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5.37 pm
Mr. Howard Flight (Arundel and South Downs): I remind the House that the growth of private-sector pension provisioning was one of the major successes of the last 20 years. In this country--unlike most other countries in the European Union--some £800,000 million of private-sector pension assets have been built up, and, as a result, UK tax rates and the proportion of the national income taken by the Government are nearly 10 per cent. lower. Some 85 per cent. of people who are now retiring already have some form of private pension; I believe that only 7 per cent. of men and 12 per cent. of women in full-time employment have no pension provision.
We have been considering those who do not already have some sort of private pension. The Government's stakeholder proposals--having finally come forth--seek to deal with that problem. I think that there is a broad cross-section of agreement in the House that as many people as possible, if not everyone, should have some form of private pension, because--as has been said today--the alternative is a massive growth in social security bills. People are living longer and longer. I was amazed to learn yesterday that, in the last decade, life expectancy has risen by a year for every four years that have passed. That is phenomenal. Moreover, there is the population bulge of which several of us, including me, are key representatives, having been born in the late 1940s and early 1950s. By 2010 or 2020, the country will have a much larger population of retired people, who will have to be provided for.
The specific issue is whether or not the Government's proposals satisfactorily address the problem of those who have no existing private pension. This very morning--I should declare an interest at this point: as many hon. Members know, I am chairman of an investment
management company--I addressed an industry conference on the Government's pension proposals and, in particular, on trying to assess what the LISA proposals are all about. The conference was attended by some hundred people, most of them representing pension product providers. Their first complaint was that there is still considerable lack of clarity about the stakeholder scheme. We are halfway through the passage of the Welfare Reform and Pensions Bill through Parliament, yet nobody knows what the LISA will be, if it comes into existence.
The Government realise that the basic stakeholder proposals involve severe cost problems. The costs are likely to be too high to meet the Government's CAT mark target and very few members of the industry are willing to provide stakeholder scheme, so the Government are going back and consulting. We do not know how even the stakeholder pension will eventually operate.
I have twice asked questions about the interregnum. The response that I got from Ministers at the Department of Social Security and at the Treasury was that the Financial Services Authority had already issued guidance to providers for the interregnum. Whatever guidance has been given, it is useless. There are major problems--for example, for companies that wish to set up money purchase schemes.
For various reasons, group personal pensions schemes are generally more popular with staff than are occupational money purchase schemes. It seems at present, although the matter is not absolutely black and white, that, if a company has a group personal pension scheme, it will have to introduce a stakeholder scheme as well, even though the group personal pension scheme may offer better terms. No company wants to be saddled with the costs of two competing schemes. What is it to do?
On the major issue as between the stakeholder pension and the LISA, according to the joint paper issued by the Treasury and the DSS, the LISA is purely a way in which pension fund moneys can be managed. The paper advises that the proposed LISA is a collective investment management scheme that can be used by occupational schemes, personal schemes and stakeholder schemes.
The original concept was for a much simpler pension arrangement, analogous to a PEP and an ISA, dispensing with the need for, and cost of, trustees. The LISA is intended to be a pension tax wrapper with appropriate rules about how much could be invested in it each year. The accumulated investment could be drawn out when the holder reached a certain age for a pension. The money invested out of income would be tax deductible and would accrue free of tax. The scheme was intended to be simple and cheap, particularly suitable for people who are self-employed.
That was the concept originally postulated. There has been a big debate between the DSS and the Treasury about whether it will be introduced or whether all pension provisioning schemes must have the hassle and costs of a trustee. It is fundamental to providers to know what we will end up with. If we have a LISA like an ISA and like a PEP was, that opens up a massive new field of product provision and marketing, but if the LISA is merely to be a method of managing money, that is nothing new. Pension fund money can already be managed in collective investment schemes.
With regard to the Government's proposals and the problem that they are intended to address, I put carers into a separate category. The main problem is the growth in the number of self-employed. There are now 3.2 million self-employed and the figure is rising. Partly as a reaction to the UK's adoption of the European social chapter, many people in regular employment now function on a self-employed basis.
There are a lot of self-employed people with incomes below £9,000--1.6 million, according to the Government's figures. Many part-time transient workers and 43 per cent. of female part-time workers have no pension provisions. Most people with a track record of transient employment do not have any pension provisions. I suggest that the stakeholder scheme will have big problems in meeting the needs of people in those categories.
It will not be so easy to move pension arrangement under the stakeholder scheme on changing jobs, as presently proposed; and it also has the strange requirement that people can contribute £3,600 per annum or 100 per cent. of their income, whichever is less. The cost of working out the income of people in transient part-time employment for the record-keepers and the providers will be a nightmare. I cannot understand why there is such a requirement; moreover, people in transient employment may not even necessarily qualify for a stakeholder scheme put in place by a company. Self-employed people will certainly not be covered by company-sponsored stakeholder schemes.
The second problem with the stakeholder scheme is expense. What indications have the Government received of how many providers have suggested that they will provide stakeholder schemes on the CAT mark cost basis of, I understand, a 1 per cent. all-in charge? A lot of tax-oriented requirements such as the contribution rule will make the stakeholder scheme not a low-cost animal at all. Jobbing back, one of the attractions of the LISA as originally proposed was that it could be a low-cost vehicle, just as the competitive PEP market had become a low-cost vehicle.
Mr. Bercow:
In his description of those excessive costs, is my hon. Friend taking account also of the higher national insurance rebates that the Government propose to encourage people to opt for stakeholder pensions?
Mr. Flight:
That is a major issue, but it falls into a separate category. The crude issue is wanting to keep the charges as a percentage of assets that flow into stakeholder pensions down to the minimum, which is a quite understandable reaction to the fact that personal pensions have often turned out to be far too expensive.
I would add that the great irony is that--after all the trouble with personal pensions and just as the market is, if anything, coming round to delivering competitive, low-cost personal pension products which may compete on cost grounds with stakeholder schemes--the Government's proposals contribute an attack on personal pensions. I find that quite extraordinary, given that8 million people have personal pensions. Are the Government sending to all those people the message that they should cash in a personal pension--potentially at great loss, given some of the costs involved in early redemption? On the other side, group personal pension schemes for many medium-sized companies are very
competitive and the best answer for their employees. However, it appears that they will not be permitted as an alternative to a stakeholder scheme.
My main point is that there is a great deal of confusion--not only among individuals about what possible pension arrangements are coming up and how they should decide on them, but in the industry itself over where the Green Paper and the Welfare Reform and Pensions Bill, which is going through Parliament, will crystallise. By their own admission, the Government are going back to the industry to consult--that may be wise, but time is getting on. I can tell them that I know of many companies that do not know what to do with their pension arrangements; and the pension interregnum, for the next two years has only just started.
The second main issue, about which I have spoken and written elsewhere, is that the stakeholder proposals, combined with advance corporation tax changes pushing companies in the direction of money purchase schemes, mean that there will be a huge increase in money purchase pensions as opposed to final-salary pensions.
Final salary pensions involve a closed pot of assets operated by a company pension scheme, whereas, in money purchase pensions, there is an obligation to buy an annuity, either on retirement or at the age of 75. The numbers of those needing to buy annuities will rise dramatically. However, as economic policies have put the Government's finances into surplus, the net supply of long-dated gilts--the natural investment vehicle for annuities--has disappeared. No wonder annuity costs have risen dramatically. Real interest rates are nearly half the level of recent years, and traditional fixed-interest annuities are not necessarily the right vehicle for people to convert money-purchase accumulation into an eventual pension. That matter has not been thought about by the Government at all adequately. All the focus has gone on the saving and provisioning side, where there are a few gaps. However, in terms of how that saving is converted into pensions, a great deal more thought is needed.
The solution may be to permit maximum draw-down arrangements and to abolish the obligation to buy an annuity, or to reform annuity law to permit much more flexible equity-linked annuities--or a combination of the two--but a solution is urgently needed.
In pursuing the issue of insurance companies that provide equity-linked annuities, I was horrified to find that, if an equity-linked annuity performs at more than 3 per cent. over the Revenue's benchmark, the insurance companies are not allowed to distribute it--it must go on one side as a reserve. If, as has so often happened, that reserve builds up higher and higher, the beneficiaries of the annuity entirely lose those funds.
I have a letter from the Inland Revenue to an insurance company which had asked what it was to do with the money. In a cavalier fashion, the Revenue suggested that it be booked to windfall profits! Booking someone's pension savings to windfall profits? Why has not the issue of fair tax treatment for equity-linked indexed annuities been addressed as part of the pension reform process? When millions of people with money-purchase pensions will need to buy annuities, we must give the greatest thought to how best to turn those savings into pension income.
I am uncomfortable with the Government's minimum pension guarantee. I am sympathetic to the proposals from the Liberal Democrats, in that increasing state pensions for the elderly is the simplest and fairest method of addressing the problem of pensioner poverty, although it may involve a rather different state pension structure emerging in due course. The earnings-linked guaranteed pension support will be a major disincentive to pension saving and, as it gathers momentum, will be seen as enormously unfair. It would appear that someone earning an average wage who has accumulated his stakeholder or LISA pension may have no greater pension than someone who has managed to get away with doing nothing, and who picks up something similar in 20 years' time as a result of the minimum pension guarantee. That does not seem fair.
The pension guarantee arrangements also pose complex related issues in relation to sorting out the annuity problem in permitting draw-down arrangements. We cannot allow people to draw down and to be left with no capital. However, if we want to put in a protection barrier, logically it should be equal to the state minimum guarantee. The higher that guarantee is, the fewer people, effectively, will be able to draw down.
I plead with the Government to get a move on and sort out precisely what the LISA will be. If the LISA comes out of the debate as was intended, the stakeholder pension will be redundant for much of the territory that it was intended to cover. There is a need to sweep together stakeholder pensions, group personal pensions, occupational money- purchase pensions and occupational final salary pensions into a signal code for occupational schemes.
We would do better as a country to move towards the United States model, where there is a basic choice between occupational schemes and self-provisioning schemes, called the 401K. We would be close to that model if we ended up with the LISA, as intended, and the ISA. Those two together would be fairly similar to the tax incentives and the tax packaging for self-provisioning pensions saving that has been vastly successful in the United States.
As it stands, we will have a whole array of different types of pension that people do not understand, so they will have to incur the expense of advice. I suggest that the stakeholder system will also be inflexible for many in the categories needing to provide private sector provisioning--who will fall through the woodwork again--because they are in transient employment and will not be covered by employer-led stakeholder schemes.
There is widespread support for the Government's objectives and, next time that we Conservatives are in power, we will have to sort out, and work with, whatever the Government have put in place. Therefore, it is desirable to get as much of a consensus as possible--and to get the issues as right as possible--now. However, many issues have not been addressed and time is moving on.
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