Pension Schemes Bill

Mark Field Excerpts

Tuesday 2nd September 2014 Commons Chamber

[Crispin Blunt]

I will take advantage of your invitation, Mr Deputy Speaker. I am not suggesting anything other than that the guidance is incredibly important—frankly, it needs to be closer to advice than guidance in its scale if it is to ensure that people are properly equipped to make such very difficult and complex choices—but I am concerned by the suggestion that the levy will be directed at firms that will benefit, whereas we want a competitive market which highly entrepreneurial firms that can put together new products will enter to win business from people who have left their money sitting or have not moved it, and who take annuities from existing providers and the rest. There is a dichotomy there.

[Mark Field (Cities of London and Westminster) (Con)]

Will my hon. Friend give way? [Laughter.]

[Steve Webb]

I do not think that my hon. Friend can intervene on an intervention, but I will give way to him in a moment if he so wishes.

I agree with my hon. Friend the Member for Reigate (Crispin Blunt) that we want to see innovation. The industry is talking about a decade of innovation, so although this system will be up and running next April, it is widely assumed that the market will develop and new markets will indeed be brought forward. I have seen no evidence that the envisaged level of levy will hamper entry into the market. As he well knows, the financial services industry is a big industry, and this is a huge opportunity. We are also talking about the auto-enrolment of between 8 million and 9 million new pension savers. These are huge additional sources of revenue for the pensions industry. Relative to that, the scale of the levy for the guidance is modest, so I think that I can reassure him about that issue of scale.



To move on to the substance of the Bill, I will make my remarks in two sections: the first on the pension schemes and the defined-ambition proposition, and the second on freedom and choice in pensions.

First, what is defined ambition? Essentially, it is a radical reshaping of pensions legislation to ensure that it remains relevant for future generations, and to reflect, recognise and, to quote the coalition agreement, “reinvigorate” innovation in consumer-focused product design in either shared-risk or, as we are calling them, defined-ambition pensions.

The Bill will introduce three categories of pension scheme based on the type of promise that they provide to savers during the saving phase about the benefits that will be available to people on retirement, including a new defined-ambition or shared-risk category of pension scheme. The Bill will enable collective benefits to operate in the UK, as they do successfully in many other countries. We have very much tried to focus on pension members’ experience of what their scheme offers. The new Bill will apply and refocus existing legislation in relation to the new terms.

The first category is for salary-related pension schemes—for example, traditional final or average-salary schemes—where the pension is specified in relation to the person’s salary. They have been in decline since the 1970s, and the majority of them are now closed to new members. They are often known as defined-benefit pension schemes, in which the employer bears the risks of longevity, investment returns and inflation.

The switch has been to the other extreme—schemes commonly known as defined-contribution or, more technically, money purchase schemes. The number of defined-contribution schemes established per year has generally increased since 2007, with 1,060 new schemes in 2013. Membership of such schemes increased by 15% to 2.7 million in 2013.

As you can clearly see, Mr Deputy Speaker, we have a binary model: people get either a money purchase or a non-money purchase benefit. Although both types of pension will be the right product for many people, is it right that the only future for pensions that is encouraged by our legislation is one in which either the individual consumer or the employer takes on all the risk? We do not believe so. Many employers have found the increasing costs of longevity and investment risk too heavy to bear, but if defined-contribution schemes are the only alternative, outcomes for savers will be less certain and more volatile than for earlier generations, making it much harder for future generations of savers to plan for later life.

Consumer trust in the pensions industry is low. As I have said, we can protect people against the risks of high charges or poor governance, but our research has shown time and again that many individuals want more stability and certainty. They want to know something about what their savings will give them and have some protection from the worst vagaries of the market. That is why the Bill provides new definitions for private pensions, including the new defined-ambition category of pension scheme, and for collective benefits.

The new shared-risk definition describes a middle ground between the more polarised money purchase and non-money purchase definitions. It will create a distinctive space to encourage innovation in pension design, and it will provide more certainty for individuals than defined-contribution schemes by sharing risks among employers, employees and third parties.

The collective benefit definition will enable a new form of risk pooling among scheme members that is able to provide greater stability in outcomes for members. Collective pension schemes are often recognised internationally as high quality, and it is only right that the United Kingdom should have access to pensions viewed as being among the world’s best. We also have the advantage of providing protections at the outset that address issues to which the more mature schemes overseas are now turning their attention.

We have engaged extensively with stakeholders across the pensions industry and found that there is an appetite for legislation that allows greater risk sharing and risk pooling. There are employers who will welcome the greater flexibility to create pension schemes that suit the needs of their work force. Pension providers want the flexibility to design and offer pensions that provide greater certainty. Individuals value the option to have greater certainty than that provided by DC pension schemes, as well as the greater stability that collective schemes may provide.

I am pleased to share with the House the warm welcome that the proposals have had. Age UK says that it

“welcomes the overall intention of the Bill”.

The National Association of Pension Funds says that it has

“long supported enabling greater risk-sharing in pensions arrangements”

and welcomes the creation of a framework that enables greater innovation and risk sharing. The TUC says that it has long supported collective pensions

“as a means of improving the income available to workers in retirement. The legislation will bring the UK into line with countries such as the Netherlands, Denmark and Canada where such schemes already operate.”

I welcome the fact that the Opposition have sort of, vaguely-ish welcomed our proposals. The more stability and consistency we have on pensions, the better, because pensions are not just for Christmas but are a long-term business. The fact that there is a degree of common ground in this area is entirely welcome.

--- Later in debate ---

[Mark Field (Cities of London and Westminster) (Con)]

I paraphrase the Minister when I say that it is probably fair to say that like holy matrimony pensions reform is probably best entered into—or not entered into—advisedly, soberly and discreetly. For good reason the final year of a Parliament is often not the best time to embark on radical reform in the sector. It simply becomes all too easy for political adversaries wilfully to misrepresent some far-reaching proposals. Yet there is no disguising that the notion of pensioners being able to unlock their life savings during an uncertain retirement is a revolutionary change, and one I support.

As deficit reduction remains more straightforward to explain than achieve, these pension reforms also allow for some considerable fiscal loosening. Once implemented the proposals will release a vast dollop of cash for those over the age of 55 to pump into the economy, rather than being forced to buy an annuity at a woefully uncompetitive rate. Make no mistake—this is not an unintended consequence of the proposals. The Red Book to last spring’s Budget made it clear that the reforms anticipate a boost to aggregate pensioners’ spending to the tune of £320 million in 2015-16, rising to over £1 billion in 2018-19.

[Guy Opperman]

Is it not fundamental that, given the failures of annuities, the Government provide extra flexibility? Fundamentally, they are doing one thing: trusting people with their own money.

[Mark Field]

I confess that I wholeheartedly support the Treasury’s belief in the principle of freedom to which my hon. Friend refers. It is right that we as Conservatives trust those who have worked hard and saved throughout their adult life to make their own decisions on their savings. Nevertheless, we must accept that the generous tax relief that attaches to private pension savings has always been predicated on the basis that, by providing for their old age, pension savers will not be a drain on the state. It will become ever more difficult to justify reliefs at the generous levels we have all been used to over the past few decades if the compulsion that goes with annuities or restrictions on access to savings is consigned to history.

I am also pleased that the coalition has consulted a little more widely on these plans, albeit somewhat belatedly. One hopes that some technical issues will be ironed out, but I wanted at this stage to make some more general observations. The Government have been commendably vigorous in reforming the pensions system since 2010. As the Minister pointed out, we are already on the third pensions Bill and he already has another in his sights. Eligibility for a state pension will only kick in at a later age. That has to be the right move forward. The earnings-related element of the pension has been abolished. We now have a system of automatic enrolment for employees. Many of these reforms have been undertaken for one simple reason: we could not go on as we had. Our understanding of retirement has changed beyond all recognition and comprehension since the state pension was introduced in 1909. Life expectancy then was lower, so there was no point in continuing the pretence that the state could adequately sustain decent incomes for generations that will now live for 20 or 30 years after retirement.

If the emphasis is now firmly on self-reliance and the ever greater involvement of private providers, the most crucial ingredient will be trust. If the law is essentially to compel citizens via auto-enrolment to hand over an unspent surplus of their hard-earned cash to what they may regard as the unqualified or incompetent, there is little incentive for anyone to save. Central to addressing all this must be a pensions industry in which there is universal public confidence and which willingly recognises a collective responsibility. As we know, we are a hell of a long way from that point. The regulator, encouraged by the Government, now needs urgently to engender a culture among the major institutions in the sector akin to that prevailing among the leading banks during the 1970s.

[Ian Swales (Redcar) (LD)]

Does the hon. Gentleman share my concern that the move to individualism will potentially shoot away the concept behind annuities, which effectively provide group insurance for life expectancy? Therefore, is he concerned about annuities having a bad name? Will the industry get its act together to provide the right kind of insurance products to substitute for annuities?

[Mark Field]

I do share some of those concerns. I agreed to a certain extent with the Opposition spokesman’s points about the tension that exists. There is a tension, perhaps an understandable tension, between the drive towards individualism, which as a Conservative I support, and elements of the collective nature of pensions that have hitherto been in place.

Unfortunately it is clear that confidence in the pensions industry has not recovered after the debacle of Equitable Life, with investment in a residential property seen as the more reliable bet to all too many of those planning their retirement. That applies to virtually everyone of my generation and I suspect to many younger voters, too.

If we are to reduce reliance on the state, we might also reflect on the sobering fact that, earlier this year, the Financial Conduct Authority found the average pension pot to be a mere £17,700. For all the promotion of pensions, no amount of legislation will overcome the fact that far too many of our fellow countrymen are too poor to save adequately for their retirement. I fear that will only become truer for younger generations who find an ever-increasing portion of salary dedicated to servicing high rents or mortgages based on inflated house prices.

I should like to touch on coherence across Government pensions policy, which was referred to earlier by the Opposition. On the one hand, the Government are trying to create a new regime which places much greater trust in the individual to manage their own retirement funds, yet on the other their new system of automatic enrolment for employees suggests they have limited faith—let us put it that way—that people will take sufficient responsibility for saving in the years preceding their retirement. Similarly, while there is an implicit understanding that the state will no longer be able to provide citizens with adequate incomes in retirement, the Government have made a costly commitment to the so-called “triple lock” which guarantees that the state pension will increase in line with wages, prices or 2.5%, whichever happens in any one year to be highest.

In short, the messages to the electorate on pensions remain mixed to the point of confusion. I am not being critical of the Government in this regard, because this is a very complicated area and there are those almost inherent tensions in the pensions system which have been referred to earlier, but it would be helpful if the Minister restated in his winding-up speech the basic principles that underpin Government thinking in this vital area.

As I have suggested, as a Conservative I instinctively welcome the notion that people who have saved and planned their finances carefully should be free to spend their retirement funds as they see fit. It is exciting to see the Treasury and the DWP inject the principles of trust and self-responsibility back into the heart of Government policy. Nevertheless, it would also be wise for the Government to examine whether such policies alleviate or potentially increase the burden on the state.

In this regard, I ask the Minister what examination he has conducted into the system in Australia. Some 20 years ago, the Government there made similar decisions to those now being made here on annuities. However, I understand that the Australian Government are now considering reversing that decision after their Murray review, examining their financial system, found that roughly half of those retiring take money out as a lump sum with a quarter of that group exhausting their funds by the age of 70. In addition, many had got themselves into debt in the years preceding retirement in anticipation of using the lump sum on retirement to pay off those accumulated debts, rather than using it for living expenses in retirement. What safeguards do we have in place to avoid such an undesirable outcome?

Turning to guidance, I have received constituency representations from an industry specialist who is concerned that the new pensions “guidance guarantee” has the potential to create widespread confusion among consumers and damage to regulated financial advisers. The Treasury has announced that under the new regime everyone will be provided with free guidance from bodies such as the Pensions Advisory Service and the Money Advice Service. The cost of this will apparently be borne by a levy on regulated firms. Not only will the new levy add cost to the operations of independent financial advisers, but they will essentially be funding a service that stands to undermine their own offering since many customers will now take the view that it is not worth paying for that independent advice. This in itself is not a problem for the consumer. However, financial advisers currently already operate in a very strict regulatory environment, whereas the guidance guarantee will set out generic options, such as whether an individual should consider an annuity or income drawdown, rather than specific recommendations. There is a danger, therefore, that many pensioners will see broad guidance as an inexpensive substitute for tailored, quality advice. My correspondent therefore recommends either that the Government’s delivery partners remove any suggestion that they will be providing advice rather than simply general guidance, or else that policy is delivered through regulated, private sector firms, perhaps through a voucher system, which would offer consumers the kind of helpful, impartial and personalised advice that they need.

Finally, I should like to say a few words on unintended consequences. It has been clear for some time that the annuity system was not designed to fund the kind of long retirements we have seen as a result of improved life expectancies. However, there are implications for the health of the wider economy if we turn our backs on annuities in ever greater numbers. The vast majority of annuity money is invested in bonds, a crucial source of alternative finance for businesses beyond the traditional banking system. This helps spread risk in the system by ensuring that problems in the banking system, such as those we saw emerge in 2008, do not completely turn off the tap of finance to the wider economy. Currently, those saving in defined-contribution pension schemes buy approximately £11 billion of annuities per annum, with around £7 billion flowing to firms through corporate bond purchases as a result. What consideration has the Minister given to a collapse in such purchases should there be a sudden drop in the sale of annuities, which might well happen as a result of these changes? While I expect this will be offset in part by a fresh flow of money from those pensioners who decide to reinvest their lump sums, this cannot be guaranteed and, as I have suggested, my fear is that, without sufficient trust in the markets, property and the rental income received from it will prove a very attractive destination for this cash. An unbalancing of the property market as a result would not be a desirable outcome of these changes.

While I should appreciate the Minister’s response to all the issues I have raised today, I would like to finish my contribution by reiterating my admiration for the boldness of the coalition in trying to tackle a pensions system that clearly is not functioning well for the majority of our fellow Britons.