Pensions Bill [HL]

Lord Stoneham of Droxford Excerpts

Tuesday 15th February 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, the Bill seeks to build on the previous Government’s work to implement the Turner commission recommendations. I accept that there will be differences on the details of the implementation but I hope that we will maintain cross-party consensus on an issue which has long-term implications. I congratulate the Government and the ministerial team on the excellent consultative papers we have had in preparation for the Bill. I would have expected nothing less of the current Minister for Pensions.

On pensions, three fundamental issues need to be addressed, many of which have been covered in the debate. We cannot ignore the pressures of longevity on funding. There has been a severe decline in private sector provision for pensions overall and an emasculation of the defined benefit schemes. The noble Baroness, Lady Hollis, referred to it as Hamlet without the prince, but today’s debate cannot also fail to consider the low level of the basic pension which simply supplements the problem of credits acting as a disincentive to saving, an issue to which I will return in a moment.

Turner highlighted the longevity problem. Everyone appreciates—particularly in this House—improving longevity, but it is a disaster for pension planning. There is no alternative but to raise the pension age—the figures speak for themselves; the intergenerational balance and the social contract between generations demands that attention—and resources should be made available to fund pension improvements. The impact on funding, if we do not deal with this issue, will be disastrous across all pension schemes, whether private, public or in the state sector, and will create huge imbalances and pressures.

The only question concerns the exact detail of how we implement the change. Clearly, in the development of this Bill there has been a trade-off with the Treasury and I accept that the swiftness of the change places more disadvantage on women than on men. That is unfortunate, as is the fact that in making these changes we are departing from the previously agreed principles of 15 years’ notice for women and 10 years’ for men. However, the particulars need to be examined as the legislation goes through both Houses. It would be easier if we could spell out what people will get in improved benefits in return for the raising of the pension age in order that this is not seen simply as an exercise in cost-cutting. I shall return to that point in a moment.

On the second issue, the decline of private pension provision, the figures are frightening. They have accelerated even further than Turner predicted and the current private sector coverage for defined pension schemes has declined from 45 per cent to 35 per cent since 1997. We know that defined benefit schemes have been emasculated. There has been a decline in confidence in funded schemes and people have started looking at alternative forms of savings and moving out of pensions. We know that many defined benefit contribution schemes have been oversold and that only later will people discover the poor returns they are to receive, which will be too late. There is a trend among employers to move towards more flexible, lower contribution schemes; they are moving away from defined benefit schemes and following the trend to flexible benefit structures.

Effective pension provision means starting contributions early in life, and automatic enrolment may help. In theory, it will help those most in need of pension improvement and where insurance companies are least interested in making provision. State support is needed and the NEST scheme will help, but it is unlikely to transform matters quickly and it is a myth to think otherwise.

The problem is that the contributions envisaged are actually quite small beer. They may work for those starting contributions early in their working life but they will be of little benefit to the women in their 50s who are going to be most affected by the rise in the pension age. The pots will be small and are hardly likely to provide a very significant pension for those people; and what they do get could well be eaten up by the withdrawal of other benefits.

This therefore takes me to the other prime issue, that of the basic pension. This is where the previous Government gave us least encouragement in these reforms. Raising the basic state pension, reforming the second state pension and reducing benefits’ complexity remain a priority if these changes we are discussing today are to be effective. The earnings link is already a major reform for this Government. It seeks to address the fact that since that link was abolished back in the 1970s, the relative position of the basic pension has declined by about a third, which neither Conservative nor the Labour Governments have addressed. It needs correcting, and it is not simply keeping up with earnings—we now have to try to correct the fact that there has been a fall. I notice that the one area in the coalition agreement dealing with pensions was about deciding what we were going to say and do about addressing this problem, because it is pretty fundamental. It is easier to accept a change in retirement age if there is a direct link to improved pensions and not simply cost savings.

I was directly involved with Steve Webb in working on our party’s proposals for a citizen pension. I hope the Government will use the talents of Steve Webb—one of the foremost pensions experts in this country—to bring in a radical reform of the basic state pension and I hope they will announce the principles for doing this during the course of this legislation. Until we do, we cannot help those in most need of it, who are nearing retirement and are having their working lives extended. Auto-enrolment will be diminished if the effective marginal tax rate associated with reducing credits and benefits undermines the incentives to save and the savings people are making through NEST. If we do not use some of the savings from a higher pension age, we will lose that opportunity forever. Frankly, the Treasury needs to put some petrol in the engine to achieve these reforms.

When it comes to the detail of this Bill, I hope that we will look at the smoothing of the pension age change; but it should be seen in the context of what the Government are going to do on the basic pension, because that is where the trade-off should be. We should make sure that the higher threshold does not discriminate against women doing more than one part-time job and does not encourage employers to increase part-time work in order to avoid making pension contributions. We must work to improve confidence in, and understanding of, private pension schemes, because these proposals assume quite a massive expansion in such schemes. However, we know from history that that expansion can lead to exploitation and mis-selling. We must therefore protect individual consumers and look very closely at the regulation that will do that.

Fourthly, we must improve the relative position of the basic pension to illustrate the direct benefit of raising the pension age. Turner, and now Hutton, recognises that pension reform is required. Whether we like it or not, it will require a combination of higher contributions, a higher pension age and some sharing of risk between stakeholders. This basic, technical Bill will deserve all-party support and should be an important component of delivering the coalition’s plans for pensions, provided that some of the concerns I have raised are dealt with during its passage.