Pension Schemes Bill

Debate between Nigel Mills and Steve Webb

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 ---

[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.

Quality Workplace Pensions

Debate between Nigel Mills and Steve Webb

Thursday 27th March 2014 Commons Chamber

[Steve Webb]

I am grateful to the hon. Lady and hope that I acknowledged in my statement the contribution her Committee has made to some of the measures. On transaction costs, from this time next year trustees and governance committees will have a legal duty to obtain information about all costs and charges; we will be working with the Financial Conduct Authority, staring immediately, to try to define them all. The shadow Minister came up with a list the other day, but there will be things missing from it. As soon as a phrase appears in an Act of Parliament, the industry will change the name of it. We must therefore ensure that we are as comprehensive as possible. We are certainly open to the possibility that that should go in a charge cap. We would not want to do that in a way that discourages transactions that are in the interests of members, but clearly we want to avoid gratuitous transactions intended only to generate charge income, rather than to further the interests of members. It is certainly something we will return to, particularly in the light of the transparent information that will become available for the first time because of these measures.

[Nigel Mills (Amber Valley) (Con)]

I welcome the charge cap, which shows how far we have come from the days of stakeholder pensions and the level of charging that was allowed. Will the Minister update the House on some of the other ideas for reform that are out there, such as defined ambition schemes and large aggregator schemes, which might also give savers a better deal?

Pensions Strategy

Debate between Nigel Mills and Steve Webb

Thursday 20th March 2014 Commons Chamber

[Steve Webb]

There is a risk of being rather patronising to women in saying that giving them new freedoms will somehow result in their losing out. The hon. Lady will have seen that the markets moved following the announcement yesterday, so there is a sense in which such decisions have to be made through a confidential process. We are in constant dialogue with trade bodies and providers, and we will continue to be so. It is a three-month consultation, so we want to ensure that we get it right. On the principle of giving people freedom, she is shaking her head; I think that Labour Front Benchers might support it, but I really cannot tell.

[Nigel Mills (Amber Valley) (Con)]

I warmly welcome the reforms, which are a great step forward for the pensions industry. The solution to the annuities problem is perhaps more radical than even the Work and Pensions Committee envisaged. May I urge the Minister to make sure that the new guaranteed guidance arrives before people reach retirement age, so that they can have a plan in their mind about what they want to do and what is there for them to choose before they reach that date?

[Steve Webb]

My hon. Friend is a distinguished member of the Select Committee, which has scrutinised the issues very effectively. He is quite right that the guidance must come at the right time. We want people to think about their retirement planning much earlier. Certainly, when they are thinking about buying financial products—or, in the jargon, decumulating—we need to make sure that there is someone on their side to give them impartial guidance. We will make sure that that happens.

Pensions Bill

Debate between Nigel Mills and Steve Webb

Monday 17th June 2013 Commons Chamber

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to be called in this debate and to welcome this much-needed reform. I served on the Work and Pensions Select Committee when we conducted pre-legislative scrutiny of the Bill, so I have already gone through the detail once. The Secretary of State issued an open invitation to Members to serve on the Bill Committee, and I sense that I might be so honoured.

[Steve Webb]

indicated assent.

[Nigel Mills]

It is unusual for Ministers to welcome that, given my record of moving amendments, so the Minister might want to be a little careful, before he gets too excited. [Interruption.] Yes, it might spare me.

We all share the Government’s vision for pension reform. We want predictable, non-means-tested state pension provision, so we know roughly what we will receive when we retire; then we want to encourage private saving in high-quality, fair, low-cost schemes and to know what we will get for our money when we pay into such schemes and how that will convert into retirement income when we reach retirement age, whatever that might be—being 38, I dread to think what mine will be: I suspect it might begin with a 7, which seems an awfully long way off.

The Bill addresses some of those aspirations—it will make it much clearer what state pension some will get when they reach the happy age and it will improve the private pensions system—but will do nothing to improve the final part of the journey and make it clear what will happen when someone reaches that happy retirement age and is told they need to convert their pension pot into a pension income. There remains a big weakness in the system around how fair a deal someone gets when they default into the annuity their pension provider offers them—that was something the Select Committee raised in our pensions governance report. Action is needed. In my view, we should not allow a pension provider to provide an annuity to the same customer. That might be too radical a market restriction for most people, but there is a real problem if people, having saved for years, see their retirement income reduced because they do not know that they can shop around and choose their annuity.

The Bill is clear that people who will retire a good few years after 2016 will get £143 plus indexation, whatever that is, but it is less clear for those retiring in 2016 or the first few years thereafter. For them, there is a complicated calculation involving what they built up under the current scheme and how that is added to under the new one. We need to educate people about the pension they will get and what the change means. In my surgeries, I hear many concerns and fears from people who thought this was some kind of big bang—that if they retired on the new date, they would get a much bigger state pension than those retiring the day before—and did not want to miss the start date. I suspect that for many people the difference will not be huge, however, so those concerns should not be there.

Oral Answers to Questions

Debate between Nigel Mills and Steve Webb

Monday 11th March 2013 Commons Chamber

[Steve Webb]

Absolutely. The process of state pension reform was happening at a glacial pace and equality between men and women was many decades away. We have brought that equality forward and men and women on both sides of the House should welcome that fact.

[Nigel Mills (Amber Valley) (Con)]

We look forward to seeing the Minister later. Does he agree that one of the problems is that people just do not understand what the change will mean for them? What plans do the Government have to write to everybody to tell them what pension they would have received under the old system and what they will receive under the new one?

[Steve Webb]

My hon. Friend is right to say that information will be crucial. One thing we have been doing with the changes to the state pension age, for example, is writing to the individuals affected so that they know exactly what position they are in. All too often in the past, laws have been passed, no one has been told and it has taken many years for people to find out about it. An information campaign will be central to taking forward these excellent proposals.

State Pension Reform

Debate between Nigel Mills and Steve Webb

Monday 14th January 2013 Commons Chamber

[Steve Webb]

I have written to the devolved Assemblies and the Scottish Parliament about our announcement today. On the hon. Lady’s question about costings, let me say that for the next couple of decades or so we will be spending pretty much the same as now—it is within the same cost envelope—but we will be getting the bill down for younger workers by the middle of the century. It will not be down relative to today—the share of national income going on pensions will be substantially bigger than today—but it will not be rising quite as fast. We are ensuring that workers in their 20s will be automatically enrolled so that they have a savings culture as well as state pension.

[Nigel Mills (Amber Valley) (Con)]

I warmly welcome this announcement, and I think we will get to the right place. How long does the Minister expect that the current complex system will have to remain in place? Will we have to keep paying people pension credits for 40 years or more, or will there be a taper so that everybody will eventually receive the new pension?

[Steve Webb]

I am afraid that the taper is sometimes called the grim reaper. The process is that everybody who has already reached pension age by 2017 will have their rights under the current rules. I have every anticipation that those rights will be honoured for as long as people are in a position to draw them.

Benefits Uprating (2013-14)

Debate between Nigel Mills and Steve Webb

Thursday 6th December 2012 Commons Chamber

[Steve Webb]

I hesitate to trade Shakespearian quotes with the hon. Lady, but to be clear, benefits are not being frozen, they are being increased. She is right on child poverty. The Government have not just stumbled across working poverty, because it was widespread under the previous Government, but it will be substantially improved by universal credit, which will make work pay in a way that it did not under the previous Government.

[Nigel Mills (Amber Valley) (Con)]

Will the Minister confirm that average pay has increased by only 10% and out-of-work benefits have increased by 20% in the past five years, and therefore that holding down the rate of increase will help to make the situation fairer for those who go out to work to pay for those benefits?

[Steve Webb]

My hon. Friend is right that we have substantially increased out-of-work benefits. He will recall the 5.2% increase last year in line with inflation. We judged that that was the right thing to do when inflation was running very high. This year, my right hon. Friend the Chancellor has had regard to inflation and the wider economic situation, which have informed his judgments.

[Mr Dennis Skinner (Bolsover) (Lab)]

BBC television this morning went to a clothing factory in Derbyshire.

Benefits Uprating

Debate between Nigel Mills and Steve Webb

Tuesday 6th December 2011 Commons Chamber

[Steve Webb]

The Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Basingstoke (Maria Miller) brought forward proposals only this week to make child maintenance more effective, because, as the hon. Lady rightly says, getting child maintenance paid is crucial. We believe that far too little is paid and the cost of collecting it is disproportionate to what we receive, so we need an efficient child maintenance system, and that is what we propose to bring forward.

[Nigel Mills (Amber Valley) (Con)]

Does the Minister agree that rather than trapping more low-paid families in the complicated web of means-tested benefits, which has done so much damage already, taking them out of tax altogether is by far the better approach?

[Steve Webb]

My hon. Friend is quite right that we have already taken, I think, just over 1 million families or individuals out of tax. We have a long-term goal of a £10,000 tax-free allowance, which would take out millions more, but what is often not understood is that couples in which both members go out to work to make ends meet get twice as much benefit. Each benefits from the personal tax allowance increase, so it helps precisely those most hard-pressed families in which both parents work all hours to keep their family going.