Pension Schemes Bill

Lord Freeman Excerpts

Tuesday 16th December 2014 Lords Chamber

[Lord Freeman (Con)]

My Lords, it is a privilege and a pleasure to speak immediately after my noble friend Lord Jenkin of Roding. I must say that this is the first time I have heard applause in this House, and I think that it is a great tribute to my noble friend. He has announced his retirement after 50 years’ service in Parliament, 25 years in the other place and 25 years here. He was the MP for Wanstead and Woodford, and a Minister between 1970 and 1985. I think that those who have served in Government will realise that 15 years is a quite remarkable length of time. He was a Secretary of State three times—for social services, for industry and for the environment—and many of the Bills that he was responsible for and the decisions he took still stand and are respected.

I would particularly like to note the encouragement that my noble friend offered to new Members of the other place. He would not always praise them, but would offer them encouragement by saying, “I think that speech was a bit too long”—or too short, but that encouragement was always appreciated. It is now my pleasant duty to invite the House to salute in the traditional way a parliamentary career of great distinction and to wish my noble friend not only long life and happiness with his family, standing at the Bar and represented there, but also the wish to see him back here in the House often. We all salute a great parliamentarian.

[Noble Lords]

Hear, hear!

[Lord Freeman]

My Lords, I am quite conscious of the fact that my contribution to the Pension Schemes Bill is not likely to attract this number of noble Lords so, as they say, please leave quietly. I shall restrict my remarks to a relatively short period of time, because we are pressed by our schedule.

These two important Bills follow the very welcome Budget and subsequent announcements from the Chancellor of the Exchequer, which I fully support. Many noble Lords will warmly welcome the flexibility of the rules being proposed in these two Bills, particularly in relation to defined contribution schemes. I shall restrict my remarks to direct and defined contribution schemes rather than defined benefit schemes, which of course for very large companies in this country, including in particular the public sector, make up the majority of schemes. However, it is the defined contribution schemes where the amount of money that has been saved by the prospective pensioner is going to be affected quite significantly.

I welcome the provisions in both of the Bills that are before us today, particularly with regard to flexibility on the drawing down of savings, but, as has already been mentioned by the speaker on the Opposition Front Bench, there are certain concerns which this House should have when reviewing the Bill in Committee so as to ensure that this new flexibility, which I welcome, does not put a pensioner in a position of inadvertent poverty. The point made by the noble Lord, Lord Davies of Oldham, is absolutely right. Your Lordships—and those who are responsible for the implementation of this legislation—should always remember that there is a tremendous difference between guidance and advice. Advice is something that you pay for, as the noble Lord, Lord Davies, pointed out, and is between the pensioner and either an individual or a respected firm. Guidance is something that the Bill deals with, and is much to be welcomed.

When one starts contributing to a pension scheme, if one is employed by a large company, and it is a defined benefit rather than a defined contribution scheme—that is, over the lifetime the individual earns an entitlement from the pension fund that is underwritten by the employer, which is a big difference from the contribution schemes where an individual is saving for later life—it is important to look at who is providing advice. The Bill provides for guidance as opposed to advice—free guidance to individuals, who may wish to ask themselves, “I have built up this substantial pot of money but I still have 15, 20 or 30 years after retirement. What is the most sensible proportion that I should leave in my pension pot and how much should I draw down, either in individual lump sums or all at once?”. That is where advice is absolutely crucial.

I hope that when the Ministers take these Bills through Committee, they will be able to answer some of the detailed questions about who pays for those who will give advice. My understanding is that it will be from public funds, which the Treasury will require to be raised from those who are providing guidance, and that the individual bears no financial burden by saying, “I want to draw down some money. Here are my assets. Here is how long I and my dependants expect to live”. That advice is absolutely crucial. The citizens advice bureaux are perhaps not the right entities to provide that advice. We need a new cadre of trained and respected bodies and individuals to provide that free advice. Pensioners and prospective pensioners should be strongly recommended to take that advice.

I will conclude by making a comment, if I may, on defined benefit schemes. Like a number of noble Lords, I have served as a trustee and now the chairman of a large defined benefit pension fund. That fund bears the risk of a diminution in the assets and—this is my final point—the movement of interest rates. When a pension fund calculates its deficit or its surplus, typically every three years, one of the factors used is the gilt rate. The gilt rates are at historically low levels at the moment, which means that when the actuary discounts the liability of the lifetime of the remaining members of the pension fund, which might be 15 or 20 years after they have retired or even longer, a very low rate of discount is applied and therefore the liabilities in the accounts of the pension fund rise. Over the past two or three years, they have risen dramatically. Although I welcome low gilt rates and low interest rates, when we come to the valuations very shortly—on 31 December of this year—we will find that the deficits of some of our largest pension funds have again risen. I have no solution to that, but we need to reflect on whether there needs to be some kind of change in the principles that are applied.

I very much welcome the Bill and I look forward to Committee.