Budget Statement

Lord McKenzie of Luton Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I think it is clear that this Budget had more than an eye on next year’s general election. Aspects of it are, of course, to be welcomed. There is the U-turn on the annual investment allowance, now to be doubled, up to the election at least, after originally being cut, and the doubling of export finance—albeit that the Government are to miss their export targets and are struggling to rebalance the economy. There is the news that the economy is growing again after three damaging years of flatlining, albeit with no recovery for millions of families who are experiencing a fall in living standards. There is good news for savers also, if you are one, but the prospect of being able to tuck away £15,000 per year into a NISA or to have the first £5,000 of savings income subject to a nil rate of tax will seem but a distant dream to those who the Centre for Social Justice refer to in its report entitled Maxed Out. I refer to those millions of people in the UK who are struggling under the weight of their personal debt, with squeezed household budgets, zero hours employment contracts and a rising cost of living. The budget does nothing for them—nor has it protected public services, which provide vital support for the most vulnerable in our society.

The noble Lord, Lord Holmes of Richmond, advised us when we were discussing these matters to reflect on the fact that the Budget was about real people’s lives also. I very much agree. I had brought to my attention just yesterday—and I pass it on to the Minister—the example of Mapledown School in Barnet, a secondary school for disabled children that provides vital care for 65 pupils, so as well as educating the children it also supports their carers. Because of cuts to the council, passed on by the council, the school has had a reduction of funding of some 25%, with heavy restrictions on the services that it can provide. So in winding up, perhaps the Minister could give that school some sort of message about when it is expected that it might be able to share in the benefits of recovery.

I propose to concentrate the rest of my contribution on the announcement on scrapping compulsory annuitisation—or, more accurately, the compulsion to take an income by way of annuitisation, or drawdown, from a DC scheme. It is, in the words of the IoD,

“the most radical reform to the pensions savings architecture in decades”.

That is possibly true and, given its ramifications, it is all the more to be regretted that this announcement came with no prior consultation, and with a paucity of underpinning analysis. Then there are major issues, such as the impact on the gilts and bond markets and government investment—a point stressed by my noble friend Lord Haskel. Also, how much of it can or should work for private sector DB schemes, what does the guaranteed guidance amount to and how can it be delivered? What does it mean for the future of the annuities market—a point just raised by the noble Lord, Lord James? Will it fuel a buy-to-let market? These are left as open questions for changes which are due to start in a year, and transitional changes which are due within days.

In his rush to get a favourable headline, the Chancellor forgot something else. The Government have eschewed the opportunity of building a consensus for this policy in advance. They ignore all the efforts which have underpinned so much of pensions policy development in recent decades, from the Pensions Commission through auto-enrolment to the single-tier pension. The policy is predicated on the importance of consumers having choice—choice, that is, in the decumulation of their pension pots. The mantra is that it is their money and we should trust them to make the right decisions about how it is deployed. Perhaps begging the question as to whose money it is, given that DC schemes get a contribution from the taxpayer on original investment and again on accumulation, we can agree with the importance of choice, provided individuals have the opportunity for an informed choice. However, we recognise that informed choice can be difficult given the complexity of the pensions marketplace.

The NAPF saw the Budget announcement as perplexing in its juxtaposition to auto-enrolment, which was designed to counter the fact that often people are ill informed and make poor decisions about planning for old age. It says:

“On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last”.

The prospect that those in retirement will take more of their pot earlier produces considerable extra resource for the Treasury. There may no longer be the 55% exit tax charge, but there are still substantial revenue gains for the Treasury, reaching £1.2 billion in 2018-19, and some £3 billion overall by the end of that year. What are the estimated withdrawals from DC pots which generate these numbers, and what is the assumption about how they are invested? The Treasury is also, ironically, taking the benefit of some £850 million from the sale of class 3A national insurance contributions—effectively an annuity product—the cost of which will mean increased state pension payouts beyond the forecast period.

The Pensions Minister—perhaps we should call him Mr Lamborghini—has apparently declared himself relaxed about people blowing their pension pots and believes that the single-tier pension will preclude them falling back on the state for support. This analysis ignores the extent to which means-tested benefits for pensioners endure through the single-tier pension arrangements, and there will be many still invested in their DC scheme who have retired, or will do so, before the single-tier pension comes on stream.

We know that the annuities market is not currently serving consumers well, and the Financial Conduct Authority considers that people are getting a bad deal. Annuity rates have been in decline and the fundamental reasons for this are clear—people are living longer and we have been in an extended period of rock-bottom interest rates. However, matters are made worse by too few people shopping around for the best deal and suggestions that the insurance company providers are extracting super-profits from their annuity business. Recent figures show that someone with a modest pension pot of £24,000 could increase their annual income by 25% just by shopping around to get the best deal. The Government have not helped by their refusal to introduce a cap on charges.

However, the position is not all gloom and doom. Annuity rates for 2013 rose because of rising gilt yields and a more competitive pricing environment—the latter driven by the focus on transparency by the FCA and the ABI and the unwinding of some of the cautious pricing from gender-neutral changes. There is an inevitability about some of the factors which have driven rates down—longevity being one—but not all.

Some of the market failures can and must be fixed. However, in acknowledging the potential benefits of more choice, we must not lose sight of the important role that annuities play and can continue to play. They are the only financial product guaranteed to produce an income for life, with the investment risk and the longevity risk remaining with the provider. They also pool risk, which is reflected in the pricing. Having individual choice over individual pension pots runs counter to all this. Certainly one of the big questions that arises from these proposals is what the annuity market will look like in the future. Evidence from other countries suggests that many will not annuitise. What is the Government’s assessment of how this is likely to affect the market, particularly on pricing?

We need to better understand precisely what is to be provided to consumers under the guaranteed guidance. Perhaps the Minister can confirm that we are talking here not about advice, but guidance; there is a difference between the two—guidance is a weaker concept. There are substantial issues about ensuring the robustness and independence of what is to be offered, and there is a wider issue of whether a one-off, face-to-face session at the point of retirement—what happens to those who have retired already or those who retire in stages?— will be sufficient to fully inform consumers and equip them to make effective choices for the rest of their retirement. Frankly, I doubt it.

This all gives the impression of having been put together somewhat in a rush, without due analysis and with big questions remaining unanswered, and perhaps with a hint that under the guise of promoting choice the Government are looking to rake in another £3 billion in tax from pensioners. That is no way in which to develop a sound, long-term pensions policy.