Savings (Government Contributions) Bill

Rebecca Long Bailey Excerpts

2nd reading: House of Commons & Money resolution: House of Commons & Programme motion: House of Commons & Ways and Means resolution: House of Commons
Monday 17th October 2016 Commons Chamber

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

It is a pleasure, as always, to debate opposite the Minister. I thank her for outlining the overarching principles of the Bill, which will introduce the new lifetime ISA and the Help to Save scheme. As we have heard, the lifetime ISA is a new savings product that will be available from April 2017 in which people under 40 may deposit up to £4,000 a year. The Government will then top up those savings by 25%. The savings accumulated in the LISA can be used as a deposit towards a first home, or can be accessed once a person is 60 to “complement”, to use the Government’s word, their retirement income. In the absence of using the product to save for a house deposit, it will be possible for a person to remove funds from the LISA before they are 60, but there will be a charge of 25%, effectively to remove the Government top-up from the funds withdrawn.

The Help to Save scheme will be available for people in receipt of either universal credit or working tax credit. If they receive working tax credit, they must have minimum weekly earnings equivalent to 16 hours at the so-called national living wage.

[Mr Gareth Thomas]

I was grateful to the Minister for her response to my question. Will my hon. Friend commit our Front-Bench team to probing the Government further on whether there should be a two-year qualifying period, or if the period should be reduced to 12 months? Similarly, will she commit our Front-Bench team to exploring in Committee whether credit unions can be allowed to take part alongside National Savings and Investments? NS&I already offers national coverage, so there is no reason why credit unions should be excluded.

[Rebecca Long Bailey]

My hon. Friend makes important points and we would support him in pushing the Government to respond to those questions. I will highlight some of the concerns of our Front-Bench team about the Help to Save scheme in particular. Credit unions are vital for the roll-out of any savings scheme that targets the most deprived communities.

[Lucy Frazer (South East Cambridgeshire) (Con)]

The hon. Lady helpfully outlined the circumstances in which the lifetime ISA kicks in. Does she welcome that ISA to enable young people to save, given that half of present ISA holders are over 55?

[Rebecca Long Bailey]

I welcome the Government’s sentiment of encouraging people to save. If I may make a little progress, the hon. and learned Lady will get a fuller response in due course.

The Opposition have serious concerns about both policies under the Bill and a number of questions, with which I hope the Minister can assist. The Labour party warmly supports the Government’s principal aim of encouraging saving. Many working people in Britain are not saving enough or not saving at all, and that is storing up a multitude of problems not just for their personal finances, but for the public purse. The helpful House of Commons Library briefing states that 28% of people say that they have no savings at all and that 38% would struggle to pay an emergency expense of more than £500. In addition, the Joseph Rowntree Foundation surveys on poverty and social exclusion consistently find that between a quarter and a third of households say that they are unable to make regular savings. In the most recent survey, which was conducted in 2012, 32% of households gave that answer.

It is therefore right for the Government to examine methods and structures that will encourage saving, but I am sure that the Minister agrees that they must also address the root causes of this low saving trend. Will she examine carefully the reasons why many people do not save at all? Is it because they are splashing out on fancy cars and extravagant purchases, or is it because wages are too low and the cost of living is too high to get through the month for some people, never mind whether they have a bit of spare cash at the end of the month to put into a savings plan?

[Jo Churchill (Bury St Edmunds) (Con)]

Does the hon. Lady agree—this is perhaps unlike some of the measures brought in by Chancellor Gordon Brown—that it is important to keep products as simple as possible? It is also hugely important that they are transferable—a Help to Buy ISA can be transferred into the lifetime ISA—and complementary.

[Rebecca Long Bailey]

Indeed. Products need to be explained as simply as possible and there needs to be a commitment from the Government that there will be an adequate advertising campaign to avoid any ambiguity about a product. I shall shortly come on to some of my concerns about the specific products to which the Bill refers.

It is important to examine the fact that those who live in more deprived areas or areas that do not have access to a healthy range of high street financial services are often more financially excluded, having limited access to reasonable lending facilities. This in turn leads many to rely on extremely high interest lending facilities such as payday lenders, which are often the only lending facility available. In many cases, that initiates a cycle of debt and sucks any possible savings surplus out of the monthly pay packet. It cannot be lost on the Minster that for some time now food banks have been reporting surges in the number of people in full-time employment who are accessing them. This in itself may suggest that many people have no spare cash to live on day to day, let alone to save.

These problems bring me to the Opposition’s main problem with the Help to Save scheme that the Bill introduces. We wholeheartedly support moves to encourage saving for a rainy day, but in many cases the idea that those on universal credit and working tax credit have a spare £50 at the end of the month is extremely optimistic. People can barely make ends meet, as the Government found out last year when there was a cross-party backlash after they tried to take thousands of pounds from the recipients of much-needed tax credits. The transition to universal credit will arguably leave people in an even worse position.

[Jane Ellison]

rose—

[Rebecca Long Bailey]

I will pre-empt the Minister’s reply that Help to Save is incredibly similar to the saving gateway scheme that was piloted by the previous Labour Government.

[Jane Ellison]

I do not wish to interrupt the hon. Lady, but it is important to make the point that this is about people saving up to £50. It must not be suggested that everyone must save £50. The figure is up to £50, and that can be a very small amount. I would just like to make that clear.

[Rebecca Long Bailey]

I thank the Minister for clarifying that point, but I think that some people would struggle to save even £5 a month, let alone £50.

Let me go back to the point I was trying to make about Labour’s scheme. We did introduce a similar scheme, but it is important to note that we had not spent the previous six years eroding the disposable income of the people whom it targeted. Help to Save might well look good on paper in terms of helping those on low incomes to save, but I must warn the Minister that, given the long-term effect of Government cuts and wider austerity measures, it will not have the desired impact in many cases. The cuts the Government are making to universal credit alone will cost 2.5 million families up to £1,600 a year, according to the Institute for Fiscal Studies. Where will these families find even £1 a month, or up to £50 a month, to put into this savings scheme?

It appears that the Government are not expecting the measure to put rocket boosters, as it were, under savings by those on low incomes. Their costing for the policy is £70 million in 2020-21. Some 3.5 million people will be eligible for the scheme, so if my and the IFS’s calculations are correct, that works out as a Government bonus of £20 per eligible individual in 2020-21.

I was very excited to read the Government’s impact assessment in the past few hours. However, the Minister should note that it arrived at only 1 pm today, and while I am pleased that it arrived at all, she will appreciate that it is really not acceptable to provide such information at the 11th hour if the Government wish to be transparent and capable of being effectively held to account. None the less, I was interested to see that the Government’s expected take-up rate was 500,000 people in the first two years. I will be grateful if she explains the rationale behind that figure. For example, are specific groups more likely to save than others?

[Lucy Frazer]

The hon. Lady refers to the impact assessment. After the sentence she referred to, it says:

“These estimates were informed by information from similar savings schemes and government savings pilots.”

[Rebecca Long Bailey]

I thank the hon. and learned Lady for reading from the impact assessment, but I was asking whether specific groups are more likely to save than others, and I do not think the assessment provides that information.

Most importantly, however, how will the scheme help the remaining 3 million people who simply cannot afford to participate in it? I can sum up my concerns about this element of the Bill by reiterating comments made by our former shadow Work and Pensions Secretary, who stated that the scheme was

“like stealing someone’s car and then offering them a lift to the bus stop.”

[Kit Malthouse (North West Hampshire) (Con)]

I have to confess that I am a little confused by the hon. Lady’s arguments. Is she saying that because the scheme will not target all 3.5 million people who may be eligible, the Government should do nothing? Despite the fact that it might be a partial success or that a large number of people might take up the scheme, she seems to be saying that because not everybody will take it up, this is not worth doing.

[Rebecca Long Bailey]

No, that is not what I am saying at all. It is important that we address this issue, but we have to be clear about how we do so. Dealing with the root causes of poverty and people’s inability to save is the first important thing that the Government need to look at, and then the second element they need to consider when rolling out the measures in the Bill is the specific groups they intend to target. If they do not target the 3.5 million people who are eligible to take part in the scheme, how will they help those who do not take part in it?

There is considerable unease about the lifetime ISA policy across the pensions industry, the trade union movement, the Office for Budget Responsibility and Select Committees of this House. The Opposition support the idea of incentivising people to save for the future, especially for retirement income, but we are concerned that the scheme could create a diversion from saving in traditional pension products, rather than being an add-on to one’s main pension plan. Even a former Pensions Minister stated that the LISA “could even destroy pensions”. The UK faces a pensions time bomb. Eleven million people are signed up to defined benefit schemes in 6,000 pension funds in the UK, but PricewaterhouseCoopers recently produced data showing that the collective deficit in those 6,000 schemes had risen by £100 billion in just one month so that it stood at £710 billion at the end of August. Earlier this year, the OECD reported that we were facing a “global pension crisis” in which a person buying an annuity today who had saved 10% of their wages into a pension for 40 years could expect just over half the earnings of someone who had saved the same amount but retired 15 years ago.

This situation is very worrying, especially when the state pension in its current form certainly cannot be relied on to plug the gap. Last week, the OBR published a report concluding that recent pensions and savings measures introduced or announced by the Government would create a £5 billion a year black hole in the public finances. The report states:

“The net effect on the public finances is positive in the early years, peaking at £2.3 billion in 2018-19 before turning negative from 2021-22—the year after our March 2016 forecast horizon…But the small net gain to the public finances from these measures over the medium-term is reversed in the long term as the net cost continues to rise, reaching £5 billion by 2034-35. Expressed as a share of GDP—a more relevant metric when considering fiscal sustainability—the net cost builds up until it reaches a steady state toward the end of the period of just over 0.1 per cent of GDP. If that steady-state effect was to continue to the end of our usual long-term projection horizon of 50 years, that seemingly small cost would add 3.7 per cent of GDP to public sector net debt.”

The report also said that these measures

“shifted incentives in a way that makes pensions saving less attractive—particularly for higher earners—and non-pension savings more attractive—often in ways that can most readily be taken up by the same higher earners.”

That is a pretty worrying assessment of the Government’s pensions and savings policy, in which the LISA will play a large part.

I am also worried about the level of assessment that the Government have carried out about the impact that the LISA could have on pension savings, and, more specifically, their auto-enrolment scheme. The Work and Pensions Committee has outlined its concerns about the threat to automatic enrolment in workplace pensions, the roll-out of which is having a great deal of success. The Committee was particularly worried about the risk of people opting out of a workplace pension in order to save in a LISA, thinking that it will be more of a beneficial pension savings product when it is not. The Committee highlighted extreme ambiguity about whether the LISA is intended to be a pension replacement.

As the House will recall, the previous Chancellor stated in his Budget speech that the LISA was for

“those under 40, many of whom have not had such a good deal from the pension system”.—[Official Report, 16 March 2016; Vol. 607, c. 966.]

That was something of an indication that this was a new-generation pensions product. On the other hand, the Department for Work and Pensions has stated that the LISA is

“not a part of the pension system but an additional flexible savings product”.

I am pleased that the Minister has, once and for all, clarified this point and stated that it is a complementary product. None the less, many witnesses who gave evidence to the Select Committee said that all indications so far suggested that the LISA was being interpreted as a pension product, including those from the Centre for Policy Studies, which actually developed the LISA and stated that many employees not already in a pension scheme would have to decide whether to save through a LISA or enrol in the pension scheme. Royal London stated that many people could in fact opt out of workplace pensions.

Will the Minister therefore confirm whether she has made any assessment of the impact of the LISA on automatic enrolment into workplace pensions? Will she confirm what safeguards will be put in place to ensure that people do not opt out of auto-enrolment? Will the Government mount a detailed advertising campaign, as suggested by the Select Committee, to ensure that people do not wrongly view the LISA as their main pension product? The Pensions Regulator has argued that by 2017, when the LISA is available, thousands of small and micro-businesses will not have rolled out auto-enrolment. Have the Government considered timing the LISA roll-out to coincide with the full completion of auto-enrolment to avoid the risks I have outlined?

It is acknowledged that LISAs will be successful among those who have savings elsewhere. There might simply be a case of them transferring those savings into LISAs, but will the Government provide the distributional analysis of the income groups who will specifically benefit the most? Will they confirm what impact the scheme will have on women and minority groups, especially, and therefore provide a much more detailed impact assessment, as the Work and Pensions Committee suggested? Will the Minister confirm what the Government will do to assess those groups that are not currently saving or unable to save, and what will they do to ensure that these people will be able to avail themselves of the scheme? The Select Committee has suggested that those who might benefit most from the scheme could be those who can afford to contribute to a pension scheme and deposit additional savings in a LISA to complement their retirement savings—higher earners, in other words. In these difficult economic times, Opposition Members question whether the scheme is an effective use of up to £2 billion of public funds.

Another concern is not simply that people will use the LISA as an alternative pension product, but that there will be nothing to stop them from taking the money early for other purposes, aside from as a deposit for a house. The Bill enforces a 25% charge for the early withdrawal of funds, which effectively removes the Government bonus, but people will not lose anything from their savings. That will therefore not be a significant deterrent from removing money early, so there is a significant risk for those who use the product as their sole pension income.

LISA funds may be used towards a deposit for a first home. That is not a bad thing, but the Government are failing to address the wider problems that are causing the housing crisis. There is no point having a deposit if there are no houses to buy. We need a significant private and social house building programme supported by the Government, not populist policy making. It is a shame that fewer new homes were built during the previous Parliament than under any peacetime Government since the 1920s. Labour has committed to build more than 1 million new homes over the next Parliament, and that is the level of intervention that is required of any Government who truly want to ensure that everyone can live in a decent and secure home.

[Mr Gareth Thomas]

Before my hon. Friend concludes her speech, may I suggest one further area on which Labour Front Benchers could press the Government in Committee? The Bill does not include a requirement that any employer should offer payroll deduction services, but that could help all savers, especially those on low and middle incomes. In that way, people could, if they wanted, have money deducted from their pay at source by their employer. Ideally that would go into a credit union, but it could go into any other source of savings. I suspect that that would create a significant boost to savings in this country.

--- Later in debate ---

[Rebecca Long Bailey]

My hon. Friend makes a very important point that Labour Front Benchers are considering in detail.

The Opposition have serious concerns about the policies in the Bill, as I have outlined, and I hope that the Minister will respond to my various queries. However, as I have confirmed, we support the overarching aim of encouraging people to save at a time when they are not doing so. There is significant room for improvement in the Bill, so we will try to amend and improve it as it makes its way through Parliament in the coming weeks to try to alleviate some of our stakeholders’ concerns about the possible effect of the lifetime ISA and the Help to Save scheme.