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Mr. David Laws (Yeovil) (LD):
I am pleased to be able to contribute to the debate and I start by congratulating the right hon. and learned Member for Kensington and Chelsea (Sir Malcolm Rifkind) on introducing the Bill and on the constructive way in which he made his proposals. Clearly, the attempt to incentivise savings in this country and to increase the
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amount of private saving is timely. Government figures released yesterday show that only 44 per cent. of people of working age are currently making any provision for their own retirement on top of the state pension. That must surely be a matter of concern.
Mr. Timms: I apologise to the hon. Gentleman for intervening so early in his speech and I am grateful that he has allowed me to do so. May I correct him, as there have been some misleading headlines about those figures this morning? The proportion to which the hon. Gentleman refers is the proportion of employees in defined benefit schemes. If we add in the other forms of pension savings, the proportion of employed people contributing presently is, on the basis of the new figures, 56 per cent. compared with 55 per cent. in 1997.
Mr. Laws: We could trade statistics for some time. I was talking about people of working age, not just people who are in employment. Surely we should be concerned about all individuals of working age. I am sure that the Minister would agree that, irrespective of what figures he wants to place on the table and in the light of the figures reported in the media today, there is a massive crisis in respect of the lack of additional private saving that is being made on top of state provision. I am sure that Lord Turner would agree with that, too. So far, the Government have been unsuccessful in shifting the balance of provision away from reliance on the state towards more private forms.
In that context, the Bill is timely and we agree with a number of proposals within it. It also highlights the need for the Government to join up their thinking in a number of areas in respect of pensions and savings policy. The hon. Member for Wantage (Mr. Vaizey) pointed out earlier that the Government are spending a considerable amount of money establishing child trust fund accounts. They will initially cost about £0.25 billion a year, stepping up to more than £0.5 billion over a period of time. The idea behind the accounts is to get young people engaged in the savings habit from an early age. We are sceptical about the value of those accounts, but if the Government are going to introduce them, why on earth is there no joined-up thinking about them? The accounts mature when the person reaches the age of 18; why are not those 18-year-olds then encouraged to use the accounts as a vehicle for saving and, ultimately, as a vehicle for retirement? When the Child Trust Funds Bill was in Committee, I put to the Financial Secretary precisely the point raised today by the hon. Member for Wantage, and it was clear that the Government had not thought about it. That is baffling.
The right hon. and learned Member for Kensington and Chelsea has set out some important proposals today, which may be of help in addressing the savings gap. It is also appropriate to say that the hon. Member for Portsmouth, North (Sarah McCarthy-Fry)—she was obviously encouraged to give way to interventions to an extent that she may never do again—highlighted the fact that the pension provision crisis is far wider than the issue of incentivising private saving, which will always be easier for those individuals on higher incomes. Today's debate, therefore, covers only a small proportion of the debate that we will want to have once Lord Turner has presented his report at the end of November. Indeed, I am sure that the right hon. and
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learned Gentleman would concede that his Bill does not seek to address all of the problems in the pension system and that it would leave many people with considerable problems under the present system.
The Bill contains three major proposals, which I shall address in order of my enthusiasm for them, but I shall give the right hon. and learned Gentleman two cheers, not three. I agree with the first proposal to do away with the existing, inflexible rules on annuities. My hon. Friend the Member for Northavon (Steve Webb) has spoken several times on that issue in the past few years, and our party believes that we need more flexibility in the rules to give people more choice in retirement. That would become much easier if we had a state pension system that took people above the means-tested level or out of poverty. The Government's inclination to stick with the annuity rules is partly, I presume, driven by their concern that people might blow all their money early in their retirement and then fall back on means-tested benefits. We hope that Lord Turner will propose a movement away from the means-tested system, towards which we have been increasingly driven since 1997, through the introduction of a much better state pension that would lift people out of poverty, set at or above the means-tested level. If that happened, it would be much easier for the Government to be more relaxed about how people manage their private funds in retirement. The questions that the Minister asked about the risk that people might run out of money towards the end of their retirement, especially as they are living longer, would be less of a concern. That risk would still be of concern to the individuals, and they would have to take personal responsibility for the way in which they managed the funds, but the state's responsibility is to ensure a minimum level of provision. Therefore, we support the right hon. and learned Gentleman's proposals for removing the inflexibilities in annuitisation, which include his well-named RIF proposal.
The second proposal would increase the portability of private employer-provided pensions. That is an important issue, given that people increasingly have several different employers during their working lives and may want to take their pensions with them, instead of having several different pensions in different places. The right hon. and learned Gentleman's proposal seeks to update the present pension system for the modern era and I hope that it can be linked with some of the suggestions—welcomed by all three parties—for more auto-enrolment, so that every employee ends up in a pension scheme unless they decide to opt out. If that happens, new pension options will be necessary, because small and medium employers may not want to establish their own pension schemes. We may need to consider options that give people confidence that they will not pay a large portion of their savings in commissions, that are solid in terms of credit risk and that take low market risks. The Minister will know that my hon. Friend the Member for Northavon, in pensions proposals we made earlier this year, suggested that National Savings and Investments might have a role in establishing a low-risk, low-cost pension that could be the default option for people who are auto-enrolled by small and medium-sized employers who may not wish to establish schemes of their own. The right hon. and learned Gentleman's proposal fits in well with the thinking—I hope—of all three parties about the need to ensure in the future that
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we use the force of inertia to keep people in second pensions, instead of keeping them out, which has been the case for many years.
The Minister raised an important point about the burdens that the proposals may place on business, which will need to be addressed if they are taken forward. The right hon. and learned Gentleman pointed out that his proposals were published only a few days ago and it is therefore rather early for business organisations to comment. The Investment Management Association has already released a briefing paper on the Bill, which welcomes aspects of it, but also says that it does not address the genuine concerns of small to medium-sized employers who will have serious difficulty meeting the obligations in clause 3. The proposals would need to overcome some serious practical issues and we would also need to ensure that they did not undermine good existing employer provision. Employers must be very tempted to shed any responsibility for pensions, given the increase in longevity and poor asset market performance in recent years, which have made many employer pension schemes a massive financial liability. Many employers would welcome the opportunity to be rid of that responsibility, so we must ensure that giving people more choice of pension product does not erode the commitment of employers to that savings vehicle and result in inferior provision.
The third proposal, for a savings and retirement account, is the one that I approach with greater caution. It is proposed that people would be able to save and draw down their money under certain circumstances. I accept that the right hon. and learned Gentleman is attempting to create the most flexible possible system of saving to give people as much freedom and independence as possible, and we should all look favourably on proposals motivated by such considerations. However, we would need to resolve several serious practical issues, the first being tax relief and whether the proposals would simply shift savings around rather than increase the amount of saving. The hon. Member for Portsmouth, North mentioned the fact that the existing tax relief largely favours those in the upper income brackets. Some 60 per cent. of existing tax relief goes to upper-rate taxpayers and tax relief is not usually very relevant to people on low incomes. The second concerns the practicality of the draw-down mechanisms that the right hon. and learned Gentleman proposes. The issue really is whether his proposal that people should be able to save and draw out money in a pension vehicle is right, or whether we should focus on improving the existing pensions regime and enable the provision of a flexible savings vehicle for people who want to save money but have access to it.
On the first point, last year the Association of British Insurers released a report on UK pension reform that referred to the individual retirement accounts used in the United States, which are similar in some ways to the right hon. and learned Gentleman's proposals. The ABI points out that the current limit on contributions in the US is £1,058, plus £132 for a non-working spouse, which is just over £2,000 per household. However, it points out that tax deductibility under that scheme is limited to those who are not members of an occupational pension scheme and those who are on low earnings. It mentions that during the 1980s, when the rule was removed, it led to a surge in pension saving by those on higher incomes, and there was a fall when the rule was later reapplied.
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Following an announcement in 2004, the Bush Administration plan to consolidate the wide range of existing IRAs and create a new form of personal pension product: the retirement savings account. Unlike most IRAs, the accounts will operate on a TEE basis—taxed, exempt, exempt—which means that contributions are made after tax, but returns and benefits are free of tax. In other words, the proposal in the US and the general way the accounts have operated there focus tax relief at the lower end of the income distribution scale. Unlike pension tax reliefs in the United Kingdom, which are all upfront with tax relief on retirement, the proposal in the US is to have the contributions made after tax and the accounts thereafter tax exempt. That is the same tax relief structure as we have on ISAs in this country.
I appreciate that the right hon. and learned Member for Kensington and Chelsea cannot say a lot about tax relief under the terms of the Bill, but my concern is that the proposal might become a vehicle for greater avoidance or postponement of tax by those at the upper end of the income distribution scale who already have significant tax reliefs and protection from double taxation. I would not want to spend much more on tax reliefs for higher earners, who are largely making good provision for their pensions. If that is what is implied by the Bill, I am very nervous about it. I am concerned that it would lead only to shifting of savings from non-tax advantaged accounts to tax advantaged accounts.
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