Queen’s Speech

Lord Stoneham of Droxford Excerpts

Tuesday 15th May 2012 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, in this debate I want to take up the theme raised by the noble Baroness, Lady Hollis of Heigham, in her speech on the future of pensions policy. I congratulate the Government on their decision to move ahead with a new pensions Bill, to complete the reforms of the Turner commission and the work of the last Labour Government. This will create a single-rate pension set above the pension credit standard minimum guarantee and formalise the strategy and process to determine the future raising of the pension age. The one overriding objective in the pension field must be to simplify in order to improve understanding. A single-tier higher pension will reduce the complexity of means-testing and the disincentive to save, but only for new pensioners. It is essential to do this to complement the introduction of auto-enrolment in pensions starting later this year.

We obviously need a new, simpler structure, but is that enough? As yet, we have no idea how many will opt out of auto-enrolment or what they will make of it when they change jobs. We are hoping that an extra 5 million to 8 million people will start making extra pension provision. We cannot expect people to save more unless they understand what they are investing in. The recent IoD report, Roadmap for Retirement Reform, says this well:

“Little wonder that the average employer or employee simply finds pensions utterly baffling … people are unlikely to engage with, stay engaged with and contribute hard earned money to something they simply can’t understand the workings of”.

Warren Buffett, the great investment manager from the Midwest, often says that he only invests in businesses that are simple to understand. How can we expect personal savers to do otherwise?

Defined benefit pensions, from which many of us here probably benefit now, were quite easy to understand. Until recently, people had confidence in them. You invested for life and they provided a pension of between half and two-thirds of your salary. Contributory pensions are a completely different story. You have no idea what you will eventually get. You will find out too late in life if it is not enough. Every financial scandal will raise your fears that you will not get anything. Just trying to understand may only depress you. It is not surprising that many people put their heads in the sand and adopt a Micawber strategy that something will turn up. The consequence is that many will simply underprovide for their much longer retirement.

Many are also adopting alternative strategies. Unfortunately, they tend to be those who are already better off. There has been a huge growth in ISAs and investment in property and parental property. Many are investing in businesses that they hope will provide their pensions. The next stage in the Government’s policy on pensions needs to be not only to declare war on government regulations but to say how to simplify savings for pensions and to improve understanding. We also need to broaden understanding that a more flexible approach to encourage saving may achieve a better response. People need to be encouraged to make greater provision for themselves. We need a simple pensions structure but we also need to encourage greater diversity.

Finally, the Government need to reduce the odds on the biggest lottery of all: how much individuals need to provide for the greater likelihood of greater social care expenditure. There are three tasks for the coalition Government over the next three years: simplify pensions savings and improve understanding; encourage more flexible savings mechanisms and schemes; and achieve a settlement for social care provision.