Pensions Bill

My Lords, it is a pleasure to follow the noble Baroness, Lady Hollis, who is a fund of knowledge on all pension issues. She lobbied, in particular, on behalf of women, but I shall refer to one or two other things that she said. She mentioned the lifetime savings account. Some six years ago, I was on a working party that looked at the possibility of setting that up and I have been much attracted to the idea ever since. I declare an interest in that, for a few more days, I will be a non-executive director of a life and pensions company and I am also the chairman of a pension trustee board. The background to the Bill is clear—we have debated it often in this House over the past few years—and it is deeply troubling. It includes the rapid decline in defined benefit schemes, not to mention their prospective near demise for new employees, with only a minority of FTSE 100 companies now offering such schemes to new employees. A very interesting paragraph in the White Paper on personal accounts—paragraph 13—states: "““In 1979, 65 per cent of employees were members of their current employer’s pension scheme compared to 57 per cent in 1995, and around 54 per cent in 2004””." That does not sound too dramatic a decline, but next it makes the point that: "““The percentage of private sector employees participating in occupational pensions fell from around 40 per cent in 1991 to around 25 per cent in 2005””." That says two interesting things. First, it indicates just how big the decline has been, particularly in recent years and, secondly, the comparative figures show very clearly that there has been a big decline among private sector employees. The overall figure of 54 per cent is held up because of the number of public sector occupation schemes. I am sorry that he is not in his place at the moment, but I very much follow what was said by the noble Lord, Lord Oakeshott, and also by my noble friend Lord Fowler about public sector schemes. There is, too, the fact that employers contribute substantially less in defined contribution schemes. There has been a poor response to the stakeholder pension. There are deficits in defined benefit schemes, so employers are much more wary of continuing with them. There is the notorious £5 billion per annum in the Chancellor’s first Budget, which has been much commented on, amounting to a loss of cash flow in defined benefit schemes almost as big as the deficits themselves. There is also the challenge of increasing longevity. Perhaps most important is the fact that a high proportion of young people in their 20s and 30s, and even some in their 40s, know that the state will not provide what they seek as a reasonable retirement income but are doing nothing or too little about it. There are a variety of reasons for that. There is a much mistaken belief nowadays, which I find among the peers of my children, that owner-occupation is not only a better option than providing for one’s pension but will, through rising house prices and equity release, provide a pension. There is the carpe diem mentality, enhanced by heavy debt that is easy in a period of low interest rates, and an assumption that a future generation of taxpayers will bail them out. I warmly welcome the intention behind the personal accounts that future savers should take personal responsibility—I stress, personal responsibility—for building private savings. It is such a tragedy that we have seen the emphasis on personal responsibility and occupational and personal pensions so eroded in the past 10 years. There is much emphasis in the current debate on the need to simplify our pension system, not least because most people find the subject so confusing; hence, the emphasis on making the system for personal accounts as straightforward as possible. However much personal accounts are streamlined, there will always be the need for advice, which costs, and for improving the financial awareness of citizens. When I was Secretary of State for Education I had to implement the national curriculum, and I was very keen to include financial education as a subject, but I was unable to do so because we were trying to get a quart into a pint pot at that time, and there was no room for it. I regret that I did not pursue this as rigorously as I should have done, and I welcome the recent government funding and the efforts of the FSA and ABI to improve financial education. But it needs to start early in schools, in a much bigger way than has happened so far, to go along with the personal responsibility required. I welcome much in the Bill, especially provision for women and carers, but in the short time available I will not dwell on those aspects. I want to concentrate on three issues. The first is consensus. There is much emphasis on the need for national consensus, avoiding the constant chopping and changing of successive Governments. We have heard that often from people outside the Westminster and Whitehall village. The Secretary of State in his White Paper said: "““If reform is to be successful it needs to be built on the foundations of a strong national consensus””." The noble Baroness, Lady Hollis, clearly indicated that that has been a theme of successive Acts, and we still go on having to add to them. I support the aim of a national consensus and pay tribute to the Government’s efforts to get all-party agreement. But—this is not said in any negative or churlish spirit but out of a desire to get the balance right and avoid false hopes—as the history of pensions shows, and given the political importance of the subject, there will almost certainly be differences of view and changes needed in the years ahead. Indeed, there will be new challenges as circumstances change, as they have in the past. Even these proposals may fall short of their objectives and targets—I suspect that they will. Chancellors may be prone in the future to make tax changes whose consequences they fail to foresee, perhaps because they did not contact the Secretaryof State responsible for pensions, which may have devastating effects. I was not going to refer to the£5 billion, but the noble Lord, Lord Rosser, did so himself. I should say in passing that I read the whole Commons debate of 17 April on this subject while on holiday—I acknowledge that I must be a pensions nerd. Three things stood out in the Chancellor’s defence. First, the usual litany of statistics was churned out, which failed to answer any of the questions asked. Secondly, the Chancellor focused only on the period 1997 to 2000, but all the cumulative damage has happened since then. Thirdly, he and his colleagues had no answer to the point that the £5 billion removed each year in cash flow means£5 billion less available each year in pension funds. So there can be no guarantee that there will not be changes, even substantial ones, in future years, but at least we have an agreed framework on which to build, and I pay tribute to the noble Lord, Lord Turner, and his excellent report for that. Pension uprating by earnings will happen in 2012 or by the end of the next Parliament, which could, in theory at least, be 2015. In the debate on this issue in the other place, when he was probed on this matter the Secretary of State said, "““we will carry out the reforms when we believe them to be affordable””." I detect a battle in Cabinet committee with the Chancellor, who is fearful of the cost incurred before 2012. Given the wasteful expenditure on the working families tax credit, ID cards, consultancy and so on, it seems a bit rich to push the link between pensions and earnings back if it is a question of affordability. The only other explanation given was: "““Because it is linked with our policy for increasing the state pension age””.—[Official Report, Commons, 16/1/07; cols. 661-62.]" I do not understand the link with the state pension age. Given increasing longevity, the different lifestyles of today’s retired—we have talked about that a lot—and the fact that 1 million people over 65 are already in employment, I wonder whether we are not moving too slowly to increase the state pension age. I have supported it for some time, as have others in this House, but why are we waiting until 2020 to start the process and then doing it by only one year a decade? If there is a link between the increase in the state pension age and the start of the link between pensions and earnings in 2012, would it not be sensible to bring both forward to prevent a situation where many pensioners miss out on the increase in earnings until 2012 or, possibly, 2015? I would be grateful if the Minister would spell out the link and why it cannot be adjusted. My last point is on personal accounts. I realise that much of this will come in the later Bill, but given that the delivery authority is looking at the whole system now, I think this is the moment to make some points about personal accounts. I warmly welcome the statement in the White Paper that the delivery authority will be independent of government, although we may need more guarantee of that. The reason given in paragraph 109 of the executive summary is that: "““The wealth of expertise in business and financial services is in the private sector””." The parallel with the Pensions Regulator is a good one because it is staffed largely by people from the private sector with expertise, and it has done a very good, pragmatic and sensible job so far. I hope that the delivery authority will be able to do the same, so I warmly welcome independence from government. I also welcome the fact that the personal account should complement rather than compete with existing good quality pension provision and that one of the delivery authority’s objectives is to minimise the impact on other good pension provision and employers more generally. This is vital if we are to avoid one of the possible concerns about personal accounts, the risk of dumbing down; that is to say, employers settling for the minimum. There is quite a lot about that in the background papers. It will be vital if we are to ensure that existing very good schemes continue and, if possible, improve. We will have to look particularly closely at how the scheme is developed to avoid that risk of dumbing down, including the cap level, which is proposed to be £5,000. I have two other concerns. The first is the potential for mis-selling, which the noble Baroness, Lady Hollis, has already raised. As we understand it, 30 per cent of pensioners will still be entitled to pension credit in 2050. How many of those likely to take up personal accounts will be included in that 30 per cent? Is there to be a substantial number? I have been trying to follow the arguments in paragraphs 74 and 75, but I need some clarification because I do not fully understand them. Surely, some of that 30 per cent will have taken out personal accounts; if that is the case, there is an accusation of mis-selling to be made. I am in favour of auto-enrolment, but I wish to put down a marker and ask whether that will be enough. I understand why this has been done, rather than compulsion, but I have two concerns. The first emerges in a footnote to page 28 of the White Paper. In defence of the link between automatic enrolment and increased levels of scheme membership, it states: "““Within private firms with 20 or more employees, the proportion of employees that were in a pension averaged 60 per cent … where the firm used automatic enrolment””," The take-up for traditional opt-in schemes was only 41 per cent. I understand why that was given as a reason for automatic enrolment; however, it still means that 40 per cent of employees opted out of automatic enrolment, therefore I am concerned that there may be a considerable amount of opting out. Secondly, even if the employee has opted in or has followed up the automatic enrolment, he can opt out after entering the scheme. My concern is that that could apply to automatic enrolment. We know that there are comparatively poor levels of persistencyin current personal pensions, with a substantial proportion of people starting and then failing to carry through, which affects much of the cost of these schemes. Automatic enrolment may not be the end of the road, as my noble friend Lord Fowler said; we must monitor it carefully. I welcome the broad thrust of the proposals and stress that we need to create a positive climate regarding the value and benefit of private pension provision, which, sadly, has not often been the climate in recent years. For the reasons that we have rehearsed, it will take a long time to undo the damage done by the decline in final salary schemes, which has enabled their present beneficiaries to claim that they are living in the golden age of pensions.