulsory state scheme with defined contributions and benefits at the end would be much better? If the better-off want to go and invest somewhere else, that is fine, but we are talking about ordinary people on relatively low incomes. Do tell the Government that they have got it completely wrong if you want to—no need to be too polite.

Carol Knight: Would you like that honour, Yvonne?

Yvonne Braun: I think that is the state pension, though. Ultimately the state pension is your safety net. Everybody is going to get the same, and especially for people on lower incomes, the state pension provides quite a good replacement rate.

If we look at some of the projections that the Department for Work and Pensions did, I think, two years ago when it looked at the adequacy problem in the population at different salary ranges, it found that the problem is between £22,000 and £52,000 of annual income. Lower than that, you have a lot of replacement income through the state pension, and higher than that people can usually sort themselves out. So that is where additional savings are more important.

I would say that the Government have not got it wrong. Automatic enrolment is a very good policy, and making it compulsory is also perhaps not terribly British, I suppose. The state pension provides the underpinning that you describe of an income that is there for everybody as a safety net.

[Kelvin Hopkins]

Q But the state pension is not earnings-related; it is for everyone. I agree with you—a much higher basic state pension would be a good idea as well—but earnings-related income on top of that means that those on better incomes do not suddenly drop down to the basic state pension when they reach retirement. They are compelled to save so that they can have a comfortable retirement.

Yvonne Braun: That is in many ways how automatic enrolment is supposed to work—it is a percentage of salary, so people with higher salaries will contribute more. There is then a question about whether 8%, as it is meant to end up in 2019, is the right percentage. We firmly believe it is not; it should be quite a bit more. That is the subject of the automatic enrolment review that will happen next year.

At this point I would not argue that it needs to be compulsory. Because the opt-out rates are so low, there is a question as to why you would go for a compulsory savings scheme.

[Kelvin Hopkins]

Q I have just one more question. If it were a compulsory state scheme with defined benefits, it would not be stock market-related; it would be a state fund. It would be extremely efficient, like national insurance is extremely efficient in how it works, and the whole thing would be better for those retiring at the end of their working lives and also provide a wonderful fund for Government investment in infrastructure or whatever, which would have returns. It is not a new idea. Barbara Castle, a great hero of mine, was talking about this sort of thing 40 years ago, and we are still fiddling around with all sorts of complicated schemes that do not actually provide the benefits that they should.

Yvonne Braun: I doubt that the Government would wish to take that on their balance sheet.

[Kelvin Hopkins]

Q I agree that the Government would not wish to do it for other reasons, but would it not be a sensible idea?

Carol Knight: I think it is a fiscal question more than anything else. It is a hard one to justify, if you could actually cover those costs.

[Kelvin Hopkins]

I have made my point.

[Lucy Frazer (South East Cambridgeshire) (Con)]

Q The Bill provides that you can take your savings out to buy your first home. Are there any other circumstances in which you think you ought to be able to take your money out?

Carol Knight: Yes. We ran a survey to get feedback from consumers and the industry. There were two, or maybe three, other areas where the feedback indicated that including additional lifetime events would be beneficial. One was critical illness and the other was redundancy. Those are incidents that are outside people’s control and that place a huge demand on finances. The other one was buying a second home, too. It is not just about your first-time purchase, but when you start a family and want to move on. Those are three additional lifetime events that we believe could be incorporated within the scheme.

--- Later in debate ---

[Maria Caulfield]

Even a lifetime ISA?

Tom McPhail: Correct. We have the same platform charge, irrespective of the arrangements you are going into. Where we lose money, or where we potentially end up having to charge the customer more money, is when things get complicated. The more complicated it is, the more it costs us money, and the more, potentially, we have to pass on to the customer in costs, but we will make no more money on any of these products.

David Wren: As a trade body, I do not think that we have access to that kind of information.

[Kelvin Hopkins]

Q I have listened to you both with interest. I have to say that this scheme will do nothing for a high proportion of our population who are less well off and less sophisticated. Again, all these schemes seem to be designed for the better-off and the more articulate. I have had to ask to have my life insurance schemes explained to me two or three times, but I have not got a clue what those who explained it were talking about—and I am a graduate in economics and mathematics. Half the population are not numerate, and a fifth of the population are not functionally literate. We need a state automatic scheme to help people like that, going beyond auto-enrolment—a defined-benefit scheme, and that can only be done in the state sector.

[The Chair]

Do you want to comment on that?

Tom McPhail: I am not sure that it was a question, but I think the simpler and more accessible we can make things for investors, the better. It is beyond my remit to talk about the state pension here today.