Pension Schemes Bill
Debate between Mark Hoban and Shabana Mahmood(10 years, 3 months ago)
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Shabana Mahmood (Birmingham, Ladywood) (Lab)
It is a pleasure to wind up this relatively short but interesting and important debate. Despite points of difference and disagreement, it has provided some thoughtful and wide-ranging speeches from both sides of the House, proving that it is quality, not quantity, that counts. Two excellent examples were provided by my hon. Friend the Member for Aberdeen South (Dame Anne Begg) and my right hon. Friend the Member for Neath (Mr Hain).
My hon. Friend the Member for Aberdeen South made an important point about complexity and expressed her fear that increasing complexity as a result of the Government’s changes to pensions might hamper efforts to get younger people to engage with their pensions. She also rightly highlighted the increased risk of mis-selling that could result from any such complexity. I shall come back to that issue later. She also highlighted the importance of governance in relation to the collective defined-contributions schemes that are being introduced by the Bill. She was right to say that there was no obvious reason to omit those governance arrangements from the Bill and to leave them instead to be dealt with in secondary legislation. It is difficult to understand why the Bill is vague on that point, and I hope that the Financial Secretary to the Treasury will be able to illuminate the House further on that when he responds to the debate.
My right hon. Friend the Member for Neath, who is not in his place at the moment, made a powerful contribution to the debate, in which he set out the challenges posed by a rapidly ageing population. They are one reason why so much attention has been focused on pension arrangements. He also noted the challenges posed by the greater need for adult social care that results from a rapidly ageing population, the interplay between those changes, and the increasing burden on the present younger generation and future generations. He talked about our expectation of what those burdens would be like in the coming years. He was right to give us an historical perspective, particularly in relation to mis-selling during the years before 1997.
Pensions are an important issue for people. They worry about their retirement and their personal social care needs, and about whether they will be able to cope with those needs as and when they arise. They also worry about whether they will be able to leave anything behind for their children. As people live longer, it is more important than ever that they should make the best possible choices for themselves. As legislators, politicians need to ensure that the range of options available to people and the breadth of the arrangements they can make for their retirement are fit for purpose, especially as we are all living much longer. That poses great challenges for us all.
In that context, the Bill’s establishment of collective defined-contributions schemes—CDC schemes—is a welcome step in increasing the range of options available to people as they plan for their retirement. We will therefore not oppose the Bill on Second Reading, although there are areas in which we might seek to extend or strengthen it in Committee or on Report.
As I said, we support CDCs in principle. In sharing risk, they have the potential to give people a more adequate and reliable retirement income than individual defined-contributions schemes, because, unlike those schemes, CDCs can pool risk across and between generations. Given the difficulties and anxiety that many people feel about their living standards at the moment, we want to support working people who are struggling to set money aside for the future. We need to ensure that they have access to pension schemes that they can trust to give good value for money and a decent income in retirement.
CDCs are also well supported by the public. Research by the Institute for Public Policy Research carried out at the end of 2013 found that there was strong public support for a collective pension. It was the most popular of the options the IPPR tested and it appealed across those with different income levels, life stages and ages. If CDCs are to be well taken up and succeed, strong governance arrangements clearly need to be in place—that point was made by my hon. Friend the Member for Aberdeen South. As my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) said, the Bill is currently silent on governance arrangements for CDCs. The highest standards of governance are needed for schemes that are even more opaque than defined-contributions schemes because they have to manage pooled assets and conduct smoothing.
The silence in the Bill occurs despite the Government’s consultation “Reshaping workplace pensions for future generations”, which stated:
“Collective schemes are complex and can be opaque—because of the indirect relationship between contributions and benefits. This necessitates strong standards of communication and governance. We intend collective schemes to be overseen by experienced fiduciaries acting on behalf of members, taking decisions at scheme level and removing the need for individuals to make difficult choices over fund allocations and retirement income products.”
Failure to require all schemes to have trustees means that we will potentially have some CDCs run by trustees and others offered by private firms that seek to maximise their short-term returns.
The Minister will know that we have consistently argued that all workplace pension schemes must be run by trustees and have a legal duty to prioritise savers’ interests. Governance arrangements remain an issue for other defined-contributions schemes, which make up the majority of what is available. The Government could have taken more steps in the Bill to strengthen the governance of those schemes. The Government have declined to impose trustee boards, but have instead opted to require independent governance committees. We are concerned that they will be neither independent, nor governing in nature. In any event, IGCs contain serious conflicts of interest, so we will argue in Committee that the Government should instead follow Labour’s lead and require all pension schemes to have trustees and a legal duty to prioritise the interests of savers above all others.
Another issue discussed in the debate, which the Opposition will continue to press the Government on in Committee, is scale. The issue was raised by one Government Member and the Minister did engage with it when the point was made about whether small and medium-sized enterprises might be able to introduce CDCs or whether this would be the preserve of larger employers. He rightly said that it was going to depend primarily on scale and how popular these schemes end up being. The Bill, however, contains no measures that will help promote the scale which most independent observers believe is necessary for CDCs, and workplace pensions in general, to do the best they can for employees. We have long argued that measures to promote scale are vital to ensure the best possible outcomes for savers. So the Government could, for example, require that automatic transfers default into aggregators and the criteria necessary for qualifying as an aggregator should include scale. One or more of those schemes which met the qualifying criteria to be aggregators under our approach may then opt to be a CDC pension scheme.
As my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East noted, the House of Commons briefing note on the Bill also says that
“certain conditions, such as large scale and strong governance, appear necessary for—
CDCs—
“to operate successfully.”
Three-quarters of respondents to the consultation prior to the Bill thought that Government intervention would be needed to create the scale necessary for schemes to offer guarantees. We will look in detail at issues around scale and governance when the Bill is considered in Committee.
We will also look at the National Employment Savings Trust, which is a trusted body for providing workplace pension schemes. It could potentially offer retirement income products or CDC and in doing so help constrain the industry and ensure that it provides decent products to all savers. However, to do so most efficiently, it would need to have its restrictions lifted. As was mentioned earlier, the Government said in July 2013 that they would legislate to lift the restrictions as soon as possible, but they have not yet done so. It would be helpful if the Minister told us whether that is something that will be taken forward by the Government, and when it will be discussed in Committee.
The second part of the debate dealt with the new arrangements around flexibility. As my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East stated at the outset, we have supported greater flexibility in relation to pension arrangements, but we have set out three tests for the new flexibility. First, is there robust advice for people who are saving for their retirement? Secondly, is the system fair to those on middle and lower incomes who want a secure retirement income? Thirdly, are the Government sure that the changes will not result in extra costs to the state either through social care or by increasing housing benefit bills?
In relation to the first test, the expectation is that the Government will propose an amendment to the draft Bill around the guidance guarantee. As it has not yet been published, it is not clear whether it will be robust enough. It would be helpful if the Minister gave additional information to the House now so that we are not waiting until the Bill reaches Committee before we know what is happening about guidance.
As many Members noted, guidance will have to be well thought through and reflect the practical steps that people take as they move towards retirement. To be effective in practice, guidance will need to include a discussion of the effects of drawdown on the individual’s tax situation. It will also need to explain the consequences of decisions regarding the different forms of saving on the extent to which local authorities can seek to recover sums for long-term care. The Government’s response to the consultation “Freedom and Choice in Pensions” indicates that drawdown is likely to be treated similarly to annuities in that income and not capital is assessed. Again, that is something that we will have to look at and examine further in Committee.
Some specific questions arise as well. For example, if guidance is a single event, how will it assist an individual seeking the necessary later event, perhaps 20 years later, of switching from a drawdown product to an annuity? Draw-down products are likely to be insufficient on their own for savers and individuals will need to insure against longevity risk to ensure that they do not run out of money during their retirement. Will there be a requirement for products to include a regular review of when the optimal moment for switching to an annuity should occur?
We have had a number of debates, both on the Floor of the House and in Committee, around the issue of advice and guidance and the very clear difference that there is between the two. There is a fear among many Members across the House that guidance on pension changes alone might not be enough to help people make the best possible choice. Ultimately, the course that the Government choose will have to be carefully scrutinised and reviewed. As I have said, this matter is of great interest to Members on both sides of the House.
Shabana Mahmood
No, we have not called for regulated advice, but I am sure that the hon. Gentleman will agree that these are big decisions for people. We must ensure that what the Government envisage will be up to the job of ensuring that they have all the information they need before then to make the best possible choice. As I have said, we have had a number of debates on this subject and the Government have given us some idea of the guidance they envisage, but I think we will have to return to these issues in Committee to ensure that that guidance is as robust as it can possibly be.
Shabana Mahmood
To the extent that we have this debate about advice and guidance, I am sure that the hon. Gentleman will recall that it was the Chancellor who said in his Budget speech that advice would be provided to people about making their decisions. We then moved quickly into the world of guidance and the two are, as I am sure the hon. Gentleman will acknowledge, very different. That is why we are concerned that the guidance on offer will not be quite as good as we might expect if advice were on offer. That is why it will be important that Members on both sides of the House stress test the final package that the Government come up with.
The TUC has rightly questioned whether guidance on its own is sufficient. It states:
“Independent guidance is clearly better than that provided by company sales teams, but half an hour of the best possible advice will not equip people for what could be thirty years of managing their pension pot… Expecting the market to deliver retirement income solutions that work for the great majority is unrealistic. The annuities market was broken, but what we need is the same careful consideration of policy, consumer preference and evidence that led to pensions auto-enrolment.”
It is clear that a number of very complex factors will play against each other, with some inherent tensions that were noted by Members on both sides of the House in their speeches. It is important that we stress test the measures properly in Committee.
The Bill introduces a number of measures that we support, and as I have highlighted, there are some issues on which we think that the Bill could be strengthened. We look forward to picking up those issues with the Minister in Committee.