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Stakeholder Pensions

Mr. Deputy Speaker (Sir Alan Haselhurst): We now come to the second debate, on the Government's stakeholder pension scheme. I should announce to the House that Mr. Speaker has selected the amendment in the name of the Prime Minister.

7.24 pm

Mr. David Willetts (Havant): I beg to move,

That this House regrets the Government's failure to deliver stakeholder pensions to its target group of 'those with moderate incomes of between £10,000 and £20,000 a year'; condemns the failure to reform the obligation to purchase an annuity at age 75, which is a disincentive to taking out stakeholders and other forms of personal pension; regrets the spread of means-testing which acts as a disincentive to saving; condemns the burdens on company pension schemes which are causing employers to close them to new members; and calls on the Government to review its pension policies so as to reverse the decline in funded pensions.

The purpose of this debate is to hold the Government to account for a policy launched in their election manifesto of 1997 on a new form of personal pensions—stakeholder pensions—known in the trade as genetically modified personal pensions. They were legislated for in 1999 and, of course, they were launched in April 2001. Stakeholder pensions have now been available and marketed for more than six months and it is time to hold the Government to account for the delivery of promises that they made when they were pushing their legislation through the House.

I shall briefly remind the House of what the Government promised. The target group for stakeholder pensions are the 5 million people on low and middle incomes who do not have a pension. Lord Rooker, the former Minister of State, said:

"Our estimate of the target group of five million people for stakeholder pension schemes is based on the number of people earning between around £10,000 and £20,000 who are not in an occupational pension scheme."—[Official Report, 10 April 2000; Vol. 348, c. 25W.]

So the target was the 5 million people with modest earnings who did not have pension provision. How successful are the Government in addressing that target group and ensuring that they take out stakeholder pensions? We know—not, I am afraid, from the Government's statistics, but from the Association of British Insurers—that 416,000 stakeholder pensions have already been sold; a modest but useful figure one might think, until one looks in a bit more detail at who those 416,000 people are.

We know that 160,000 people have transferred out of the construction industry pension scheme, which is already in operation. The biggest single move into stakeholder pensions has been by the construction industry, from another form of pension provision, which accounts for approximately 160,000 of the 416,000 pensions sold. We are therefore left with about 250,000 people who have taken out stakeholder pensions; perhaps they are in the Government's target group for the new pension provision. Again, the ABI estimates that approximately half the people taking out stakeholder pensions already have private pension provision above the minimum contracted-out level. They may be people who are transferring from some other form of funded pension scheme, or they may be taking the benefits of concurrency. However, it looks as if about 125,000 of the

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250,000 people who are moving into a stakeholder pensions already have some form of pension provision. They are not the target group, which consists of people who do not already have a pension.

We are left with 125,000 people. How are the Government doing with them? The total may be a bit smaller, but at least 125,000 members of the target group have taken out stakeholder pensions. The Government said that stakeholders were aimed at people with modest earnings; perhaps they have overachieved on that. We know that approximately 25 per cent. of stakeholder pensions have been taken out by individuals with incomes of less than £7,500 or no income at all. Who are they? We have all been reading the financial pages of our newspapers, so we know that they are the non-working wives of people who have been well advised that the pension is a useful tax relief—

The Parliamentary Under-Secretary of State for Work and Pensions (Maria Eagle): It is wives, is it?

Mr. Willetts: Yes, by and large, it is usually non-working wives. They appear to make up another 25 per cent. of the people who have taken out stakeholders, and account for another 62,000 pensions.

Perhaps the Government have at least managed to issue stakeholder pensions to 62,000 people in their target group. However, that is not the end of the story, because there is another group. We know that 15 per cent. of stakeholder pensions have been taken out on behalf of children, usually by their grandparents, accounting for another 37,000 pensions. In fact, a generous assessment of how the Government are doing is that they have managed to issue, perhaps, 37,000 stakeholder pensions to their target group of 5 million. Mr. John Jory of Building and Civil Engineering Insurance, the company which is selling stakeholder pensions to people in the construction industry, said:

"we are probably the only provider selling to the target market."

It may be that nobody else is selling to the target group. I suspect that the number of stakeholder pensions sold by the Government to the target group may be lower than the number of life peers created by the Prime Minister—248 at the last count and, of course, rising fast. We want to hear from the Minister tonight what he has been doing to meet his target of 5 million people who do not have funded pensions, which is the target group for stakeholder pensions.

What have the Government been doing? First, as we would expect from them, they have been spinning—redefining the target group. There has been an elaborate debate about whether the target group are people on low to moderate earnings, or on moderate to high earnings. I will not detain the House with the various prevarications of the Secretary of State and his colleagues about that. Suffice it to say that we can at least be clear, because it has been said time and again, and it is the basis on which the state second pension is constructed, that the target group are those with incomes of £10,000 to £20,000 a year who do not have an occupational pension.

It is no good the Government spinning themselves out of trouble by claiming that that is not the target group. They have regularly identified it as the target group.

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The Government will be spinning for the rest of their life. "Spinning their way out of trouble" will be their epitaph, but it will not do.

The other great recourse of a Labour Government in trouble is to an advertising campaign. It cost £6.5 million—three times as much as the entire Department of Social Security advertising budget in the previous year. The Government have tried to tempt people from the target group into stakeholder pensions by increasing awareness of them. I congratulate the Secretary of State. His advertising campaign has clearly worked. The Government have succeeded. During the period of the advertising campaign, between February and June 2001, people's awareness of stakeholder pensions rose by 15 per cent. That was, in part at least, because of the Government's advertising campaign.

Good news, so far, but there has been one problem: the more people have grown aware of stakeholder pensions as a result of the Government's advertising campaign, the more confused they have become about pensions in general. The IFA promotion chief executive, David Elms, said:

"The worrying trend is that as people are becoming increasingly aware of stakeholder pensions, they are becoming more and more bewildered."

The only thing the advertising campaign has succeeded in doing is making people more confused about stakeholders and pensions than they were before it started. There has been a 10 per cent. increase in the number of people who describe themselves as being in the dark about retirement planning since the Government's advertising campaign began, so the only effect of the campaign has been to spread more confusion about the best way of saving for a pension.

I want the Secretary of State to offer the House this evening an account of who is buying stakeholder pensions, whether that is compatible with the Government's objective for the target group, and what he will do to meet the objectives that he has laid before the House for the marketing of stakeholder pensions.

Why have stakeholder pensions proved such an extraordinary flop, after all the publicity, the expenditure on advertising, and the effort that the Government have put in over the past five years? I suggest that there are three reasons. The first is that as means testing spreads further and further up the income scale, fewer and fewer people can be confident that they will be better off if they have a stakeholder pension.

We hear from the Government Benches all the time about the problems of pensions mis-selling, but it would be mis-selling a stakeholder pension if people took one out, perhaps saving out of their modest earnings, and at the end of the day found that they were hardly better off, despite having put aside a few thousand pounds of their hard-earned savings. We have repeatedly asked Ministers to answer the $64,000 question: how much money do people need to have in a stakeholder pension fund in order to be confident that the money that they will receive when they retire will float them above means-tested benefits? The answer could well be $64,000. It could be more than that, but we have never had a figure from Ministers. That is why they run the risk of mis-selling their own stakeholder pension.

The Institute for Fiscal Studies warned that

"the increase in the rate of the minimum income guarantee over the next few years will unambiguously discourage saving."

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The Secretary of State has a problem of his own creation as he spreads means testing up the income scale.

Secondly, the Government have imposed new taxes on funded pensions. They have increased the burden of taxation on people who save for their retirement. The Prime Minister told the House last year that we should not worry about the burden of extra taxation. He said that

"because of rises in the stock market since the election, those sums"—

the sums that we were quoting for the increase in taxation—

"are entirely illusory."—[Official Report, 1 November 2000; Vol. 355, c. 704.]

However, the sums that we were quoting for the cost of those tax increases were very real. It was the stock market gains that the Prime Minister claimed in defence of his policy that were illusory. It is no good the Government saying that they want to encourage people into funded pensions, if they then tax them more heavily.

The third way the Government have made the problem worse is by failing to respond to the widespread demand from all parts of the House, to be expressed in a private Member's Bill promoted by my right hon. Friend the Member for Skipton and Ripon (Mr. Curry), for reform of annuity law. The present position, whereby someone is obliged to buy an annuity at the age of 75, is a further disincentive to people taking out a stakeholder pension or other forms of personal pension provision. For many people, the obligation to purchase an annuity at the age of 75 is an extremely unattractive proposition. There are proposals on the table to tackle that. It is a source of genuine amazement to me that the Government have still not acted on a manifest problem.

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