Pensions Bill

Lord Hutton of Furness Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, I draw your Lordships’ attention to the interests that I have declared in the register. I am an unremunerated non-executive director of Pension Quality Mark Ltd and advisory director to Dimensional Fund Advisors.

There is a great deal in the Bill that can be welcomed and supported. I genuinely believe that it takes forward much of the consensus that has recently been established in this country about the best way to ensure that more people retire with an adequate pension. That is a very important thing to be doing. There are some people—maybe even in this House—who recoil from the concept of a consensus in politics, but when it comes to pensions policy, consensus is a very important thing to strive for, in that it establishes the conditions for people to plan for the future with some confidence. The one thing that has bedevilled pensions policy in the UK in recent years has been the constant stop and start, chop and change, which has acted as a deterrent to people saving.

I, too, pay tribute to the noble Lord, Lord Turner, my noble friend Lady Drake and Sir John Hills—the three commissioners who made up the Turner commission —for helping us to focus our collective attention on two fundamental problems that we face in this country. If the goal is to ensure that more people retire with an adequate income, which I think is the right policy because we cannot ask the taxpayer to shoulder the principal burden in future years in the way that it has done in the past, we know that we have to address these two fundamental problems.

Not enough people are saving and what they are saving is probably not going to be enough to give them an adequate retirement income, so we have to address that. We are addressing that now with auto-enrolment. The speakers in this debate have already drawn attention to the progress that we are making. The Minister referred to the nearly 2 million savings accounts that have been established under auto-enrolment. That is to be welcomed, there is no question at all about that, but we need a reality check here. These are early days for auto-enrolment. The big challenge and the big test for auto-enrolment are still to come, but so far so good: we are making good progress.

However, we should never lose sight of one very important factor: it is wrong to say that we have an established or developed savings culture in this country. In fact, the opposite is true. We know from the Office for National Statistics survey of occupational pensions that in the year running up to auto-enrolment the number of occupational pension savers in this country fell by almost half a million—in one year. It is going to be a significant challenge to move from a culture that honours and pays homage to debt, consumerism and spending to one that puts a premium value on saving, but we have to make that transition. Auto-enrolment is the right policy to ensure that we make progress in that direction. The Bill makes some changes to auto-enrolment, such as the technical changes in Clauses 36 to 40. Some of those are to be welcomed. There is quite a lot of detail that needs to be fleshed out as we move to Committee and Report.

The issue of how much people are saving is altogether more complicated. Today is probably not the time for a debate about how much people are contributing via auto-enrolment into these new savings accounts, but the time is probably not far off when we will have to have a very honest debate in this country about whether 8% or 9% of earnings going into a defined contribution pension will be sufficient to guarantee people a decent and adequate pension in retirement. I, for one, do not believe it is.

The group of savers that we should be most concerned about are actually not those who are the lowest paid. They will do well in auto-enrolment, together with reforms to the state pension that I want to say a word or two about in a minute. The people we in this House should be most concerned about are those on median earnings, who are above the lowest threshold of earnings, who are almost certainly not heading in the right direction at the moment when it comes to ensuring that they have adequate pensions. That debate cannot be postponed for very much longer.

The second of the two big problems that we face in this country concerns the state pension. It has been clear to all of us—it was certainly clear to my colleagues in the previous Government—that the state pension has become far too complicated and far too wrapped up in means-testing, and there is a serious risk that it will act as a deterrent to people taking the principal responsibility themselves to save for their retirement. That would have been a major, mortal threat to auto-enrolment and the principle behind it, which is to shift over time the burden of responsibility for saving from the state to the individual.

Like my noble friend Lady Sherlock, who made an excellent speech from the Front Bench—to be fair, the Minister did too—I think that moving to a single state pension represents an historic opportunity to make sure that we avoid that car crash. Moving to a single state pension can complement auto-enrolment and not undermine it—and there would have been a good chance of that happening if we had continued on the path that we were on.

All I shall say about the single state pension today on Second Reading is that reform, very important and welcome though it is, is not going to be straightforward. I remember well the time when I had just become Secretary of State for Work and Pensions. I was going through a briefing with my officials on the nature of the state pension. We had a full discussion about that—there were pages in my briefing note about it and I hoped that I had got my head around it. When I turned the volume over to deal with the state second pension, there was nothing in the folder. I asked the Permanent Secretary at the time, “Where is the briefing on the state second pension?”. He said to me, “Secretary of State, it’s too complicated for us to explain it”. I was never quite sure whether he meant, “You aren’t capable of understanding it so I’m not going to bother with trying to do that”, or whether they were saying something which was actually true—that is, that it had become too complicated. I think that the latter is the case. There is no doubt in my mind that it has become complicated. As a consequence, there are some genuine transitional issues to sort out. I am quite sure that it is the right thing in principle to be doing. We know that some people will lose out; for example, people who due to their earnings would have built up a higher state second pension if these changes had not been made. It will be very important, although the principle is right, for Ministers to keep their minds open about how this change can best be implemented. However, as I have said, I think that it is the right thing to do.

Like others, I welcome Part 2 of the Bill, in particular the commitment to keep the pensionable age under regular review. This change will be necessary if we are to stay ahead of the demographic changes that have already had a tremendous impact on our society and that, if anything is true, are accelerating. Many think that at some point this trend for longer life expectancy will flip into reverse; I really doubt that to be true. There is no doubt that the pressures, both financial and societal, will build up unless we stay ahead of the process of demographic change.

That is easier said than done in many respects, and I say that for one reason: the age at which people retire, certainly for men, and for women in fact, had not changed for several generations. My grandfather would have retired at the age of 65. We have all come to expect as a natural order of things to get to that age and then retire. That is the old world and it has to be left behind, but it is sometimes difficult to persuade people to understand that. The good news is that I think that people have generally taken a very pragmatic view. If you compare the response in Britain to the increasing age at which the state pension is payable with the response to similar reforms in other European countries, you can detect a degree of welcome pragmatism here in the UK, and that bodes well for the future. However, further change is necessary and it is right that we make sure that the process is as objective and non-partisan as possible, which is why Part 2 is to be welcomed.

There is therefore a great deal to be welcomed in the Bill. I would like to say that the same is true of Part 5, particularly the clauses dealing with the transfer of pension benefits, but I really cannot say that to your Lordships’ House. The Government have made a significant mistake, or stand on the threshold of doing so, in their reforms around pot follows member.

The Minister made it clear that there could as a result of auto-enrolment be up to 50 million small pension pots being established. People will change employment fairly regularly, particularly early on in their working careers, and there is a danger of lots of small pension pots being developed and basically left dormant. We should not be complacent about that; we have got to decide what to do about it. The Government have come up with the idea of pot follows member. The other obvious course open to them, which my noble friend referred to from the Front Bench, to use aggregation as the default option, has been rejected.

I say to the Minister that I hope he can reflect on this with his colleagues. I think that a mistake is about to be made here and I hope that we can avoid it even at this late stage. I have nothing in principle against pot follows member—there is a logic to it—but making it the default option through legislation is the wrong decision. I say that it is wrong because it lacks ambition. It exposes some savers to the risk that they will move from well run, well managed, good value-for-money schemes into schemes that are less well run and provide less value for money. I am not entirely sure that the minimum standards will iron out or rule out that hazard.

When it comes to setting policy in this area, we must keep asking ourselves: what is the best thing for people who are saving? It is not necessarily the same thing to ask ourselves: what is the least risky reform for Ministers to make? The question is: what is in the best interests of savers? I accept that aggregation poses some significant challenges—there needs to be a clearing house, proper data, and so on—but that route genuinely offers the prospect of higher pensions in retirement than pot follows member.

The National Association of Pension Funds has made that argument very clearly. In my experience as a Minister, when the NAPF says, “You really need to think carefully about that”, Ministers really need to think carefully about the course of action that they have proposed. But it is not just the NAPF, it is other commentators, too. I am a great admirer of Michael Johnson and his recent pamphlet for the Centre for Policy Studies, which is not an organisation that I would naturally find myself standing up in the House to support. He has basically said the same thing to Ministers.

My noble friend is right to say that we need to debate those provisions in due course, and I am sure that we will. I hope that the Minister and the Government are open, even at this late stage, to taking a different perspective. The issue is: what should be the default option? I genuinely think that it is a mistake to offer pot follows member.

With that, I end my remarks. I look forward to taking part in Committee and on Report. I echo the congratulations that many others have offered to the Pensions Minister on taking forward these important historic reforms to the state pension. I am sure that it is the ardent wish of everyone in the House that the reforms work to support the savings culture that we so desperately need.