Pensions Bill

My Lords, I am glad to follow the noble Lord, Lord Hunt, in this preliminary celebration of his birthday. He made a very thoughtful speech. We should judge the Government’s policy on pensions against two criteria: is it realistic and is it fair? We are all immeasurably indebted to the Pensions Commission, chaired by the noble Lord, Lord Turner of Ecchinswell, for its information, analysis and recommendations. The intellectual and moral quality of its work is impressive. The Government have done well to establish the Pensions Commission and to be guided by it. As the Pensions Commission said, "““the fool’s paradise has come to an end””." The baby boom permitted Governments to persistin the illusion that funded private pensions would allow the state to get away with minimal provision. People continued to trust that the welfare state would provide, even as the world of Beveridge faded away and a state provision more and more inadequately matched new social patterns: the end of full employment; women, usually lower paid and often in part-time work, juggling between part-time paid jobs, raising children and other caring; rising divorce rates, new cohabitation and singledom. Optimism persisted, even as policy and events became more chaotic. While many of the better-off contentedly claimed their salary-related pensions, the earnings link was severed to keep the basic state pension affordable and poor pensioners became relatively poorer. The 105 per cent rule on overfunding and ill judged contributions holidays ensured that when stock markets fell, numerous pension funds found themselves underfunded. Policies contradicted each other: tax relief encouraged savings, while means-testing and the requirement to commute funds into annuities at75 discouraged saving. Pensions savings went into decline. The old culture of saving, battered by inflation, government promotion of mortgage-funded owner occupation, and indiscriminate peddling of credit by a deregulated banking sector, had in any case given way to a culture of borrowing. When mis-selling by the pensions industry plunged people into disaster, layer upon layer of impenetrable regulations left them even more at sea. The actuaries went to sleep and by the time they woke up to demographic reality, defined benefit schemes were on the skids. Government information literature was of such sloppy quality that people remained as gullible and vulnerable as before. The Parliamentary Ombudsman propped up the culture of delusion when she gave people to understand that the Government should be expected to underwrite the private occupational pensions system—no matter how prodigiously trustees might screw up, the taxpayer should come to the rescue—and the court reiterated that. The latest illusion among our fellow citizens, mentioned by the noble Lord, Lord MacGregor of Pulham Market, is that houses will substitute for pensions. It is believed that property values will keep going up, so your home or your buy-to-let property will be your pension nest egg. The trouble is that the relation of supply and demand may well scupper that. If more and more people at retirement want to realise the cash value of their bricks-and-mortar pension fund, and relatively fewer people of working age are available to buy their properties, house prices would seem likely to fall. The retired people have to get themselves rehoused and, if they are prudent, put money aside for long-termcare. They may also have mortgages to pay off, which will not be assisted if the Pension Commission’s recommendation is accepted that a scheme-specific tax regime for personal accounts does not permit a tax-free lump sum to be taken. Housing assets will of course assist many people moving into retirement, but those with the meanest pension rights will commonly be those with the least housing equity. Reliance on property values is not the solution. The Pensions Commission invited us all to face reality, saying: "““The current system of private funded pensions combined with the current state system will deliver increasingly inadequate ""and unequal results ... Some mix of higher taxes/National Insurance contributions, higher savings and later average retirement is required””." This Government have previously done much to help the poorest pensioners. In the 2006 White Papers and in this Bill they are now grasping the nettles held out by the Pensions Commission and addressing themselves to constructing a coherent overall system of pensions. The new system will, of course, face major uncertainties. We have no idea how inflation will fluctuate in future decades; nor can we know what will happen to longevity. Will better treatments be found for heart disease and cancer? What will be the impact on our demography of migration, perhaps further stimulated by climate change? The policy, based on the Pensions Commission’s recommendations, that the Government are proposing seems to be as robust and flexible as it can be in the face of such uncertainties: to create a multi-layered system in which affordable state provision guards against poverty—for most, at any rate—and provides a platform for individual saving which is discretionary but effectively encouraged. I would like to ask the Minister about some specific aspects of policy. The Pensions Commission recommended certain policies to encourage and support people to work for more years. It proposed making age discrimination in employment beyond65 illegal, allowing deferral of part of the basic state pension and S2P, relieving employers of national insurance contributions for employees post state-pension age, more vigorous policies on occupational health, and a better focus on re-skilling older workers. Can the Minister clarify the rather fuzzy account in the White Paper of the Government’s intentions on these particular recommendations? The White Paper makes it clear that the Government intend to mount a drive to improve financial literacy and ensure that people understand the nature of the choices open to them on pensions. This is important and welcome. It is not appropriate to introduce financial literacy as such into the national curriculum. On this, I do not agree with the noble Lord, Lord MacGregor of Pulham Market, although I was his schools Minister. The national curriculum is cluttered as it is. We will not persuade teenagers, who think they will forever be young and invulnerable to the hazards of drugs and fast cars, to interest themselves in pensions any more than in planning their funerals. The noble Baroness, Lady Thomas, made the same point. What is needed is good education that eventually produces people who are numerate and responsible. It is, however, essential that people receive advice to enable them to make appropriate judgments about pensions and, indeed, other aspects of financial planning. Individual pensions advice, which, as has been noted, is usually better described as sales talk, is so expensive that it eviscerates the value of modest funds, so generic advice must be provided. The Pensions Commission was pessimistic, speaking of the, "““limited impact of providing better information and generic advice””." I am more hopeful. When people’s interest is kindled they will grasp quite complicated calculations, as punters do on the racecourse, or farmers work out how to take advantage of CAP schemes. When people are to have their own individual pension pots and property assets, their interest will be of a quite different order. I am pleased that the Government noted in the White Paper Personal Accounts: A New Way to Save that, "““providing good quality information will be critical to the success of personal accounts””." What worries me a bit, however, is that inparagraph 3.12 of that White Paper the Government appear to conflate marketing and communications. They recognise that among the objectives of the delivery authority must be, "““delivering appropriate levels of choice””." It will be a crucial and difficult judgment to determine what that should mean. I believe Sandler was wrong to maintain that regulation of the financial product should make advice unnecessary. The Pensions Commission more accurately noted that people may, for example, need to be advised that they should direct their resources to paying off expensive debt before embarking on a personal pension account. The noble Baronesses, Lady Turner and Lady Hollis, drew our attention to risks in the eventual interaction of benefits withdrawal and pensions drawn from personal accounts. Citizens Advice rightly said in evidence to the DWP committee in another place that people need advice, "““in the round, about you, your money, your future prospects, your family, how to manage that money effectively and then keeping that under review””." How do the Government propose to ensure the availability of suitable generic advice? Through the Personal Accounts Delivery Authority? Through funding Citizens Advice or the Pensions Advisory Service? Through encouraging employers to provide financial advice in the workplace? I was informed a while ago that such advice not only was not a tax-deductible cost for employers, but was treated as a taxable benefit in kind for employees. Was that correct and, if so, has the position altered or will it do so? The provision of generic advice would probably not be a suitable role for the successor body to the Pensions Commission that the commission has called for. The commission proposed that there should be a permanent pensions commission, charged with presenting every three to four years a report setting out trends in life expectancy and implications for the long-term trade-off between public expenditure and the state pension age, trends in private pension saving—no doubt including the impact of continuing means-testing—and an evaluation of personal accounts in stimulating increased participation, as well as trends in retirement ages, differences in life expectations by socio-economic class and implications for policies required to support people to stay in work. I agree with the noble Lord, Lord Freeman, on this. Surely such a recurrent exercise would valuably inform government, the industry, commentators and the public. It would not be expensive, so why have the Government rejected the proposal for a permanent body and said instead that they will set up only ad hoc reviews from time to time? The job could be attempted by a pensions think tank or a university department, but that would not carry the same authority. I would like to see a provision in this Bill not only to establish a permanent pensions commission with such terms of reference, but also requiring the Government to have regard to its findings and to publish their response. We hope that the Bill will help to establish a sustainable consensus on pensions policy, but we must not allow complacency and inertia thereafter. Pensions policy needs to be fair as well as realistic. The Government have rightly rejected the option of allowing pensioners to become poorer relative to the rest of society. They are seeking to strike a series of fair balances. A fair balance between the generations means that the basic state pension should be indexed to average earnings and that people should work longer. For many people, that means that they will not only be wealthier but healthier and happier. For many others, however, in comparatively unrewarding occupations, particularly physically exhausting ones, and for people in poor health, it would not be just to insist that they should toil for more years to achieve their basic state pension. Will the Government, as the Pensions Commission suggested, assist such people to retire earlier, by making the basic state pension, possibly topped up by the guarantee credit, available before S2P? The White Paper is somewhat opaque on this, too. A fair balance is to be struck between employers and employees, and between those who are presently in funded pensions and those who are not, by providing for a compulsory employer’s contribution, but set at a modest 3 per cent. I appreciate the worries that have been expressed about levelling down, but I worry that levelling down would take place in any case. I believe that the 3 per cent compulsory employer’s contribution is well judged. The Government also seek to strike a fair balance between those who have full-time or near full-time working lives and those who, in the interests of society, put their lives together on a different pattern. This has already been recognised by the Government in the switch from SERPS to S2P. Now it is to be taken further in a new pattern of credits for carers, so that all should be able to build a full basic state pension plus some S2P entitlement in their own right over 30 years. But the Government should be willing to consider in the passage of the Bill whether their model for women with interrupted working lives could be improved on within the bounds of affordability. My advice is that they should pay heed to the noble Baroness, Lady Hollis; I always do. On fairness, there are some other matters to consider. Tax relief for investment in pensions is, to my mind, outrageously loaded in favour of the well-off, who have least need of incentive and assistance. I have seen various figures—perhaps the Minister can advise us as to the correct ones—but it appears that between 5 per cent and 10 per cent of the wealthiest people receive half the total tax relief. This is neither just nor efficient. If the revenue forgone in tax relief were to be used instead to provide grants to support those most in need of assistance in saving for pensions, that would be a better use of resources. The Pensions Commission recommended a scheme-specific system of tax relief to give impetus to personal accounts, and I hope that that will happen. Meanwhile, the commission explained, so long as defined benefit schemes still loom large in the array of pensions provision, there will be problems in altering the existing pattern of tax relief. I do not see why this particular tail should wag the dog. Of course we should do nothing to accelerate the demise of DB schemes, but why not proceed in relation to DC schemes? It is important, in justice and for the economy, to find effective ways of reversing the very worrying decline in saving for pensions by the self-employed. The White Paper tells us that the Government see no satisfactory way in which to enable the self-employed to enter S2P. Therefore, the recommendation by the Pensions Commission that the self-employed should be allowed to participate in personal accounts on a voluntary but cost-effective basis is all the more important, although the commission did not put much flesh on the bones of that proposition. The White Paper tells us that the Government intend to allow the self-employed to opt into personal accounts. That is good, but do the Government have further thoughts on how to encourage and enable self-employed people to save more for pensions? It is also vital that the Government find ways of helping employers in small businesses to cope with the costs of contributing to personal accounts for their employees. Will the Government accept the Pensions Commission’s recommendation that they should take advantage of their improved cash flow from the abolition of contracted-out rebates in DC schemes—£4 billion at the start—to mitigate the costs of employer contributions to personal accounts for very small businesses? I think that we should also reflect on issues concerning migrant workers. There is free movement of labour within the European Union, and many migrants are coming from outside the European Union, too. We will all depend on them. Highly skilled immigrants will sort out their pensions, but many immigrants will do menial and poorly paid jobs and, of them, many will not accumulate anything like 30 years of contributions. What development do the Government envisage of portability of pension rights across national frontiers? Should we not feel ashamed if we were to depend on migrant labour for cleaning and many other jobs in the health service, and for public transport, and then leave those people as second-class citizens to eke out their old age on meagre benefits? These are questions that I raise, but I welcome the Bill. For the first time that I can remember, we have the prospect of a coherent, realistic and just pensions policy.