Pension Schemes Bill

Nigel Mills Excerpts

Tuesday 2nd September 2014 Commons Chamber

[Steve Webb]

I am grateful to my hon. Friend for raising that important point about the potential market and demand for such schemes. We have undertaken research not only among consumers but among employers. We have found that about a quarter of employers say that they would be interested in providing shared-risk schemes and that another quarter are waiting to see. To be honest, if I were surveyed at this point, I would probably be in the waiting-to-see quarter because the legislation is yet to go through and the regulations that this framework Bill provides for have yet to be tabled. Understandably, firms are not queuing up to declare for this form of pension provision.

On the whole, such schemes are unlikely to be provided by SMEs. In general, we anticipate that just as with final salary and DB pensions, it is larger employers who will tend to go for shared-risk schemes—not exclusively, but largely. The reason is that, beyond the bare legal minimum of auto-enrolment, providing a workplace pension is not a legal requirement but an option. It tends to be larger employers who see pension provision as part of a package, perhaps including a company car or a workplace crèche, and who offer additional benefits. A risk-sharing scheme is, to my mind, a fringe benefit. However, it is a very valuable benefit where the employer says, “I want to do more for my employees than the legal minimum.”

My hon. Friend the Member for Hexham (Guy Opperman) asked what the incentive is. Although the best pension schemes may have gone, the best employers have not. There are therefore good employers out there who want to do more than the bare legal minimum. They will find that their employees want a pension scheme that reduces the risks and uncertainties of this very uncertain world. They will therefore find that this is an attractive part of their package.

Once the schemes are up and running, small employers may well choose to join them. We will probably need scale before we get to that stage. I am guessing that larger employers will use them first, but once there is the infrastructure—a regulatory regime or governance regime—one can imagine a scenario in which smaller employers would join.

[Nigel Mills (Amber Valley) (Con)]

The Minister has just mentioned the regulatory regime. Has he given any thought to how we will regulate the new defined-ambition, shared-risk schemes? Presumably, if a defined-contribution scheme adds a small promise, it will trip over into being a defined-ambition scheme. The regulation would therefore move from the Financial Conduct Authority to the Pensions Regulator, and it could drop back again. Does it not look as though we need one pensions regulator to make it all make sense?

[Steve Webb]

I am grateful to my hon. Friend. That is an issue that the Work and Pensions Committee, of which he is a member, has raised in relation to the appropriate regulatory regime. It is fair to say that in drawing up the regulations and guidance for the Bill, the number of times we have had to ask ourselves which regulator it is that does which bit and to ensure that what the FCA does mirrors what the Pensions Regulator does has added to the complexity of the process. When I gave evidence to the Select Committee a little while ago, I said that this was not the time to start reforming the regulators. That remains my view. My hon. Friend will be aware that the FCA has only just been created out of the ashes of the Financial Services Authority. This precise point is not the right time for yet another regulatory reform. However, the experience of the last 12 months has made me more sympathetic to the view that the eventual destination might well be a single regulator.

My hon. Friend also raises the regulation of DA and collective DC schemes. It is clear that what we need is good governance. Arguably, one of the problems of the Dutch experience, as it has been described to us, is that the schemes were described as DB to the members and DC to the employers. One of those two descriptions was not true. We have to ensure that we have good governance and transparent communication. Because of issues of intergenerational fairness and so on, the rules of the scheme—who gets what when things go wrong and who benefits when things go well—have to be transparent. We therefore need a clear, although not excessive, regulatory framework.

What I have described so far is the Pension Schemes Bill as we originally envisaged it, which deals with risk sharing. Obviously, that is the fruit of several years’ worth of consultation papers and extensive engagement with stakeholders in the pensions industry. I would like to place on the record my appreciation to the many working groups that the Department has run, including the defined ambition working groups of Andrew Vaughn of the Association of Consulting Actuaries, and to all the experts who have given their time to help us draw up the various models. We are very grateful to them.

The second half of the Bill relates to the Chancellor’s freedom and choice in pensions agenda. It may be that other right hon. and hon. Members regularly have people walk up to them in the street, shake their hand and thank them for Government policy. It has been a relatively novel experience for me, but I have genuinely had people walk up to me, shake my hand and thank me for this policy because it gives them back control over their own money. It says not that the Government know best but that the individual, with the right support and guidance, should be in the best place to make their own choices about their own money. The Government are committed to giving people freedom and choice in how they use their pension savings.

Budget 2014 announced radical new flexibilities in how and when people may access their pension arrangements. We undertook a 13-week consultation, and the response to it was published in July. Draft tax clauses for technical comment were published in August. The momentum is gathering. This Bill, along with the taxation of pensions Bill, will mean that from April 2015, individuals from the age of 55 will be able to access pensions flexibility if they wish to, subject to their marginal rate of income tax, rather than the current 55% tax charge.

This Bill will make the required changes to pensions legislation, including a guidance guarantee. That means that everyone with a defined-contribution pension arrangement will be offered free, impartial guidance so that they are clear about the range of options available to them on retirement. There will also be a duty on providers and schemes to ensure that they make people aware of their right to guidance and signpost them to this service.

The taxation of pensions Bill will legislate for the required tax regime changes. The Government will continue to allow members of private sector DB schemes the freedom to transfer to other types of scheme. In the majority of cases, it will continue to be in the best interests of the individual to remain in their DB scheme. That is why two additional safeguards will be introduced to protect individuals and schemes. First, there will be a new requirement for individuals transferring out of a DB scheme to take advice—with a capital A—from a financial adviser before a transfer can be accepted. Secondly, there will be new guidance for trustees of defined-benefit schemes on using their existing powers to delay transfer payments and taking account of scheme funding levels when deciding transfer values. To protect the Exchequer and taxpayers, however, transfers will not, other than in very limited circumstances, be allowed from unfunded public service DB schemes to schemes with DC arrangements.

I want to pick up on two final issues that relate to how the freedom will work in practice. The first was raised in oral questions yesterday and relates to the position of schemes with exit fees. The uncharitable side of me would say that one or two of my answers yesterday were misrepresented in the Twittersphere, as I think it is called. The charitable side of me would say that my comments were misunderstood. Let me be absolutely clear about where we stand on schemes with exit fees.

First, despite Opposition attempts to hype this up and overstate the case, the number of schemes with exit fees is very much in the minority. In other words, our 2013 pensions and charges landscape survey found that more than five in six trust-based schemes, and nine out of 10 employers with contract-based schemes, had no exit fees. We must therefore be clear that exit fees are exceptional.

Secondly—I am generally talking about legacy schemes here—we are already considering charges, and a legacy audit is being undertaken of old and high-charging schemes. That is due to report by December and will provide additional information about existing fees. At the moment, we do not have full information with which to form policy, but the Government are working with the pensions industry to understand how common exit fees are, how large they are, and the terms under which they operate. Crucially, once the evidence is clearer, the Government will be able to decide whether additional measures are required to protect savers. At the moment we are gathering information, but we are determined to ensure that savers are protected. I hope that is helpful.

The compatibility of the two halves of the Bill has been mentioned. On the one hand we are giving people freedom and flexibility, and on the other we are bringing forward a framework within which people might be members of a pension scheme all their life, through working age and well into retirement. We must obviously ensure that those two things gel, and I assure the House that they do.

All our reforms are about putting the saver first and addressing people’s desire for greater certainty about income in both the savings and the pay-out phase—the accumulation and decumulation phase. In a defined ambition scheme, more than one type of benefit arrangement is likely to make up the overall pension pot or income stream. We expect people with defined contribution arrangements within a defined ambition scheme to be able to access those arrangements in line with new budget flexibilities. Members of DC schemes that offer collective benefits will be able to cash out their collective benefits if they so choose. If they remain within the scheme, it is likely that they will receive a pension income for life, since that is how we envisage collective benefits being set up. People will not have to make decisions on how to access their savings; decisions on how to pay out scheme benefits will be made by scheme fiduciaries.

These schemes will offer an option—that is the crucial point: the freedom and choice agenda—for those who wish the scheme to pay them a pension income for life. Either way, the individual will have choice over what to do with their savings. Together with the amendments that will follow shortly, the Bill will set out a legislative framework that will mean greater choice and flexibility for future private pensions, tailored to the needs of employers and individual savers.

This Parliament has seen little short of a pensions revolution: radical state pension reform providing a firm foundation; mass membership of workplace pensions through the effective implementation of automatic enrolment; quality standard charge caps; and a war on rip-off pension charges. Now in this Bill there are two new strands to our reforms: enabling and facilitating risk-sharing pension models rather than the extremes of risk that would otherwise be the case, and new freedoms for individuals to know best what to do with their money. At the end of this Parliament, we will truly have transformed the pensions landscape. That is a record of which this coalition Government can be proud, and I commend the Bill to the House.

--- Later in debate ---

[Gregg McClymont]

I would like to take all the credit, of course— having not been in the previous Parliament—but in my opinion and that of the Opposition Front-Bench team, there is a very good case for encouraging collective provision. Politics involves evolution. I am kinder at times than the Minister, so I will not give him chapter and verse about how he has chased our tail on pensions policy, but whatever the origins of the policy, surely the point is to get the best possible outcomes.

The Minister alluded to other parts of the pension scheme in the Bill. Its provisions reflect the knock-on consequences of the flexibilities at retirement announced by the Government, evidenced by the fact that this is being shared between the Treasury and the DWP. It redefines the type of workplace schemes that can be set up so that a third form of scheme—neither DB nor individual DC—can be created. It also prevents the transfer out of most public service defined-benefits schemes, except to other DB schemes, which makes sense given the basis on which these Treasury-funded schemes proceed.

Currently, on the insolvency of an employer, the Pensions Regulator can employ an independent trustee from a register that it maintains. Conversely, when it uses its general powers of appointment to replace a trustee found not to be fit and proper, it does so using flexible procurement panels. The Government’s response allows the alignment of both procedures on the second, which seems to make sense. And of course the Bill will allow the Secretary of State to make payments into the Remploy pension scheme. These are all sensible policies supported by the Opposition.

The principal case for the Bill, however, as the Minister set out, is the recognition of the case for collective pension saving. There appears to be some appetite among the public for this kind of risk sharing. Research undertaken recently by the Institute for Public Policy Research suggested as much when it found that collective pensions were the most popular option across different income levels, life stages and ages. That makes sense given that pensions are a form of collective insurance against poverty and indignity in old age. On that basis, the debate that the Bill generates is welcome.

The Minister described how the pensions landscape had changed. DB is no longer as popular as it once was; employers do not want to take on the risks of defined-benefits schemes; and increasingly we live in a world of individual defined contribution, where the risk is entirely on the individual saver and depends on the performance of the stock market. As he suggested, finding a way to share risk is a good thing, but let me point out several aspects on which the Bill is silent—aspects that are central if collective pensions are to succeed.

The first aspect—as far as I am aware, the Minister was silent on this—is the awareness that cross-generational collective pensions can, in extreme circumstances, involve a reduction in pensions in payment. This is not something that the UK is culturally and historically attuned to. In a cross-generational collective pension fund, the smoothing of risk and reward between different generations can mean, in extreme circumstances, that the pensions being paid to pensioners are cut. That is something with which our politics is not familiar and an important point about defined-contribution collective pensions that has to be considered.

The second important point is that governance is even more important in collective pension schemes of this kind than it is in other forms of pension. Managing a rolling pension fund—one that brings together the savings of teenagers, pensioners and every generation in between and that demands that each cohort is treated equally—requires substantial technical expertise. The prize, if a fund is managed correctly, can be bigger pensions, but that demands governance of the highest quality, yet the Bill is silent on governance. The Minister mentioned it in the round, but he did not talk about the governance that he wishes to see or that, more importantly, the Bill puts in place for these pension schemes. And the Bill is silent despite the Government saying in their response to the consultation document, “Reshaping workplace pensions for future generations”:

“Collective schemes are complex and can be opaque… 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”—

not a philosophy the Government are adopting at the point of retirement via their Budget reforms. What has happened to their intention that governance be undertaken by experienced fiduciaries?

I am reminded of the fankle that the Government have got themselves into over the governance of individual defined-contribution pensions. I will not give chapter and verse now, because it would not be appropriate, but the independent governance committees that the Government intend to set up for individual defined-contribution pensions—the Minister referred to them—are neither independent, nor governance. They will be in the hands of the insurance company. The mistake that the Government appear to have made over individual defined-contribution pensions, they are now making with respect to collective defined-contribution pensions.

There is nothing in the Bill about the standards of governance that CDC pension schemes will have to meet. Everything is left to secondary legislation. I say to the Secretary of State and the Minister—who asked about the attitude of the Opposition—that so much of pensions legislation under this Government has been left to secondary legislation, making it difficult for the whole House accurately to understand the consequences and outcomes of any one pension Bill or policy.

As regards collective pensions and the second aspect of the Government’s silence—on governance—the Opposition believe that the Government should follow our lead and require the schemes to have trustees and to be based on a legal duty to prioritise the interests of savers above all others. Failure to require all schemes to have trustees—this is crucial—means that some collective DC schemes will be run by trustees and others by private firms seeking to maximise their short-term returns. That is surely not in the spirit of the collective pensions on which the Minister wishes to build. Given the complexity of managing collective, inter-generational, risk-sharing pension schemes, the highest level of governance is critical, and I urge the Government to say explicitly—either today or as the Bill goes forward—what the governance criteria and rules will be.

Beyond governance, a third crucial aspect of collective pensions remains unexamined by the Bill. The Government have left entirely to secondary legislation the question of what kind of collective pensions they wish to promote. The Minister suggests that collective DC is one sort of pension scheme, but it is not: there are different forms of collective defined contribution, so clarity about which form the Government wish to see would be useful for all parties as we examine the proposals.

Broadly, there are two kinds of collective pensions that the Government might wish to promote. One is a form of collective DC that sets a target income for each saver and a probability of the target income being met on retirement—a 95% probability, say, of that target being realised. This form of collective DC demands significant assets in reserve so as to make the probability realistic. Given the substantial assets that any scheme would need to materialise, that is what we might call a heavy form of collective DC pensions.

There is also, however, a lighter form of collective DC, which is more intra-generational than inter-generational—involving risk sharing among a particular cohort rather than between generations. That lighter form of DC collective pensions is also to be welcomed, as it would bring the advantage of scaling and pooling within a generation. Fundamentally, too—I am not sure the Minister mentioned this—the great advantage of collective pensions is that they avoid the real difficulty of having to make the decision on the spot on retirement for the rest of one’s retirement. That does not happen under either the heavier or lighter form of collective DC, as a form of draw-down applies. The pension fund never ends; it continues, so a form of draw-down is possible. As I said, an on-the-spot, once-in-a-lifetime decision about retirement income might apply under the Bill.

The Government have not stated which form of collective DC they wish to see materialise from the Bill. As with governance, the Bill is entirely silent on those points. Everything is left to secondary legislation once again, and I see a pattern when it comes to pensions legislation under this Government. They bring forward a Second Reading, take a Bill into Committee and then leave so much of the fundamental detail to subsequent secondary legislation. I am not sure that that is a sensible way to proceed if we want to make substantial and good legislation. Those are some of the issues on which I would like to gain further clarity from the Government.

The Minister spent some time talking about the budget reforms, and we have heard contributions and interventions from Front Benchers about them. The Government are silent on the issues of flexibility and the interaction with auto-enrolment pension saving. They claim that all those aspects fit together very well, but I have suggested that there is a fundamental difference in approach in the spheres of building up the pension pot, auto-enrolment and turning the pension pot into retirement income.

The three tests that the Opposition have set for these reforms are sensible. We must know first what the guidance guarantee amounts to—a fundamental point on which we still have no clarity. We expect perhaps an amendment or amendments to provide clarity on the guidance guarantee. We should remember that the Chancellor promised advice, not guidance, in his Budget statement. There is a fundamental difference between the two, and the Minister subsequently clarified that guidance rather than financial advice will be provided. We await with bated breath the details of the guidance guarantee. Without top-quality guidance, the potential for successful flexibilities will be much reduced.

Secondly, we need to know how the budget reforms will impact on the pension pots and retirement income of low and middle earners. That is important. One of the weaknesses of individual DC, from which the Minister is trying to move way, is that 10 years from any individual’s retirement, the pension fund has to move assets into low-yielding bonds to avoid any risks so close to the retirement age. There is less risk, but less return. The danger of the Government’s flexibility provisions on retirement is the interaction with pension fund asset management. It now becomes the norm that individuals will cash in their pension pot at 55, 56 or 57, which means that at the age of 45, 46 or 47 the pension fund will have to move into low-risk, low-yielding assets, reducing the pension pot when cashed in on retirement.

[Nigel Mills]

I understand the hon. Gentleman’s point, but is there not a reverse problem when someone wants to keep their pension savings pot until long after the normal retirement age, so they would not want to move over to low-risk returns at 55 but leave it until 65 or later? The position is more complex than the hon. Gentleman suggests.

[Gregg McClymont]

I am rarely accused of making pensions less complex, so I shall take the hon. Gentleman’s comment as a compliment. I take his point, however; there are lots of unanswered questions about how income draw-down will work. The potential impact of the reforms on the asset management of individuals’ pension pots is crucial.

Thirdly, the interaction of the budget reforms with social care, for example, is an important issue. How do the Government view the position on the ability of local authorities, for example, to say that a pension pot is a realisable asset that can be brought inside the capital disregard for social care and other benefits? That is a significant question to which we still have no answers. The Opposition have lots of opinions, as the Minister says, but if the Government take so long to explain how any of their policies will work, it is no wonder that we spend a lot of time asking questions.

I have highlighted important issues and pointed to substantial unanswered questions about governance, about how the reforms will interact with the budget flexibilities and, more widely, about how a Government committed to automatic enrolment of individuals into pension saving can be equally committed to an individually focused policy for turning pension pots into retirement income.

Let me make some final observations. The Minister did not mention the National Employment Savings Trust and that is no surprise, because he has promised that the restrictions on NEST will be lifted, but since July 2013 we have heard nothing on when they will disappear. That is important because, if we are thinking about collective defined-contribution pensions, NEST is a trusted pension provider backed by the Government that could offer such pensions. In doing so, just as it has in the auto-enrolment sphere, it could constrain the pensions industry and drive up standards and quality, so that the products that the Minister, I and everyone would like to see delivered are delivered by the industry. Therefore, the restrictions on NEST are a problem. The Minister has indicated that he will lift them. Can we have some clarity on when they will be lifted, especially since they pertain to the Bill’s objectives?

More narrowly, technical drafting may prevent someone from transferring their pension pot to a CDC scheme unless they were an “earner” and their current employer was an employer in relation to the CDC scheme. I know it is a technical issue, but there would appear to be no good reason why a workplace CDC scheme should not be able to take in pots from any source if the person willing to transfer in thinks that they receive a good valuation for their contribution. For longevity risk, investment risk and lower costs reasons, an individual may prefer a steady income from CDC instead of draw-down or annuity.

More widely, the Bill contains no measures that will help to promote the scale which most independent observers believe is necessary for CDC pensions, and workplace pensions in general, to be as efficient as possible. The Opposition have long argued for measures to promote scale and we would like to see such measures in the Bill. The House of Commons briefing note on the Bill states on page 1:

“certain conditions such as large scale and strong governance, appear necessary for it”—

that is, CDC—

“to operate successfully.”

The Bill promises, offers and evidences neither. The Government have work to do to make the Bill as substantial as it should be in contributing to the developing consensus that collective-scale pensions are better. We welcome the Government’s approach while reserving our right as the Opposition to continue to press them, even when the Front-Bench team do not like it, on the lack of detail therein.

--- Later in debate ---

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak in this debate and welcome the many positive measures in the Bill, which will substantially improve the pensions landscape in the UK—not before time, perhaps. I wish to touch on the two main areas that the debate is focused on: the introduction of the defined-ambition or shared-risk scheme, and the move to get flexibility at retirement age and the guidance that that involves.

We should pay tribute to the Minister for the fact that we have defined ambition in a piece of legislation; it has been almost a one-man dream for most of this Parliament, and perhaps we all thought it would not quite make it, but here it is in the Bill. If I appear generous in my praise for my coalition colleague, let me say that it was a brave thing for any politician to try to define a promise. We have all struggled with this: when is a promise not a promise? We know now that a promise is not a promise when it is an ambition. I think we were tortuously trying to work out in this Bill how to say what constitutes a complete pension promise and where something is not quite a promise but an aspiration, a hint, a suggestion or something more than a hope. I think that the Bill’s definition just about gets there, but I am not totally sure, without trying to work it through in various scenarios, that I can work out when a full pensions promise perhaps becomes a partial promise. That goes to the nub of the matter.

When we try to get into the detail of how we regulate these things and move them forward, we find how much of a promise or how much certainty or expectation can be created to allow one of these schemes to become a shared-risk scheme rather than a defined-benefits scheme or something that is no more meaningful than an existing defined-contributions scheme. Working out exactly what a good employer who is trying to be generous and helpful to their staff can say without falling foul of some of these rules will be hard. I assume that what we are trying to do is to say that under a defined-benefits scheme, if a person finishes their role on £30,000 a year, they will get a £20,000 a year pension. That is clearly a defined benefit. I suspect that what we are trying to say under defined ambition is that if a person finishes their role on £30,000 a year, and investment returns and longevity are just about what we expect, we think that we will be able to give them £20,000 a year. But if those assumptions are a bit out, we might have to put in a bit more money ourselves and they will get £18,000 rather £20,000. I suspect that that is the sort of promise we are trying to achieve with a shared-risk scheme.

It is not clear exactly how we can set the parameters. For example, when can £20,000 become £10,000? If there is a higher investment return, contributions can be reduced and we may still think that we can get £20,000. I think that we will just end up dropping back into regulatory uncertainty and all the issues that we have had on defined-benefits schemes. A lot of work needs to be done to get these schemes out in the market. We need to understand exactly how much risk the employer is running and how much certainty the individual gets; otherwise we are left with the difficult situation the Minister alluded to, where one side thinks it is an actual promise and the other side thinks it is a kind of hope. It probably means that whoever regulates these new shared-risk schemes will have an incredibly important role. In some ways, it will be even more difficult for trustees to administer defined-benefits schemes. I sense we will need a very competent and focused regulator looking at these things.

As I said in my intervention, it is a little difficult to see where the line will be drawn between defined benefit and defined ambition and between defined ambition, defined contributions plus and pure defined contributions. I suspect that before these things get into full speed, we will need one regulator doing all those things. If a scheme makes a bit of a promise and then withdraws it, does it drop out from being a defined ambition and become something else?

[Ian Swales]

My hon. Friend raises some excellent points. He does not specifically mention governance, which could make the thing slightly more complex because there is a third leg to the stool between the employer and employee. The explanatory notes talk about comparisons with schemes in other countries and use the expression “when governed appropriately” when talking about what schemes can provide. Has he any comments about the governance situation?

[Nigel Mills]

Yes. I have not been totally clear. I was alluding to the fact that these schemes will be even harder for trustees. I meant the trustees who try to govern these schemes. If we have a scheme that is giving a clear promise, we can create a set of assumptions. We will know how much funding we will need on top of our investment returns and longevity predictions. We will at least have some fixed parameters, so we can then define the contributions. If we even vary what we are promising to pay, we would have to take a really educated decision and say, “Shall we vary the promise down from £20,000 to £18,000, put up the contributions or a bit of both? Will it all be all right again in five years?” That will become quite difficult for trustees, and we will then really need the regulator to be able to check that trustees are capable and competent at dealing with shifting sands in these calculations.

[Steve Webb]

I did not respond properly to the hon. Gentleman when he intervened on me on this matter. Broadly speaking, it would not change which regulator was involved if there was or was not a bit of a promise. The Pensions Regulator deals with occupational workplace defined-benefits and defined-contributions pensions. The Financial Conduct Authority deals with group personal pensions and similar. Essentially, that is the division rather than whether there is or is not a promise.

[Nigel Mills]

That is a helpful clarification, but we have still had the bizarre situation in which the Pensions Regulator is responsible for auto-enrolment even though most of the schemes into which people are enrolled are not regulated by the Pensions Regulator. I sense that we are introducing further uncertainty into what schemes there are and people need to understand exactly what is going on.

Trying to create a new form of pension that can try to stop the bleed away from defined benefits is the right direction in which to travel. If we are to have a credible pensions industry, we need to ensure that people can have certainty or at least confidence that if they keep paying into their pension funds with their employers at the rate that they are they will have some idea what they will get rather than a vague hope that they might at some point get something suitable. That is the thing that does most discredit to the pensions industry. People end up getting so much less than they thought they would, despite what they thought they were paying and would be entitled to, that they decide the whole thing is not worth doing at all.

That question takes us to a fundamental part of pensions policy. We are spending a lot of taxpayers’ money on tax relief for pensions and if we end up with just a glorified savings vehicle with no direct link to pensions, we must wonder whether we will be distorting the investment market quite horribly. We need a clear and confident link, so that people know that the money they are putting away is meant to get a retirement income that they are happy with and is not just a super-glorified pre-tax income ISA, which I fear we might be drifting towards.

The Work and Pensions Committee considered the principle of collective schemes briefly in our inquiry on a pension governance a couple of years ago. The idea that we can somehow share risk between the generations, smoothing things out so that if there is a market crash just before someone expects to retire they do not suddenly have their pension income destroyed in a way that they cannot possibly recover from—clearly, that can be smoothed out by reducing the risk profile of investments, as is done now—looks to be a perfectly sensible and attractive way forward. I am a little intrigued about how we can go from having none of those schemes to having them in place, having enough people in them and having enough confidence that people will continue to join them to ensure that the intergenerational thing can work. Some European countries have had such schemes for 60 years and we can see how they work, but the question is how we go from zero to having three generations of people without the first lot thinking that they are taking all the risk for no advantage, although perhaps if their grandchildren join it might all be okay. I am sure that the industry will work out how to devise schemes in a way that will get people involved.

Let me turn to greater flexibility in the pension world. I can see that if we say that we do not think people are sufficiently engaged with pensions to join a scheme we must ask how we can be confident that they are sufficiently engaged to make even more difficult choices when they retire about what they want to do. There is a big difference. I might not be too bothered about pensions when I am 30, as I might have more pressing things to think about such as buying a house, paying for my children or sorting out other stuff, but perhaps when I am closer to retirement age and thinking about what my income will be in six months’ time, a year’s time or perhaps even a little further away, I will probably be much more engaged in the best choices for me and will perhaps be more inclined to go out and look at the various options.

One issue that we have had until this point has been that the option has been to have some kind of annuity that is lower than I would like. If I try to shop around, I find differing levels of things I do not like. That is not a great motivation to go shopping. If I know that I am not going to want to buy any of the things I am offered but I have to, I might as well just default to the first thing I get. There does not seem to be any advantage to shopping around.

[Dame Anne Begg]

Does the hon. Gentleman agree that often when there is too much choice people are paralysed and end up grabbing at the first thing that comes along rather than the thing which is best?

[Nigel Mills]

Yes. Some data suggest that the optimum number of choices is four. If there are 20 choices in a mobile phone shop, people walk out without buying one. If there are not enough, they do not ever have a phone. We need enough choice to see a difference, but not so much that we are completely baffled by our options.

I think that we are hoping that the market will innovate certain things that will mean it will not be a choice of annuity into which we will opt for life that will give the same amount for the rest of our lives or some kind of draw-down in which we keep spending our pots and hoping that they will last. I suspect that we will end up with people taking some kind of fixed guaranteed income, so that no matter how long they live they will have the quality of life that they want, but they might be able to choose to use some of the rest of their money to fund travelling in early retirement, paying off the mortgage or doing something for their children or grandchildren. Perhaps we could have an annuity that varies, which is higher at the start, dips and then goes up at the end when people need care fees.

I think that we are hoping that most people with a small or medium pension pot will not be faced with a blizzard of hugely complicated financial products, but that there will be options that they can match to their personal choice for their retirement. That is where high-level guidance is important.

People need to understand that there are different things out there for them to look at. I suggest that they do not just immediately accept the annuity offer that their pension provider makes. They should at least think about what would suit their lifestyle, what their existing financial position is and what they and their spouse want to do. That is where guidance is very important. It is very different from financial advice, which might be, “Take out this annuity with this provider, on these terms.” I suspect there is no way to get such specific guidance, and we should never want such specific guidance. That would be a horribly expensive programme, which would only be appropriate for a relatively small band of people.

Those who retire with huge pension pots should already be taking such advice and can afford to pay for it. Those with small and medium pots will not have that advice and, I suspect, in many cases will not need to spend thousands of pounds getting advice; it would not be a worthwhile use of their money. It is people in the band in the middle who perhaps could really benefit from expensive financial advice. How we get that guidance to work, and when people receive that guidance, is very important.

I think that we shall see a move away from retirement at one’s 66th birthday, or another fixed date. People may gradually step down to working four, then three days a week. They will have small amounts of income coming in from different sources. Lifestyles will vary, and they will start varying, perhaps, in people’s mid-50s. Some people will work full time right into their 70s. Possibly, they will not want advice at the age of 65 and a half or 66; they will need to think, “Do I want my pension fund to start de-risking my investments now, at age 55, or would I rather they did that for part of my pension fund, so that I know that I will get something when I am 66 but I will keep some higher-risk investments to get a higher yield for a few more years?” When we make that guidance available, and when people can choose to receive it, will be a key aspect; otherwise, people will end up in a default fund that does not suit what they plan to do with their own hard-saved income.

It is clear that the change is a very positive step in the right direction. If people are responsible enough to save for their retirement, I cannot see them frittering the money away on the proverbial Lamborghini when they hit 66. This flexibility will give people the chance to have the retirement that they want without being ripped off by the annuity market.

Some of us had wrestled with the question of how we could fix the broken annuity market. I had come up with the suggestion of splitting the pension fund industry and the annuity market, which did not meet with much approval in the industry. But what the Government have done is far more radical. An annuity may be the right thing for many, many people; but for many, it will not. Now there will be no compulsion or expectation for people to take out an annuity when they hit retirement age. That has to be the right answer, and I fully welcome the Bill.

--- Later in debate ---

[Mr Hoban]

I am not sure that tulips and the Netherlands are necessarily an appropriate model. One of the earliest financial crashes was in the price of tulip bulbs, so it may not be a model to follow. However, the point about sectoral and non-sectoral schemes is important. Other countries have had success where they have had a social model—a relationship between employers and employees—that we do not necessarily see in the UK. There will be questions about how to encourage more employers to come together to create these schemes. Perhaps there is a role for insurers in that regard.

Although these schemes aim to boost returns and offset some of the impact of under-saving, we need to do more to help people save more towards retirement. Auto-enrolment will help to ensure that more people are saving, but as I pointed out earlier, the DWP’s figures estimated that some 11 million people would not save enough to meet the recommended replacement income for retirement. If we look at contribution rates to pension schemes in other countries, we will see that the 8% auto-enrolment rate lags behind the rate in other countries that have established innovative pension schemes. In Australia, the contribution rate to the Super scheme is heading towards 12%, and in the Netherlands—the Minister mentioned the Netherlands, so I feel at liberty to talk about it—the contribution rate to the scheme is over 20%, which is significantly higher. We have some way to go before we match those contribution levels.

I think it would be wrong to contemplate increasing contribution rates before the roll-out of auto-enrolment has been completed, but we should not ignore the fact that people are not saving enough towards their retirement and we need to find ways to help people to build higher contributions. There are ways in which we can do that. We have not done enough to draw on the insights from behavioural economics and initiatives such as Save More Tomorrow, which has been adopted in some parts of the United States, which encourage people to increase their contribution rates when their pay rises, making a commitment today to secure increased contributions in the future. I think we can look at the way in which fiscal incentives encourage those on low incomes to save more towards their retirement, and I certainly think we can support people to make better choices on retirement. That is a significant area that we need to focus on, and it is the last point I want to touch on in my speech.

As I said at the start, we have introduced a series of radical reforms to the pensions system over the past four and a half years. However, to make the most of the freedoms that we need, we must make sure people have the necessary support to make the right choices both when they are building up their pension pot and when they choose to use it. That is why I am very supportive of the guidance guarantee. I know the Government are going to introduce amendments to this Bill, either in Committee or on Report, to introduce the guidance guarantee, and it is an important part of the package of legislation, but we must also think about how we can encourage the industry to go further to provide better guidance both before the point of retirement and afterwards. The decisions we make at the point of retirement are ones we would want to come to as individuals to revisit later on.

We need to find a service that will help those who feel they cannot afford independent financial advice without crowding out independent financial advisers, and we need to give people support to think about draw-down, annuities and the other products that are out there, to help them maximise their income over their retirement, and also to think, while they are saving, about what sort of lifestyle they want in retirement. Too often, people do not think about what they aspire to in retirement. They tend to shape their retirement around how much they have saved, rather than thinking before they retire, “This is what I would like to do. These are the holidays I’d like to have. This is the sort of lifestyle I’d like.” We need to give people more support in that regard.

I also believe we should be harnessing technology to draw together details of people’s savings—not just their pensions, but their individual savings accounts and bank savings—to end the complicating fragmentation of data. That should encourage people to look at the totality of their financial assets and use that information to engage with their retirement planning.

[Nigel Mills]

The one asset my hon. Friend did not mention is the house a person owns, which I suspect people will, as years go on, increasingly have to consider using for their own retirement, rather than passing that on to their children, as perhaps we all hope to do at the moment.

[Mr Hoban]

My hon. Friend makes an important point and he is right to pick up on that omission. When we think about retirement, we should be thinking not just about pensions, but about a person’s income in retirement. Some of that will take the form of state pension; some will be interest on savings accounts; and some may come through work—depending on what age we retire at, and how we phase in our retirement. Certainly housing is a valuable asset, too, and very good work is being done by a number of organisations to look at how housing can be used, but we are still some way off having something that people will recognise as a good way to use their housing assets. As I say that, I feel a letter coming on from my former colleague Nigel Lawson on this point, but there is more work to be done in respect of how people view housing as an asset and how they can utilise that asset in retirement to supplement their income. We need to build out from the guidance guarantee, and more work will need to be done on that in the coming months.

I want to mention a point that has been raised with me and that I will probably talk about in more detail when the complementary tax Bill to this comes through later in the year: we must think about what sort of outcomes we expect people to see in retirement. My right hon. Friend the Minister for Pensions referred to a decade of innovation, but he will recollect that when we introduced reforms to liberalise the open market option, and to make that more of the default, there were some unforeseen challenges from that, and we have seen some of the consequences and the report published by the Financial Services Consumer Panel. I do think there is a responsibility on industry, the Government and the regulator to do some thinking about what good looks like under the new reforms and how we can help shape that post-retirement market. That would form an important part of the work.

I commend the Government on this comprehensive package of pension reforms. They will form a key part of our legacy, and they are an important way of expressing what we have achieved as a Government in setting down long-term foundations to help people to take more responsibility for their savings in retirement, to help them to save more in their retirement and to give them the freedom and choice that they need in their retirement. The Bill is part of that package, and I look forward to seeing how the schemes develop to help to provide people with more certainty in regard to their future pension incomes, when all they have seen up to now is increased uncertainty.