Pension Schemes Bill

Lord Bradley Excerpts

Tuesday 16th December 2014 Lords Chamber

[Lord Bradley (Lab)]

My Lords, I begin by adding my own tribute to the distinguished career of the noble Lord, Lord Jenkin of Roding. As we have heard, he has given huge service to Parliament in both Houses over 50 years and held many of the great offices of state—even if he did not get on to the front row of the photograph. His contribution today is further testimony to his massive wit, wisdom and insight into both Houses of Parliament. I wish him a very happy and healthy retirement.

We have heard a wide-ranging and high-quality debate. I thank the Minister for his detailed introduction of the Pension Schemes Bill which we will explore in great detail in Committee and at other stages in this House. I thank all noble Lords for their excellent contributions to the debate. A theme that has run through it is that, although we are taking the two Bills together, they do not necessarily fit together quite as well or as coherently as the Minister argued when introducing them, just as the four pensions Bills introduced during this Parliament belie the proposition of the Minister for Pensions, Steve Webb, that, overall, this is a coherent set of reforms.

My noble friends Lady Drake, Lord Hutton of Furness and Lord McKenzie of Luton made clear in their excellent speeches that how the new freedoms and flexibilities in assessing pensions, introduced through the Taxation of Pensions Bill, and the provisions to allow the creation of collective defined contribution and shared-risk schemes, sitting between defined benefit and defined contribution schemes, will impact on each other has not been fully worked out. I am sure that, as we go into Committee, the Minister will provide further details about the new pension freedoms and how they will impact on the types of shared-risk schemes that may be created following the changes in the Pension Schemes Bill. We want to explore the potential tension between guidance, help and encouragement to build up a pension pot, particularly following auto-enrolment, and flexibility and choice in turning this into an adequate retirement income.

As my noble friend Lord Davies made clear, we support freedom and flexibility in accessing pensions but want to ensure that three tests are met: savers should get the right guidance—I stress that we are talking about guidance, which is different from advice; the system should be fair to low and middle-income savers; and the reforms must not lead to additional burdens on the state. These principles will steer the questions we ask when we look closely at the guidance guarantee in the Pension Schemes Bill. For example, will the guidance be of sufficiently high quality and impartiality to help people with perhaps the most complex financial decision that they will ever have to make? Will take-up be sufficient to ensure that people are not left unequipped to deal with this decision? Will those who receive an annuity or are defaulted into one still be able to access a good-value product?

The Government clearly understand how important it is that the guidance guarantee—or whatever it is eventually called—meets the substantial challenge of equipping people to navigate what can be a very difficult market. This reflects another tension between the different strands of the Government’s pensions reforms. Auto-enrolment is based on the idea that consumers do not always make the best decisions in a complex market and, instead, may end up doing nothing. The pensions freedoms are predicated on those same consumers becoming highly engaged with the decision in front of them when they reach retirement. The guidance guarantee is the bridge over which they attempt to cross that fault line between different reforms, and it will need to be up to the job. We will address this issue in Committee when we look at that aspect in the detail that the noble Lord, Lord German, set out.

Those difficulties are possibly made more pronounced by the pace at which we need these reforms to be implemented and the pace at which the Government are pressing through this legislation in this House, as the noble Baroness, Lady Greengross, clearly pointed out in her excellent contribution. In the case of citizens advice bureaux, for example, it comes on top of an already challenging set of circumstances for people who rely on that service. I hope that the Minister will be able to reassure the House that all the organisations that will be responsible for giving guidance, including the Pensions Advisory Service, will be adequately resourced to do what they are being asked to do. That is especially important given the disparate estimates that have been made of the take-up of that guidance, as came out clearly in Committee in the other place. As we heard from my noble friend Lord McKenzie, Legal & General has said that following its own pilot a mere 225 out of 9,000 contacted took up the offer of guidance. Therefore, take-up could be very low. TPAS has estimated that it will be 25% but I accept that others have made higher estimates. However, take-up will be crucial if the guidance is to be meaningful for the people who rely on it.

Questions remain unanswered about how the new flexibility that has been announced will affect the way that pension savings are treated. If they can be accessed at 55, can a creditor demand that money be drawn down to cover debts? Currently, the fact that pension savings are put aside for purchasing an annuity prevent them being accessed and treated as free money. There are concerns that the pace at which these changes are being rolled out means that the Government have not ironed out all the details of such important matters for individuals reaching that age.

The other principal change to the legislation ahead of us is the outlining of new definitions of the different kinds of pension schemes, moving beyond the general money purchase and non-money purchase definitions in the legislation to make it possible to create shared-risk schemes. We support the changes and in fact earlier this year we called for these changes to create CDCs. Their benefits have been laid out by other noble Lords. They have the potential to offer a more stable retirement income than individual DC schemes. Modelling for the DWP showed that a collective pension would have outperformed an individual one by an average of 33%, according to historic data, and, just as importantly, would have performed more consistently. We need to look carefully at those outcomes. However, there is obviously the potential in collective shared schemes to achieve that stability and longevity in retirement income.

There can also be benefits from not having to divest from relatively riskier assets into safer ones with a lower return as the saver reaches retirement age, as is often the case with individual DC schemes. They can also have lower administrative costs. As a result, IPPR work from last year showed that it was the most popular option for government reform, backed by a broad spectrum of the population. Clearly there are benefits to be had from collective schemes.

The Bill is light on detail. As the Minister intimated, it does not contain the detail of the kind of defined ambition and DC schemes the Government envisage will be arrived at. Nor is there much suggestion of how many collective schemes the Government envisage will be set up in the short to medium term. I hope that the Minister will provide some more detail on the DWP estimate for the number of employers likely to take up the option of a defined ambition scheme. I hope that we will have details of that not only today but as the Bill passes through its stages in the House.

There are a number of missed opportunities in the Bill. There are steps that the Government could take to improve the market that would fit well with these reforms, such as changing the legislation so that pension schemes are required to have a board of independent trustees with a fiduciary duty owed to scheme members over and above that owed to shareholders. That was clearly identified by my noble friend Lady Drake. The OFT has shown that the contract-based market is not getting value for money for savers. As we have heard, international evidence shows that if the Government were to move in that direction it is likely to lead to better governance and transparency. We look forward in Committee to laying out the evidence on how trust-based governance can improve dysfunctional markets.

With this there is also the chance to build up scale in a way that would drive efficiencies and build up those economies of scale, which we again know from inter -national evidence can improve administration. It would mean that fewer trustees could cover more of the market and lead to the lower transaction costs through intermediation as recommended by the economist, John Kay. Two hundred thousand schemes are too many, so it would be helpful if the Minister could outline what is being done to encourage scale.

There is also a missed opportunity to build on the good work that NEST has already done by lifting the restrictions placed on it in the light of the European Commission’s confirmation that doing so would not breach state aid rules, as the Government previously argued it would. For NEST to remain influential in the marketplace, it needs to be able to grow to reach more employers and attract more savers. We will be exploring that possibility in Committee.

It is also crucial that, in the excitement of the new flexibilities being rolled out this April, we do not forget about reforming the other parts of the market that have not worked well for consumers but which provide the types of product for which there may still be demand. The Financial Conduct Authority’s interim report on the retirement income market published last week showed that the market is still not working well, and we know that of the 40% of people who get an annuity with their existing provider, 80% were not aware of the option to shop around. Others were not practically aware of how to go about this, or did not think it worth shopping around in the first place. In fact, it can make a substantial difference to people’s retirement income. The National Association of Pension Funds estimates that not shopping around can cost up to 20% of retirement income. It would therefore be of great benefit to the consumer to require an independent broker’s recommendation before it is possible to sell an annuity to someone who has saved with the scheme they are purchasing the annuity from.

We also urge the Government to take action to prevent people who are taking advantage of the new flexibilities being subject to similar examples of consumer detriment, albeit perhaps through a different product. It is concerning that the Government’s plans to address rip-off pensions do not include income drawdown, despite the fact that 320,000 people are likely to be looking to access these products after April. If charges equivalent to many of today’s drawdown products were to apply then, someone investing a pension pot of £30,000 could see 27% of their savings taken away in charges. Given that the median annuity in 2013 was purchased with a pot of £20,000, these charges could be significant.

As we have heard from other noble Lords, this Bill is more a framework than a completed piece of legislation, enabling rather than fully formed. It will be difficult to scrutinise without further details from the Minister about the likely content of regulations and the timetable for when these regulations will be laid. It is essential for this House to have sight of those regulations so that we can look across the piece of the primary legislation and the regulations to be absolutely sure that we are scrutinising effectively the impact of the Bill on future incomes in retirement. However, the number of amendments that the Government introduced as it progressed through the other place, and the number that we are likely to see as it progresses through this House, means that it is vital that these proposals are adequately tested here. We may therefore look at whether clauses should stand part of the Bill when we come to Committee stage to enable us to debate the crucial issues that have been identified by many noble Lords this afternoon.

We want a pension market that protects consumers and provides them with what they need in retirement. That is precisely what we will attempt to achieve as the Bill passes through this House.