Future of Pensions Policy

Rob Roberts Excerpts

Tuesday 8th December 2020 Westminster Hall

[Rob Roberts (Delyn) (Con)]

I beg to move,

That this House has considered the future of pensions policy.

It is an honour to serve under your chairmanship, Mr Hosie. There is an old saying that people should not talk about politics or religion; I sometimes wonder whether that extends to the topic of pensions as well. While saving for a house or car is seen as exciting and a real achievement—and rightly so—the same enthusiasm and planning is never given when people are saving for their retirement. It is time such attitudes around pensions and planning for retirement changed. Pensions are becoming increasingly important and we need to talk about them, both here in Parliament and in the wider public domain, if we want people to feel empowered to make their own decisions about their future, and secure a retirement that they deserve.

People are living longer, and the state pension age has increased, but discussions and debates around pension policy and infrastructure have not moved on in any significant way. A recent study found that 22 million working-age adults do not feel that they understand enough about pensions to make decisions about saving for retirement, highlighting that we need to do more to ensure that people feel informed and empowered to do that saving.

The fact that 5 million people in retirement are not satisfied with their financial circumstances proves that more needs to be done to ensure people take steps earlier so that their later years are more comfortable and secure. Only 38% of seven to 17-year-olds say that they have learned at school how to manage money, which showcases that the lack of knowledge and awareness about savings and pensions starts right at the beginning. This tells us that we need to be having frank and honest conversations about pensions much earlier in people’s lives. It is not enough to start discussing savings and retirement at 60; it needs to be happening in education, in the workplace, at key moments in life, and also here in Parliament.

Today’s debate, I hope, is the first of many important and crucial conversations around pensions and how we, as parliamentarians, can look to shape pension policy in a positive way in the years to come. I am going to touch on a couple of broad themes, the majority of which the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman), can respond to, while I appreciate that some of the topics—although relevant—may be for the Treasury to consider rather than my hon. Friend.

Although it is hugely important to start conversations about pensions and retirement as early in life as possible, it would not be right to hold a debate on pensions policy without first looking at how we can help pensioners who may already be struggling. Sadly, pensioner poverty is a real problem across the UK. While it may have decreased over the past 20 years—I commend the efforts of the Minister and the Department in their work on this—Age UK found that 1.9 million pensioners are still living in poverty in the UK. That means that over a quarter of pensioners, despite having worked all their lives, paid their taxes and contributed to our economy, are now living their later years facing more challenging decisions than they necessarily should, wondering whether they can afford to turn the heating on or pay their bills, and watching how every penny is spent.

It does not have to be that way. Many pensioners will be eligible for pension credit: a financial lifeline that tops up their income and prevents them from having to make those difficult decisions, such as keeping warm in their home or having a good meal. Pension credit is also a gateway to other benefits that make a real difference to pensioners’ quality of life, including cold weather payments, NHS dental treatment and, topically, free TV licences for those over 75. Quite simply, pension credit gives older people the financial stability and security to live their lives in a much more worry-free manner.

It is also important to note that, while pension credit makes a huge difference to many individual pensioners’ lives and well-being, it also benefits the whole of society. Research from Independent Age estimates that the cost to the Government of those eligible for pension credit, but not taking it, is around £4 billion a year in increased NHS and social care spending, so it is imperative that we either get the implementation of this benefit right, or reform it altogether.

The question is: does the benefit work effectively for the people it is supposed to serve? Currently, it is not working nearly as effectively as it could, with uptake stagnating at around 60% for the past 10 years. It has never been more than 70%. To put that into perspective, around four in every 10 eligible pensioners are not collecting the free money that is due to them. That means that, at present, around £3.5 billion that is allocated to eradicating pensioner poverty is not reaching older people each year. That is, in part, due to awareness of pension credit being low, despite many advertising campaigns by successive Governments. It seems that wholesale reform is necessary to help reach the people it is designed to help.

The low take-up of pension credit is also due, in part, to the way it is assessed. Instead of being an automatic benefit provided to those who need it, pensioners have to make a claim when they reach the appropriate age, which considers their income level and savings. That is problematic for a couple of reasons, not least that the process can be seen as daunting, overly complicated and difficult to navigate for pensioners. Also, by taking into account people’s savings pots, it discourages long-term responsible economic actions such as saving because people will become ineligible not only for pension credit, but for other gateway benefits I mentioned earlier on.

We need to have a fundamental change in how pension credit is assessed and claimed. We should be looking to help those who need it most by ensuring that financial support is accessible and fair, taking away the blame on people who fail to make that claim. One way to do that would be by making pension credit a full or partial auto-payment benefit, so that no claim has to be submitted, and basing it solely on income levels, which Her Majesty’s Revenue and Customs really should be able to track to ensure that no one is unfairly at a disadvantage for having prudently saved throughout their working life.

While successive Governments have taken steps to raise the profile and take-up of pension credit, as seen through the work to make it claimable online during the pandemic, we need serious, fundamental change if we want pension credit to play its part in eradicating pensioner poverty and helping the poorest households. I want the Government to consider their role in boosting take-up by making it an automatic benefit that solely considers income.

While pension credit is one important issue that the Government should review as we look to bring positive change, many other areas would also benefit from innovation and further development. One such area is the auto-enrolment regime. Auto-enrolment was introduced by the Government to improve pension savings in the UK, and it has worked, reversing the decline of workplace pension saving. Prior to the start of auto-enrolment, the number of eligible employees who enrolled was 10.7 million. That has now increased to almost 19 million—almost 90% of those eligible.

While that confirms the success of its original aims, instead of engaging the wider public in taking an active role in their workplace pensions, being auto-enrolled has meant that the vast majority of savers assume they will automatically have a large pension pot when they retire. However, that is often not the case, and we have added a layer of what I will call complacency risk into the mix of other issues to consider. It is the risk that people will assume that the pot they are building up is going to get them a particular lifestyle in retirement, which may not always match reality.

Do not get me wrong; auto-enrolment has been fantastic in getting pensions moving again. I really believe that we should be looking at what has been done so far as a starting point rather than an end game.

[The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)]

I congratulate my hon. Friend on securing the debate. I accept entirely that this is a legitimate discussion about the future progress of automatic enrolment, which has transformed savings among women and young people to the extent that 80% are now saving, up from 40%. He is right that we are doing better than we have previously done, but it is the suggestions for the future that clearly need to take us forward. I support entirely the direction of travel that he is taking us on.

[Rob Roberts]

I thank the Minister for his intervention. The suggestions for the future are about to unfold before his very eyes, as he may have anticipated.

Analysis by the Pensions and Lifetime Savings Association suggests that the current contribution rate of 8% is simply not enough for people to have a good standard of living in retirement. I fear that will be the case for many people in several years’ time who have been auto-enrolled into workplace pensions and assume that, as the rate is automatically set by the Government, that means they will have a comfortable pension pot when they retire. Unfortunately, many people are simply not engaged enough with their pensions to realise that until it is too late, despite them being fundamental to their future. I fear auto-enrolment has created the complacency I mentioned earlier.

To combat that issue the PLSA has proposed an increase in the minimum contribution level, to at least 12%, and I agree. Forty-three per cent. of savers do not know how much of their monthly salary they should be saving, in any case, and the increase would benefit a great many individuals, by increasing their savings further. Additional changes could include reducing the starting age to 18 and removing the lower earnings limit, so that every penny of earned income counts towards pensionable pay. According to the Association of British Insurers that would have the potential to save a further £2.5 billion in pension pots. It would not only increase the number of years over which an individual saved, and consequently increase the pot; it would emphasise the importance of saving from a younger age.

What else can we do with auto-enrolment? Why not think a little more outside the box and create a savings culture in the UK? If covid has taught us anything it is the importance of preparedness and planning for every eventuality. One of the bedrocks of financial planning is having an emergency fund in place, but putting money away each month is perhaps easier said than done—there is always something else to spend it on.

We could look at including a savings element in auto-enrolment. Why not, when payroll makes a deduction for the relevant amount for a pension, put 1% into a savings pot at the same time? There could be an auto-enrolment ISA, and people could be given the ability to increase the percentage to what they can afford. Creating a savings culture on the back of pensions policy could be one of the more pleasant side effects of covid. Many people might be more open to having emergency funds to combat future challenges.

Another area of pension policy that could benefit from further positive change are the annual and lifetime allowances. Bearing in mind that that is a Treasury issue and not necessarily one for the Department for Work and Pensions, I shall not labour the point, but there is no need for an annual allowance if there is a lifetime allowance. Saving should be encouraged, and individuals should not be penalised for taking on extra work and saving more into their pensions. That happened to doctors recently, leading to them not taking on shifts and procedures because of the danger of a significant tax bill. A potential solution to that issue would be to remove the tax penalty for breaching the annual allowance, but keep the restriction on the amount of tax relief available to current limits. There would be no additional cost to the Exchequer, and people would be able to continue saving into their pensions in the same way. Yet those who were unnecessarily penalised under the limits of the annual allowance would not be at a disadvantage. As I have said, it is a Treasury area, and I am sure that the Minister will take great pleasure in passing it along.

Wider change is needed in the pensions industry, and one way to achieve that and encourage people to engage earlier with pensions is by improving the accessibility and reach of financial advice and guidance. Despite having been a financial planner involved in the pensions industry for many years prior to coming to this place, I admit that the topic of pensions can be complex. I can see how, for many without such experience and knowledge, pensions could be viewed as hard to understand or even, God forbid, a boring subject—a terrible thought.

I welcome the Government’s push for a simpler regime, which is coming down the line, to make statements more comprehensible for both the consumer and professionals. Members would not believe the wide range of disparate information that pension providers send out to customers, making it impossible not only to understand what they have but to make accurate comparisons between providers. It is currently extremely complicated, and I look forward to simpler statements that will put the consumer in charge. I keep my fingers crossed that that policy will not be several years in the making, as the wheels of Government tend to take rather an age to turn.

It is right to empower individuals to make their own decisions about their futures, but we should ensure that before they make such life-changing decisions they feel informed and supported, and have considered their own unique circumstances. Advice and guidance about pensions needs to be accessible, affordable and available. Despite the benefits that financial advice can bring, only 8% of all UK adults have received it. That is, amazingly, an increase on previous years, but it is still shockingly low, and it puts individuals’ retirements at risk. Whether that is because people feel that financial advice is unaffordable or only for the wealthy, or because they feel it is a risk and do not trust the financial services industry, we need to work actively to change those perceptions and show that financial advice is for everyone.

I can assure the public that the vast majority of advisers whom I have worked with will treat someone’s £30,000 pension pot with the same care and diligence that they will treat someone’s £300,000 pot, because each sum is just as important to the individual concerned. Indeed, the smaller pot can be considered to be much more important to that individual in many ways, because it will often be a lower-earning individual’s only pension provision, and so the risks of it running out too early are more significant.

If we do not promote the need for and the benefits of financial advice, I worry that we will have a retirement crisis on our hands 20, 30 or 40 years down the line. Recent data shows that 35% of the adult population say they do not have a pension. Of those who do have one, 36% are not sure how much is in their pot. Even more worryingly, the uncertainty around pensions goes further than uncertainty about individual circumstances, with almost half the population admitting that they do not have a clue about how much income they would need to retire comfortably. That clearly shows that widespread advice and education regarding pensions and retirement are urgently needed if we want people to be able to live out their later years in financial security and comfort.

In the past, these types of financial decisions and risks were shouldered by employers, pension providers and life insurance companies. Now, however, with the introduction of greater flexibility and freedom to the pensions marketplace, it is increasingly down to the individual to decide these matters, which is a wonderful thing in some respects, but worrying in others. We should not really place all responsibility for such important decisions on to people themselves. Instead, we should ensure that people feel supported and know where to turn for help and advice.

Financial advice is not only needed to help people feel more informed and aware when they make decisions that will affect their lives; it also adds real value to people’s pensions, providing them with a better retirement in the long run. A recent report by the International Longevity Centre found that those who have sought professional financial advice are better off by an average of £40,000 in their pension pot compared with those who did not seek advice. That is not an insignificant amount of money. Ensuring that financial advice is seen as a viable option for people is not only the right thing to do, but crucial if we want people to have the best possible future, as well as the peace of mind that they are making the right decisions to benefit themselves.

Most importantly, how can we make sure that people are accessing the right financial advice and support? Forcing people to access support is not an option. Some people will not even take a vaccine to save lives, for goodness’ sake, so mandating things just because people have an in-built aversion to being dictated to does not work.

One option, however, is to encourage individuals to use guidance services, such as Pension Wise, the free and impartial guidance service that was set up in 2015. Accessing guidance is often the first step towards accessing full financial advice and should be greatly encouraged. Seeking guidance helps people to gain a good initial understanding about their options and also helps to boost their confidence in their ability to do things such as avoiding pension scams, which, sadly, are all too common.

In addition, we know that financial guidance is a great enabler for the full advice process. Data from Pension Wise’s user evaluation report recently found that 36% of customers who booked an appointment with Pension Wise went on to speak to a financial adviser in the following three months, compared with only 22% of non-users. That highlights the fact that we need to emphasise the benefits of these services, and ensure that people use them as early as possible to improve advice take-up and improve the financial outlook for many individuals in the UK.

Currently, it is far too easy to opt out of taking this free guidance from Pension Wise. Many studies over many years have shown that individuals need several exposures to information before they start taking action, so perhaps we need to start them on that journey a little bit earlier, so that they are engaged in the process when the time is right.

[Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)]

I commend the hon. Gentleman on his speech, which shows his great expertise in this important policy field, and he is right to press on this issue of financial advice. However, does he agree that the education systems of the respective countries of the UK should play a greater role, so that our children are financially capable when they leave school? When it comes to pensions in particular, the earlier that people start saving for their pension, the better. Interventions need to happen far earlier than they do now.

[Rob Roberts]

Absolutely—that is a very salient and very welcome intervention from the hon. Gentleman. I completely agree.

We need to start financial education in schools about the more basic things: what is a current account? How does it work? What is an overdraft? What is a credit card? The number of people leaving school and university who are already in massive debt before even taking into account things such as university fees is staggering. If we are not getting people on the right footing, I completely agree that we should be looking into developing that. People need to start the journey earlier.

During my research for this speech, I came across an article from years ago with a picture of a young-looking fresh-faced pensions Minister: my hon. Friend the Member for Hexham. He was supporting the concept of a provider’s mid-life MOT. Engagement with the UK population as a matter of course when a person hits particular ages could be a transformative idea. Imagine the benefits of speaking to someone aged 45, when they may be in a more stable home and employment situation after those expensive years of having young children, and providing that person with some guidance on what they should be looking at from a financial point of view! That could have a significant impact on their outlook on pensions and financial planning for their remaining 20-plus years before retirement.

[Guy Opperman]

I am conscious that this job has aged me a great deal and that I look different from the fresh-faced photograph taken in 2017 when I first got it. I have no idea why I have aged so much in the job—aside from putting on the lockdown stone.

On the mid-life MOT, I point my hon. Friend to the Aviva trial and the various other trials done by the private sector. The mid-life MOTs started out as an HR benefit to employees. Their benefit to employees was found to be good, but the benefit to the business and to wider state in terms of wealth, work and wellbeing—the three things on which it is measured—was utterly transformational. I encourage all businesses to follow the initiative of those companies and the public sector to follow the initiative of the DWP, which also pioneered the mid-life MOT.

[Rob Roberts]

Absolutely; I thank the Minister for his intervention. It was in the Aviva article that I saw the fresh-faced youthfulness of the Minister, although he has now turned into an advert for Just for Men. It is working well for him.

The Minister is absolutely right. Adding a health review to that mid-life MOT process could also have untold benefits: it could catch illnesses early and could encourage people to change their lifestyle before problems arise. I completely endorse the Minister’s support of the mid-life MOT process and encourage him to work across Departments to put something together in that space that could drive real change in financial and medical wellbeing.

The banking and financial industry has developed and adapted to the 21st century, and in the same way the financial advice sector needs to undergo wholesale reform and change. Financial advice is often viewed as too expensive, or individuals worry that they do not have enough to invest. Those outdated perceptions of the sector need to change. To do that, the sector needs to become more transparent and to move towards set fees on an hourly rate, or towards a project fee basis. That would help make access to financial advice easier and more affordable.

There is a large amount of worry and mistrust around the financial services industry. It would certainly help boost consumers’ trust and confidence that they were getting the right advice if the advice sector were made more transparent. The inherent unfairness of percentage-based charging is clear. It is simply wrong to charge double the fee for handling a £200,000 investment compared with a £100,000 investment; it literally takes no more time and no more resource to do the work.

Even factoring in slightly more indemnity risk to the adviser for advising on a higher sum would certainly not justify anything like a doubling of the fee. I firmly believe that the public should seek out advisers who charge fees expressed in pounds and pence, and who give a quotation for services based on time expected or a fixed project fee rather than a percentage-based amount.

[Damien Moore (Southport) (Con)]

Does my hon. Friend agree that many providers who give pensions advice should actually be putting their fees and charges explicitly on websites and other promotional materials, so that people can see what the costs would be from the start of the process?

[Rob Roberts]

I very much agree with my hon. Friend. It is now incumbent on advisers when they see clients for the first time to give them an initial disclosure document, which sets out the fees and charges that the client can rightly expect to pay. The disclosure of fees should always be completely upfront and agreed to by the client, before any work is undertaken—that is an absolutely vital part of the process, for sure.

Too many consumers are missing out on the potential opportunities that advice can bring because of a lack of understanding or a perception that advice is too expensive. It is time to develop the financial advice sector and make it work for consumers. I urge the Minister to continue to develop awareness of financial advice and guidance services, and make them as accessible as possible so that the advice gap around pensions can be closed.

One area of pensions where the advice gap is intrinsically linked is costs and charges associated with pensions. In many cases, the associated costs and charges, whether the annual management charge or underlying fund charges, are too much of a focus for consumers, advisers, the regulator and policy—to the detriment of the performance and quality of the actual pension. Instead of focusing on which contract is the cheapest, more time and guidance need to be shared that consider the end result and outcome. This is what will be available to pensioners and what will impact the quality of their retirement.

Even though pension costs may be more expensive, if a contract has the propensity to generate higher returns, it will give a better end result for the individual. In addition, as many people do not seek financial advice regarding their pension, many will lack the knowledge to understand the full impact of any costs and charges, which often leads to people choosing the cheapest contract which may not benefit their situation. The principle of having lower charges and less of a drag on performance is a noble principle, but it does not always work out that principles follow through to superior outcomes. It is the outcomes that people can spend in retirement, not the principle.

Finally, it would not be right to hold a debate that seeks to improve people’s future in retirement without considering how to ensure that the pension industry is becoming green and playing its part in protecting the environment. Given that pension funds—long-term investments—hold around $20 trillion in assets globally, they are an integral part of socially responsible investing and can play a major part in helping the UK to reach net zero. I commend, in his absence, my hon. Friend the Member for Grantham and Stamford (Gareth Davies), whose campaign has led to the UK’s first green investment bond, which is on the horizon.

According to the Make My Money Matter campaign, sustainable pensions are 27 times more impactful in reducing your carbon footprint than stopping air travel and following a plant-based diet combined—27 times! Looking across the whole fund universe, we see that relatively few pension funds have fully embraced socially responsible investing or incorporated environmental, social and governance factors into their processes. While some have suggested that the Government should force private pension schemes to invest in a socially responsible way, that feels like an over-reach—an inappropriate and counter-productive use of power—as it may well encourage disinvestment. The bottom line to keep in mind is that pensions are there to provide retirement income first and foremost; if we can save the planet afterwards, that is an extra bonus. But 68% of UK savers want their investments to consider people and planet alongside profits, while 71% would opt for a fully or partially sustainable pension if they had the choice, showing the demand for socially responsible investment of pensions.

The Pension Schemes Bill has recently created a taskforce on climate-related financial disclosures that puts the consumer in charge and increases the transparency of pension funds regarding investments. There is clearly a demand in the UK for socially responsible investing within pension funds. The Government aim to facilitate that, as shown with the taskforce, and I commend them for it and look forward to seeing how it develops.

As I said at the beginning, pension policy is a topic that can often be overlooked. It is overly complex, too technical and not relevant to the many immediate, pressing issues of the day. But it does not have to be overlooked. Pensions policy is an incredibly important topic that will impact all of us in later life as we look to retire, and it is the responsibility of all of us to look at how we can shape it positively to provide the best retirement for as many people as possible. The contributions and sacrifices that our older citizens have made throughout this pandemic, and indeed throughout their lives, are considerable, and it is only right that our policies recognise and reflect that hard work and allow them to live out their retirement in comfort with the peace of mind that their pension will see them through.

I look forward to the contributions of colleagues, including the Minister and the shadow Minister. Although great strides have been made through the Pension Schemes Bill, there is more to do if we want our pensioners to have the retirement they deserve.

[Several hon. Members rose—]

--- Later in debate ---

[Rob Roberts]

I thank the Minister for summing up. I am interested to hear about using the BBC to enhance pension credit take-up. I suggested that very thing to my right hon. Friend the Work and Pensions Secretary just last week at Department for Work and Pensions questions, so it is good to know that there is movement on that. I was very pleased to hear about auto-enrolment, changes to age limits, losing the lower earnings limit and adding a savings element—all very good.

I thank all hon. Members. There seemed to be wide-ranging agreement on things such as promoting the idea of automation where we can and financial education. That may include not only knowledge of facts but the skills, critical thinking and analysis that will serve our young people well. There was cross-party support and agreement on many issues, although sadly not for the comments of the hon. Member for East Renfrewshire (Kirsten Oswald) on Scottish independence. That is for another day.

I appreciated the hon. Member for North East Fife (Wendy Chamberlain) channelling her inner Donald Rumsfeld and trying to tackle the unknown unknowns. I think we will allow our mortal Minister to tackle the known unknowns before we give him any powers of clairvoyance. That is definitely a wise thing to be doing. I appreciate everyone’s contributions, including that of the Minister.

Question put and agreed to.

Resolved,

That this House has considered the future of pensions policy.

[Stewart Hosie (in the Chair)]

In order to allow for the safe exit of hon. Members participating in this item of business and the safe arrival of those participating in the next, I am briefly suspending the sitting.