Pension Schemes Bill

Lord McKenzie of Luton Excerpts

Tuesday 16th December 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I start by congratulating the noble Lord, Lord Jenkin, on his splendid speech this afternoon, and I give him my personal best wishes for his retirement. It has been a privilege to work with the noble Lord on a number of pieces of legislation. I have always found him incredibly knowledgeable and there is an old-fashioned kindness about his approach, as well as enormous stamina. There have been times when he has still been going at 10 o’clock at night, or 10.15 or 10.30 and beyond, when other noble Lords were flagging and wishing that somebody would call the House to order and to be adjourned.

We have two Bills before us this afternoon but, sadly, no opportunity to undertake a line-by-line consideration of one of them—the Taxation of Pensions Bill. It may contain only four clauses, but there are some 75 pages of schedules to add to the nearly 3,000 pages of tax legislation that the coalition has visited on us to date. If there were a Committee stage, we would have the chance to examine the very important issues that my noble friend Lord Hutton raised earlier.

The Government herald these two Bills as introducing a radical reform, giving greater choice for individuals and business. Indeed they do, but whether it will mean better outcomes in terms of retirement income for individual savers is another matter. As my noble friend Lord Davies of Oldham has said, we support the principle of increased flexibility for people in retirement and reform of the pensions market so that people get a better deal, but the changes undoubtedly bring forward a more complex landscape with different choices for consumers and the prospect of new, more diverse pension products. Given the huge significance of the decisions which individuals make at or when they approach retirement, affecting their lives and that of their partners for 20, 30 or even more years, it is vital that they are supported to make the choices that are right for them.

The Government’s rhetoric has been about the benefits for retirees, and they have been a little coy about the benefits expected to accrue to government. The Taxation of Pensions Bill, after taking account of changes to taxation of death benefits and the reduction in the annual allowance, will generate increased taxation for the Government of £3.86 billion in the period to April 2020. Can the Minister confirm that figure? Increased income tax receipts are expected through to 2030, with modest reductions thereafter.

With taxation receipts for government falling short of expectations, it is doubtless welcome news to the Chancellor that pensioners will be contributing more. However, we do not know much about who is going to bear the extra tax, and in what circumstances. How much of the extra tax will be derived from individuals putting themselves into higher rate tax bands? We know that for any sum taken from uncrystallised funds, 25% will be tax free and the balance taxed at marginal income tax rates. So those wishing to access the whole of their erstwhile tax-free amount will have to subject the whole of the balance to income tax in one go. Perhaps the Minister can give us some breakdown of all of this.

What percentage of retirees is it estimated will continue to take annuities, and what percentage will take their pension pot in one go? Notwithstanding this tax bonanza for the Government, there are lingering concerns that some, with resources and compliant employers, will see the new flexibilities as an opportunity to reduce their tax bills by the use of salary sacrifice arrangements, thereby saving national insurance and tax on the 25% tax-free withdrawal. The Government have addressed this issue in part, by reducing the annual allowance from £40,000 to £10,000 once flexible drawdown is under way, but there still appears to be the prospect of tax leakage in pre-flexible drawdown periods. Are the Government accepting of that?

As we have heard, the Pension Schemes Bill allows for the establishment of collective defined contribution schemes—an arrangement that we support, and indeed have called for. Similarly, we support the concept of shared-risk schemes. It is high time that pension provision was broadened to offer more than just defined benefit or defined contribution schemes. Increasingly, the binary landscape has left new savings going into DC schemes as the longevity, investment and inflation risks, coupled with accounting rules, became too difficult for many employers to sustain. Efforts to chip away at some of the perceived more burdensome obligations of DB schemes have not stemmed the tide of closures in the private sector.

As the NAPF 40th annual survey identifies, active membership of DB schemes has reduced by two-thirds since 1975, to just 1.1 million today. Active membership of DC schemes outnumbers that of private sector DB schemes for the first time ever, and the success of auto-enrolment is expected to reinforce this shift.

At the same time this is taking place, decumulation of DC schemes is happening in an environment of sustained low interest rates, with quantitative easing helping to create an environment of miserable annuity rates. All this has been accompanied by a substantially dysfunctional market. So the defined ambition elements of the Bill which provide the framework for risk sharing between employers, employees and third parties are to be welcomed—as is the prospect of collective benefits involving risk pooling between members, with the opportunity of greater stability of outcomes.

I understand that it is hoped that the necessary secondary legislation will be ready for April 2016, to coincide with the abolition of contracting out. Does that mean that we will not see drafts of the key regulations during the passage of the Bill?

Undoubtedly the aspect of the Bill which has attracted most comment involves the new flexibilities around decumulation of DC schemes. The speed with which these changes were announced and are being introduced is, as other noble Lords have said, worrying. The lesson from previous major reforms, such as the single state pension, auto-enrolment and most changes to the state pension age, is surely the benefit of laying the groundwork, through extensive consultation and stakeholder engagement, and building a consensus where possible.

The guidance service—the deliverer of the guidance guarantee—is especially important, because the availability, scope and effectiveness of the service will be key if the new flexibilities are to work as intended. As a very recent PPI report shows, we will have to recognise the changing circumstances that face individuals as they approach retirement—such as rises in state pension age and the normal pension age in private sector schemes, removal of the default retirement age, increases in longevity, and current economic challenges. These factors are changing the way in which people approach retirement and pension transition. It is no longer necessarily just a case of leaving work and taking a pension—although accessing DC pensions is, as we have heard, currently considered the most challenging aspect.

Just at the time that inertia is being put to good effect to encourage accumulation by auto-enrolment, the Bill seeks to galvanise engagement and enthusiasm when it comes to decumulation, as my noble friend Lady Drake said. This engagement is expected initially of a generation who have generally not saved enough for retirement, whose longevity is increasing, but where men in particular underestimate life expectancy, and who tend to overestimate their income returns.

So far as the current market is concerned, let alone one selling more diverse products, as two recent reports by the FCA make clear, providers are not generally treating customers fairly. One of its reviews showed that 60% of retirees with DC pension savings were not switching providers when they bought an annuity despite the fact that around 80% of those consumers would obtain a higher income on the open market. I think that my noble friend Lord Hutton made that point. As for those with medical conditions and lifestyle factors, the FCA estimated that 91% could get a better deal on the open market. The review identified that only 5% of annuities sold by providers to their existing pension customers were enhanced, compared with 50% of annuities sold in the open market.

So how can we have confidence that the guidance guarantee will facilitate better outcomes, especially over time when the vacated space of compulsory annuities will engender a wide range of products? There are a number of concerns. The first is whether people will seek to access the service in the first place, and some piloting by Legal & General was not encouraging. We know from the “near final” rules published by the FCA on 27 November that they will introduce a requirement —the first line of defence—for DC providers to ask consumers whether they have used the guidance service or received financial advice, and to encourage them to do so if not. That is all well and good, but a growing number of voices are calling for a second line of defence—we heard some of these this afternoon, particularly that of the noble Baroness, Lady Greengross —which requires providers actively to prompt consumers, to ask whether they have considered matters such as tax, their partners’ needs, benefit implications, medical or lifestyle needs, including social care ramifications, the impact of inflation and the risks of running out of money. The FCA reviews certainly give emphasis to the need for such a second line, and we will doubtless explore this further in Committee. But perhaps the Minister can say whether it is intended that there will be only one free session at which guidance is provided. How will this work over a lifetime in circumstances where an individual does not opt for an annuity and new products are coming on stream over his or her lifetime?

There is much else that can be explored in Committee —matters that are in the Bill and, indeed, some that are not. Certainly, we will wish to pursue the issue of removal of restrictions on NEST. I take this opportunity to say that my attention has been drawn to the operation of the PPF and how it affects certain categories of employees. In particular this issue has been raised by pilots of BMI and Monarch. BMI entered the PPF in 2012 and Monarch is in the assessment period. However, the operation of the PPF cap is raising the prospect of such pilots receiving pensions dramatically below their original scheme expectations. Can I meet the Minister to explore that issue rather than raise it endlessly in Committee?

These Bills have the potential to change the pensions landscape and we have a duty to engage with them constructively but rigorously.