Pensions: Automatic Enrolment

Lord Freud Excerpts

Thursday 10th June 2010 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, I thank the noble Lord, Lord Kirkwood, for raising this debate and providing the House with an opportunity to discuss this important issue. I also congratulate those taking part and join the noble Baroness, Lady Greengross, in her congratulations to those people on such an extraordinarily high quality of debate, which I personally found extremely valuable as we shape the immediate period ahead.

During the past decade, we have seen a big decline in the level of pension saving in the UK. Overall saving in the private sector workplace in terms of pension provision has fallen, from 46 per cent of employees in 1997 to 37 per cent in 2009. That means that 2.6 million more people are not saving in a workplace pension. In the same period, the availability of defined benefit schemes in the private sector has also declined, as the noble Baroness, Lady Hollis, pointed out, and membership fell by 1 million between 2005 and 2009.

For those in defined contribution schemes, there has been a decade of lost growth in the primary market—the equity market. The average real rate of return between 1999 and 2009 was minus 1.2 per cent per annum, and just last month the typical pension fund performance for balanced managed funds was down 3 per cent.

While those trends have been happening, life expectancy in the UK has reached its highest level on record and will increase further to the point where in 2050 there will be just three working people for each pensioner. The reality is that, if people want to enjoy a decent standard of living in retirement, we all as individuals and as a nation need to be much better prepared. But that, of course, is not the only problem we face. Whatever we do now needs to be seen in the context of the worst recession since the Second World War, and the need to reduce the unprecedented fiscal deficit. As a nation, we simply cannot afford to continue without a step change in our savings culture.

This coalition wants to see the principles of fairness, responsibility and social justice apply to both our welfare and pension agendas. The Government want to encourage individuals to take more personal responsibility for themselves by saving more and saving longer towards a retirement income that will meet their expectations. Already, we are in a position today where 45 per cent of pensioner households are entitled to pension credit, and 50 per cent to council tax benefit. It is not sustainable for the state to continue to meet the challenges of undersaving all on its own.

The state pension needs to provide a fair and solid foundation for people to save for their retirement, so this Government will restore the earnings link with the basic state pension from April next year with a “triple guarantee” so that it will rise by the higher of earnings, prices or 2.5 per cent. However, at the same time, we need to restore confidence in public finances, so we will hold a review to set the date at which the state pension age starts to rise to 66 years.

We also want a more flexible approach to retirement. People need to be able to retire when it is right for them, so we intend to phase out the default retirement age and will be consulting with employers and others on how to do this. However, if we are to have a pension system which is fair and sustainable into the future, we also need to reverse the significant decline in private pension saving that we have witnessed in the past decade. That is why we continue to support automatic enrolment.

We want to encourage employers to provide high quality pensions for their employees, but additionally we want to explore options that will stimulate greater personal saving. We are therefore considering additional ways of reducing the costs of running pension schemes, making pensions more affordable for employers to run, and investigating ways of making saving more attractive to individuals. Changes such as our commitment to abolish compulsory annuitisation at 75—as the noble Lord, Lord Fowler, suggested—will provide greater flexibility for pension savers in planning for their future.

The big prize here is to help people when they are working to save more and save for longer, and to make it easier for them to do so—to take responsibility for their future. We need to encourage and enable participation in pension saving so that it is no longer the preserve of the financially savvy or those who happen to work for particular employers. Quite simply, we need to get people back into the savings habit and ensure that they have access to a good workplace pension scheme.

The Pensions Commission’s solution to this dilemma was automatic enrolment into a pension scheme, with mandatory contributions by employers. We on the Government Benches have long been firm supporters of automatic enrolment. We believe that it will be highly effective at tackling the failures in our pensions system by increasing participation in pension saving.

At this point, I pay tribute to the work of one of the earliest behavioural economists, Dr George Loewenstein, who happens to be my cousin. He created the concept of asymmetric paternalism which was so influential in getting these automatic enrolment features in a range of public provision. The evidence shows that it works, leading to increased participation. Your Lordships have only to look at the United States, where automatic enrolment increased membership of its 401(k) schemes among new employees from around 20 to 40 per cent to nearer 90 per cent. Another example is New Zealand, where the introduction of automatic enrolment is estimated to have doubled pension savings in the KiwiSaver product over a three-year period.

As we made clear in our coalition programme, we remain committed to automatic enrolment, but we need to find the right way to make it work. A lot has changed since the Pensions Commission published its recommendations back in 2005. Given the current economic climate, it is essential that we ensure that automatic enrolment is introduced in a way that strikes the right balance between cost and benefits, and ensures maximum value for money for individuals, for employers and for the public purse.

Our review of these reforms will cover the scope of existing plans for automatic enrolment and NEST. Noble Lords would agree that it is vital that the Government take ownership of this initiative so that we have cross-party agreement on this, which, as my noble friend Lord Kirkwood pointed out, is so essential.

We will reach our conclusions quickly and take a hard look over the summer at the plans that we have inherited. If necessary, we will make changes to ensure that the reforms deliver for individuals, employers and the taxpayer.

Let me deal with the many fascinating points raised in debate; I will aim to get through as many as possible.

[Baroness Hollis of Heigham]

I was fascinated by the noble Lord’s point about the review. Which areas in particular are the Government concerned about, and will therefore be discussed in the review? I do not mean what will the conclusions be, but what will the territory be?

[Lord Freud]

I thank the noble Baroness. That is exactly what I was about to get straight on to. I will deal with her particular issues in that context. Before I get into what the review will cover, I start with the speech of the noble Lord, Lord Kirkwood, particularly what he said about employer attitudes and his concerns after meeting the people from AXA and reading their research. Evidence emerging from our research—a large survey of employer attitudes—suggests that 56 per cent of employers believe that these reforms are a good idea. Seventy-seven per cent believe that when they are already contributing 3 per cent or more. There is no doubt that the cost to employers of automatic enrolment is significant. The cost to employers—the smallest employers in particular—concerns me and is something that I want to look at closely in the review.

We are committed to getting the details right. That is why we are carrying out the review—to ensure that the proposals work properly. Several participants in this debate have asked about the details of the review, including the noble Lord, Lord Kirkwood, my noble friend Lady Noakes and the noble Lord, Lord McKenzie. We are finalising the details of the terms of reference, including who will conduct the review, its process, its reporting and so on. We hope to make an announcement encompassing those issues soon. To offer some reassurance, we are concerned about the impact on employers, particularly small employers. We also want to look at the position of older workers. We will review the contract for the NEST administration services, but with an open mind; if it fits with what is needed we will run with it. We aim to reach our conclusions quickly. Again, the detail is yet to be determined, but I expect we will know where we are with this before the House returns after the summer.

The noble Lord, Lord Kirkwood, asked about the NEST charging structure and whether we would keep it. He will infer, from my last answer, that that is a level of detail that we have not yet got to. The first question to ask is: does the scope of auto-enrolment work for both individuals and employers? Scope is key here. Secondly, given that, is NEST, as it is currently configured, the right intervention?

The noble Lord, Lord Kirkwood, asked about the certification process and whether that meshed with the BIS drive to reduce red tape. We are committed to recognising and maintaining existing high-quality pension provision. That means developing a process for employers with good money purchase schemes to show that their scheme meets the minimum requirements for auto-enrolment. This is called the certification process. In the coming months, DWP officials will work with the pensions industry and directly with employers to develop effective processes to support automatic enrolment. This includes straightforward ways for employers to assure themselves that their pension schemes qualify under the law.

The noble Lord, Lord Kirkwood, queried the four-year implementation period. We are fully committed to taking forward the automatic enrolment provisions under the Pensions Act 2008. However, the effects over the medium and long term will be huge. That is why we want to take stock of where things are; that is what the review is about and I do not want to prejudge it.

The noble Lord, Lord Kirkwood, concentrated my mind on wider savings incentives. It is critically important that people have confidence in saving towards their retirement if we are to deliver the step change in savings behaviour that we want. The department’s analysis is that more than 99 per cent of people can expect to be better off in retirement if they have saved than if they have not saved. However, we need to take seriously the possibility of someone facing a loss. The problem is that the people who fall into this category are not like leopards with spots that one can see beforehand; that situation emerges later, so it is a difficult problem. It is important that we allow people to take personal responsibility. However, the noble Lord, Lord Fowler, made the point that people are woefully ignorant in this area. I think that the noble Lord, Lord Kirkwood, said that he used the term “ignorant” in the best way in that regard. There is ignorance in this area, which means that it is very hard for people to take personal responsibility. Clearly, this is a vital area which we will address in our review.

The noble Lord, Lord Kirkwood, mentioned the costs of the Personal Accounts Delivery Authority and the impact of any expenditure cuts. The reduction of the deficit is a number one priority for the Government. Therefore, we will need to look right through the cost base to ensure that the costs are justified and that savings can be made where possible. I reassure my noble friend Lady Noakes that we will take a hard look at those costs and that we will not spend money unnecessarily.

It is vital that individuals have information about opting out. The noble Lord, Lord Kirkwood, is concerned about that. That will be critical to the success of the reforms. We are working closely with the Pensions Regulator to ensure that there is coherent and consistent information.

The noble Lord, Lord Fowler, and the noble Baroness, Lady Hollis, talked about the state of our state provision. The noble Baroness, Lady Hollis, again drew to our attention, as she did in her excellent speech last week, her booklet, A New State Pension. I was touched to think of her running on to the age of 95, and I hope that she does. However, it is slightly invidious to say that, statistically, only three noble Baronesses who were then present in the Chamber would do so, as I count seven who are now present, so it is a case of pot luck. There are clearly attractions in combining various elements of the state pension to introduce a single decent state pension. However, a large number of issues, not least one of them being cost, need to be considered before we introduce such a scheme.

I am very conscious that I am running out of time—unless noble Lords want to give me three more minutes.

[Baroness Anelay of St Johns]

No.

[Lord Kirkwood of Kirkhope]

Shame.

[Lord Freud]

I saw someone else obtain three minutes the other day, but this is not permissible. I will write to noble Lords on other issues that I have not managed to cover. I have a lot to write to noble Lords about; I apologise.

Our goal is straightforward—

[Baroness Anelay of St Johns]

That is it.

[Lord Freud]

I close by thanking all noble Lords who have taken part in this debate and I will write where I have not responded.