Pension Schemes Bill [HL]

Lord Hain Excerpts

2nd reading & 2nd reading (Hansard): House of Lords & 2nd reading (Hansard)
Tuesday 28th January 2020 Lords Chamber

[Lord Hain (Lab)]

My Lords, we always welcome the contributions of the noble Lord, Lord Young of Cookham. I say that we all do but I am not sure that that is always the case with his Front Bench, which he occupied with distinction. He is very fortunate that Barbara Castle is not present to reply to him in her normal robust fashion.

I refer to the Members’ register in welcoming the Second Reading of this Bill, especially having been Secretary of State for Work and Pensions in 2007-08. Its provision for collective defined contribution—CDC—schemes is a step forwards in addressing the UK’s growing pensions crisis.

Individual, as opposed to collective, defined contribution schemes are now the default for occupational pensions, but these individual DC schemes are characterised by inadequate contribution rates and uncertain outcomes that completely fail to provide a decent standard of living in retirement. The average total contribution rate for an individual defined contribution scheme is just 5% of pensionable earnings, and the average pension pot is £50,000, which would give an annual income of just £2,500 a year. That is nowhere near enough to live on, and experts are saying that we should save at least 13% of our income from the age of 25. By comparison, average contribution rates for defined benefit—DB—schemes are far higher, at nearly 26% of earnings, compared with 5%.

Fresh impetus was given to the push for collective defined contribution pension schemes when Royal Mail and the Communication Workers Union agreed in February 2018 that they would seek to introduce a CDC pension scheme for Royal Mail’s 143,000 employees. I commend Royal Mail and the CWU for their efforts in working closely together to pursue this new “third way” pension scheme, which, as CWU national officer Terry Pullinger said at the time of the agreement, would

“secure our members’ future employment, standard of living and retirement security”.

Nobody pretends that CDC is some silver bullet, as the noble Baroness, Lady Altmann, pointed out so succinctly; indeed the Royal Society for the Encouragement of Arts, Manufactures and Commerce has recently published an excellent analysis, which I hope the Minister will read, highlighting some of the specific issues of concern that all CDC schemes must address. But there is widespread recognition that CDC schemes can provide greater certainty about retirement outcomes than is possible in traditional individual defined contribution schemes.

When in 2018 the CWU secured this ground-breaking deal with Royal Mail to introduce a CDC scheme after the company closed its defined benefit scheme to future accrual due to rising deficit costs, the union had fought to save the DB scheme, but, with the deficit repayments increasing from £400 million to £1 billion a year, they had no choice but to discuss alternatives.

The agreement opens the way for new collective pension schemes to be rolled out across the UK with the help of this Bill. It shows how elements of defined benefit can be linked to CDC because it includes a defined benefit cash balance fund that will provide guaranteed lump sums for members. In pushing for this deal, the union saw a clear need to do something to improve pension provision for all its members, 80,000 of whom were in the company’s defined benefit scheme and 40,000 in the defined contributions scheme. The DB scheme was closed to new entrants in 2008. Most DC scheme members were on the base contribution level, which was very low, and most were in the younger age bracket, so there was a question of generational fairness and making sure that younger employees had access to a decent pension scheme. There was also the need for the CWU to protect those who were in the defined benefit scheme, as moving them on to the defined contribution scheme would have substantially reduced their expected benefits.

Although a CDC scheme provides for a target rather than a guaranteed pension benefit—a point made by other noble Lords and Baronesses—modelling shows that the Royal Mail CDC scheme would hugely outperform the individual defined contribution scheme and could even deliver the kinds of benefits that would have been expected under DB.

It is important to understand why CDC schemes, at least of the kind negotiated between the CWU and Royal Mail in 2018, have clear advantages over individual DC schemes. First, they allow savers to pool their risk, which enables higher yield investment strategies and better returns. Studies have shown that CDC schemes can generate a pension that is up to 39% higher than a traditional DC scheme. Evidence from other countries—such as the Netherlands, as has been mentioned, where CDC schemes are widespread—clearly demonstrates that CDC schemes offer a better alternative to DC schemes. Secondly, collective pensions are subject to less volatility than individual pensions, making them far more predictable. They also avoid the need for an annuity or draw-down, which reduces costs and avoids difficult and often stressful decisions for savers about how to invest their funds. It is no secret that the guarantees associated with annuities are expensive and consumers often receive a poor deal when choosing them.

There has been some resistance to these plans from those with a vested interest in selling DC products, of course. They say that CDC schemes could run counter to the trend towards individual freedom and choice in pensions, but the evidence suggests that the majority of scheme members do not want the responsibility of managing their savings pot when they come to retire, or the uncertainty that comes with it. I certainly would not want that. Most savers just want financial security with the guarantee of a pension income for life, and that is what CDC offers.

Of course, there are also benefits for employers because CDC schemes avoid the risk of large, long-term pension liabilities on their balance sheets. Defined benefit schemes remain the gold standard for occupational pension provision and should be defended as far as possible. Sadly, however, DB schemes have been closing at an alarming rate over the last decade as companies have sought to cut costs. There has also been a total lack of innovation in the pensions space. The only show in town has been inadequate defined contribution —DC—schemes. If they remain the norm, and the Government, with business, do nothing, the state—which means the taxpayer—will begin incurring multi-billion costs in future to save millions of elderly citizens from abject destitution.

As the CWU’s Terry Pullinger has explained, in the Royal Mail we have a generation of people fast approaching 40 years of age who do not own any property and have little or no pension provision. It is a social car crash waiting to happen and, if not addressed, will leave an entire generation facing poverty in old age with total reliance on the state.

Research by the TUC has found that a typical DC saver could be £5,000 a year poorer in their old age if they retire after a bad period of investment returns for pension funds rather than in a good period. The benefits of scale and pooling of investment and longevity risk in CDC schemes are clear; modelling by the highly respected Pensions Policy Institute likewise confirms that, over the long term, CDC produces better outcomes than individual DC schemes.

Overt measures have been taken in the design of the Royal Mail scheme to ensure that there is no deliberate saving up of a capital buffer which would represent money paid in by one generation that is held back from that generation’s benefit provision. While there will inevitably be variations across generations, Royal Mail and the CWU have worked to ensure that these are only the product of varying circumstances rather than an inherent bias.

Furthermore, the legislation before us is drafted in such a way as to ensure that CDC schemes are governed within a strict regulatory structure and implemented only once a clear governance and disclosure framework is put in place. This regulatory framework is vital in providing savers with full confidence in this new type of scheme. There is an indisputable case for enabling CDC schemes through legislation and encouraging their take-up as an alternative, at least to DC pensions. That is why it is welcome that the Bill sets out not only how Royal Mail and the CWU can progress with their CDC scheme, but also how other companies could follow suit.

As the CWU has said, this scheme will drive pension innovation for current and future generations of working people, and will resurrect the principle of dignity and security in retirement. Royal Assent to this Bill is needed as early as possible. Can the Minister in replying please say when exactly that is expected to occur?

CDC schemes offer a third way forward, which has been recognised by one of our largest employers, Royal Mail, and one of our largest trade unions, the CWU. If we get this legislation right and enable the establishment of these schemes, I believe that they could offer a positive way forward for many other employers, as well as unions.

Pension Schemes Bill [HL]

Lord Hain Excerpts

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 30th June 2020 Lords Chamber

[Lord Balfe (Con)]

My Lords, this is the first time for two months that I have been in this Chamber. It is a bit emptier than normal but it is good to be back.

I hoped to speak after the noble Baroness, Lady Bennett, because I want to say a few words about her Amendment 33, which is about trustees. It seeks to require trustees to take age, gender and ethnicity into account. I will certainly not support or oppose this amendment but I want to make a few points on trustees and where I think she is trying to get us to. The fact of the matter is that the whole area around the appointment of trustees could do with a close look.

There are a number of problems. The first problem for any pension scheme, particularly a small one, is getting trustees from among the membership. You can always get a professional trustee because they are normally paid £1,000 or more a day for coming to the meeting, so it is not too difficult. The difficulty is getting representatives of the pensioners. The second and even greater difficulty is getting representatives of the pensioners who actually know what they are talking about, because many people are completely bewildered by pensions.

When I read through both this amendment and the amendments about ESG and environmental safeguards, I was reminded very much of pensioners who come to me and say, “All I want, Richard, is for you to pay my pension. I couldn’t care less where it comes from.” I say, “Presumably you wouldn’t like us to invest in gas ovens,” and they say, “Well, no, but you’ve got enough common sense not to do that. You don’t need me to tell you.”

So I come to the point that, when we are looking at the age, gender and ethnicity of trustees, we also need to look at their qualifications and the way in which they are allowed to come forward, because some trustee boards are effectively self-perpetuating because they govern who is allowed to stand. You are invited to apply to become a trustee, and then you are assessed as to whether you are able to become a trustee. Often, people who come forward are not highly professionally qualified, but they are qualified in one thing, which is common sense. My experience of pensions, which goes back quite a long way, is that certainly some members on a board—not a majority—who can demonstrate common sense are extremely good.

I would also like to say that dealing particularly with gender and ethnicity can lead you into many problems. My wife gets a pension from the Workers’ Educational Association pension fund. It got itself tied into complete knots trying to deal with ethnicity and gender. It ended up asking people to vote for trustees who were anonymised. They were anonymised by taking out not only their name, age, gender and ethnicity but also most of the other things about them. So the great game in this case was to look back at previous reports and try to work out which trustee was the anonymised one. Of course, that gets you nowhere and in fact is a bit of an insult to the members who have applied.

So I say to the noble Baroness, Lady Bennett, and to the Minister that this is a subject that is much wider than this amendment, but it is certainly one that needs looking at. The way in which pensioners are represented on the governing boards of pension funds is haphazard, to put it mildly. It varies enormously between funds. Although there is a great cry from professional trustees that you clearly need professionals in the room, I counsel the Minister and everybody else to beware of the cry for the professional. It is very easy to get a professional to sit there and give you advice as an employee or if they are hired for the purpose. You do not necessarily need more than the odd one of them actually on the board. They have nothing great to add than cannot be added by a professional adviser. They do not need a place on the board, although sometimes—note the word “sometimes”—having a professional trustee as a chair can add a certain amount of discipline, knowledge and structure to the way that debates go. But it can be overestimated and, particularly since the pensions industry is dominated by the professionals, there is a great danger that it gets overemphasised because it is precisely the people who write in the pensions papers who are the experts and who then promote themselves for the jobs.

So I welcome the amendment in the name of the noble Baroness, Lady Bennett; I see it just as a probing amendment, laying down a few guidelines that we could look at. I say to the Minister that when there is an opportunity, it would be well worth while to set up some sort of study or working group to look at the way in which trustees are chosen or appointed, how they work and how they are remunerated.

[Lord Hain (Lab) [V]]

My Lords, I thank the Minister for the way in which she introduced these amendments, and particularly for the concessions that she granted on affirmative procedures for the issues that are contained in the government amendments. This is a very welcome response by Ministers to the feeling that was in the House.

I will speak to Amendment 1 and associated amendments in the name of the Minister concerning the authorisation criteria for collective money purchase schemes. I warmly welcome the introduction of these schemes, also known as collective defined contribution—CDC—schemes, as they represent an attractive third way in workplace pension provision, with a capacity to deliver significantly better outcomes for savers than individual DC—direct contribution—schemes. However, in order for the CDC schemes to be widely trusted, we need to get the legislative and regulatory framework right. To give one example, it is vital that the authorisation criteria are appropriate. A balance must be struck in ensuring that requirements are not so cumbersome as to deter employers who might offer these schemes from doing so, while ensuring that there are robust protections in place for employees saving in these schemes.

If we can get this right, there is a significant prize to be had in the introduction of CDC schemes, and the case for this is only strengthened by the current Covid-19 crisis. The virus has had many negative consequences for our society and economy. One of those consequences is directly relevant to the Bill before us today: there has been significant negative impact on the defined contribution pension savings of many individuals as a result of the financial markets’ reaction to Covid-19. I am afraid that, as the noble Baroness, Lady Altmann, so compellingly pointed out, the Bank of England’s recent injection of quantitative easing will make this much worse. A drop in asset values and bond yields has led to more expensive annuities and resulted in pension reductions of around 8% to 10%. This has caused much consternation and led a significant number of people to defer their retirement during this period.

In my remarks at Second Reading, I welcomed the introduction of CDC schemes and cited, among other factors, their enabling of the pooling of risk between savers. This can, in turn, enable higher-yield investment strategies, as well as less volatility and greater predictability for savers. It begs the question, therefore, of how CDC schemes might have fared in comparison with individual DC schemes in the light of the recent crisis and the sharp economic downturn that has so negatively impacted DC pension savers.

Royal Mail, which in conjunction with the communication workers—CWU—has been leading the push for the introduction of CDC for its 143,000 employees, asked its actuarial advisers to look at precisely this question. The resulting analysis, carried out by pension consultants Willis Towers Watson, was conducted in the context of the 20% fall in the global equity market in the first quarter of this year. The modelling looked specifically at how the CDC scheme design proposed by Royal Mail would have been affected. The conclusion reached by Willis Towers Watson was that the CDC would have performed significantly better than an individual DC scheme. In this scenario, a scheme member close to retirement would have been able to retire as planned, with no reduction in their retirement income. This is because the Royal Mail scheme is designed with a certain amount of headroom in contributions, intended to fund future pension increases. As Willis Towers Watson has written,

“it is only if the funding health suffers very materially that the headroom could run out and pensions would be reduced … in the vast majority of scenarios, it would only be the level of future pension increases that would be at risk.”

Even with the severe level of market shock experienced in quarter one of this year, therefore, the modelling shows no effect on current pension levels for CDC scheme members, and that is very welcome. Future pension increases would be impacted, but only by a modest 0.25% per year, as this market shock was nowhere near severe enough to remove the significant headroom that the scheme would hold. In contrast, an individual DC pension saver, due to retire by starting to draw down benefits in the near future, would expect their pension pot to have fallen in value by approximately 10% over the quarter. While they would have the option to keep the pot largely invested, this saver would potentially have to rethink their retirement plans, such as changing their planned pace of drawdown, or even deferring their retirement altogether for a period. Those considering an annuity would find that the price levels had increased by around 8% over the quarter.

This analysis provides a timely and powerful illustration of just one of the benefits that CDC schemes will bring to savers through the pooling of risk and the capability to build up significant headroom to smooth out the impact of shocks, even those as severe as we have recently experienced. CDC therefore represents an attractive third way in workplace pension provision, offering better value and greater certainty for savers than individual DC schemes. With that in mind, I welcome the Government’s commitment to ensuring that the appropriate processes will be in place around authorisation criteria. I commend the Bill to noble Lords, and I hope that we will see its swift passage through its remaining stages in this House and its early introduction and passage through the other place.