Pensions Bill

My Lords, in making my contribution, I should draw attention to my interest as director of a life assurance company that is also a major pensions provider. Like others who have spoken in this debate, I very much welcome the general direction of the Bill and I pay tribute to the work of the Pensions Commission under the noble Lord, Lord Turner, on which the Bill is based. Nevertheless, I fall into the camp of those who believe both that the Bill does not go far enough and that the measures as proposed raise some major concerns, which we will need to address. As others have said, in looking at the pensions issue, we need to recognise that we are at a point in time when there is a sea change in the pensions environment that has made much of the previous way of providing for pensions unsustainable. The primary driving force of that is the length of time that people now expect to live in retirement and the consequent rise in the dependency ratio. Unless we are prepared to increase the retirement age far further and faster than anyone currently envisages, so as to move that expectation of a long life in retirement, we will face a situation in which an increasing proportion of our national income needs to go to those who are not active in work. We cannot assume that our current projections are the end of the story. What will happen to life expectancy because of medical advances is as yet unknown. I believe that, in the long run, the only sustainable and robust solution to the pensions issue is to move to a much greater level of funding of future pension liabilities. I welcome the encouragement in the Bill for private savings and the new pension accounts, but I believe that ultimately we will have to tackle funding of the state pension as well, moving it from a pay-as-you-go provision to something that has a greater level of funding behind it. That applies both to the pensions liabilities for state employees, which have been mentioned as a huge potential burden on future taxpayers, and to those liabilities that successive Governments have refused to put on their balance sheet, but which are nevertheless there, for the future basic state pension for the population at large. My wager would be that at some time we will need to return to a variant of the scheme put forward by the Government some 10 years ago. That would have phased in state pension funding over an affordable timescale, giving everyone their own pension pot to which their savings could be added. I recognise that that goes far beyond the scope to the Bill, so we need to turn to making the more modest changes proposed work as well as they can. On that I would like to raise four points. The first point, which has been well aired, involves the interaction with means-tested benefits, including pension credits. That means that many in the target population—as the noble Lord, Lord Turner, pointed out, many of them have no savings at all—and because of the interaction with state benefits, do not have an incentive to save; it is not worth their while. I accept that the Bill will stop the situation getting worse but I am not convinced that it will solve it. Like others, I would welcome more information from the Government on their estimates of how many people will still have most of the benefit from the introduction of employer contributions at 3 per cent and the tax relief on that and their own contributions, taken away by the benefit taper rate. It is still likely to be a very significant proportion. As a result, I suspect that we need to do more to resolve that. One part of that solution could be to give a more generous top-up from the state for those who have modest savings so that they are worth more. I have long been a fan of the so called BOGOF principle—buy one, get one free—where those who do not have much to save can be assured that the top-up from the state will make their savings worth having. As the noble Lord, Lord Howarth, pointed out, it is an anomaly that those on higher incomes get a 40 per cent contribution to their pension pot whereas those at the bottom end of the scale get 20 per cent at most. I am not suggesting that we should reduce the tax relief at the top, but it is worth giving more benefit to those at the bottom to make sure that their savings are worth more. That, in itself, may help get us out of this trap with the pension credit taper. I was interested in the proposal that the noble Lord, Lord Turner, made for cash commutation for small pension pots. That is worth pursuing. However we do it, if we are going to encouraging savings from the target population—which is the group that we are primarily worried about here—we need to ensure that a pound saved means that they are a pound better off in their retirement. That leads on to the second issue, which is the problem of advice. My noble friend Lord Fowler argued for a compulsory contribution system. If the system is not compulsory, people will have to make a choice. The issue is not only about the interaction with benefits but is also because many have outstanding debt and liabilities whose net cost is far higher than return on investment from savings. Many of those people are far better off paying off debt on which the interest rate may be 15, 20 or 30 per cent than putting money into a savings scheme, even with the tax relief, and even before you start knocking off the negative return from the benefits taper. A large proportion of the target population have large amounts of net debt. Even if we solve the benefit problem, we will not solve the problem of the net benefit of saving versus dealing with other liabilities. How do we get advice to those people? The problem is that over the past 10 or 20 years regulation of advice has shifted so far in favour of protecting the consumer that compliance costs mean that most private sector providers simply cannot afford to sell —and, in order to sell, to give advice—to the less well off half of the population, who most need it. As the noble Lords, Lord Addington and Lord Howarth, pointed out, the Government’s faith is placed in generic advice. I am not as optimistic as the noble Lord, Lord Howarth, that generic advice will solve the problem. Generic advice will not help people who do not understand these issues to deal with the complexities of their situation, and the interaction of debt and benefits, unless it is face-to-face advice that deals with their specific situation. If you are in a face-to-face advice situation you cannot, by definition, stick to generic advice without risk of getting it wrong. The Government have a brave project to develop generic advice but, as the noble Baroness, Lady Hollis, pointed out, without prejudging this there must be an enormous risk that, as with the advice on opting out in the 1990s, some future ombudsman will judge that we have misinformed people and land the Government with the large cost of compensation. To solve this conundrum, if it is solvable, we need to shift the culture to reduce what are in many cases box-ticking compliance costs, and only penalise sellers where it is clear that there has been deliberate mis-selling. Whatever we, do we must end up with the same rules on advice for the private and the public sector. I cannot envisage a situation where somebody can get large compensation for advice from a private sector pension provider, but somebody given the same advice from a public sector advice provider is not entitled to compensation at all. That will not stand the test of legal challenge. The third point I would like to raise involves the issue of annuity, which many others have raised. We all understand that if the Government give tax benefits they do not want to see them used on luxury holidays by people who then fall back on the state. We can solve that problem in other ways—for example, by ensuring that there is a minimum amount left in the scheme once people are over a certain age, with the freedom to draw down as they need income. We should then allow remaining funds to pass down through inheritance into the next generation’s pension funds tax free, so that they can help the next generation accumulate savings in time. We have to recognise that it will simply not be possible for much of the population to save enough in one lifetime to make enough difference to their security in retirement. Therefore, we need to encourage the accumulation of wealth over generations. With baby boomers now moving into retirement, it could make a major difference to the next generation if their pension pots, however modest, do not disappear when the current generation die but become a foundation for the next generation’s pension savings. We should encourage, not prohibit, that. In order to do that, as other noble Lords have said, we need to tackle the annuity requirement. I will be happy to join others when those amendments are put to the test. My final point is about the design of the delivery authority. The detail on that will follow, but we need to avoid creating something that destroys the remaining successful private sector provision and sucks money into what could become, if it is not set up and run wisely, an inefficient public administration machine. There is much debate still to be had about what role the private sector should have in administering the schemes. As others have said, there is a risk that some companies will use the proposals to level down contributions in existing private schemes. We need to be aware of that. It must be desirable to ensure that there is a level playing field for existing group pension schemes so that they are not handicapped by competition from, for example, subsidies to the cost to the new pensions administration that would further encourage a slide from well provided private pension schemes into less well provided Government schemes. We should also look at the rules surrounding automatic enrolment, which is proposed for the national pension scheme. At the moment, as I understand it, the distance selling directive prohibits automatic enrolment for conventional group schemes that are not set up as trusts. Again, that is not a level playing field. If we believe that automatic enrolment has a role to play, it may well have an important place in the continuation of those private schemes as well. Because of those issues, I wonder whether it would be sensible to build into the Bill the safeguard of a minimum period of consultation between the final proposals on the new pension machinery being set out and the legislation being brought forward to enact them. That would allow proper time for discussion so that the House and the country are not faced with the fait accompli of a Bill that it is too late to debate and amend. I should welcome the Minister’s assurance on the timescale for that discussion and, indeed, I should like to know whether he will accept an amendment to build that timescale into the Bill. In conclusion, the Bill makes a very useful start but, as others have said, as we go through it, we will need to test the willingness of the Government to accept its limitations and to be open to further strengthening its provisions so that we do not miss the opportunity to make a real difference to future generations.