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That is not my view, but the view of the former welfare reform Minister, the right hon. Member for Birkenhead (Mr. Field). A major cause of the crisis is the Government's decision in 1997 to remove the right of pension funds to reclaim dividend tax on the equities that they owned. That decision has created a loss of £5 billion, discouraged the country's savings culture and increased the spread of means testing.
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To compound the problem, in recent years, many final salary company pension schemes have been wound up, as has been said. The Pension Protection Fund and the financial assistance scheme were introduced to address the problems relating to the winding-up of pension schemes. However, the Government's response to the crisis has been inadequate. The financial assistance scheme, which involves the payment of £400 million of public money over 20 years, is welcome, but with only £20 million a year, it cannot live up to the billing that the Government gave it, hence the narrow criteria for entitlement to assistance. The Government presented the FAS as an answer to many of the problems of pension scheme wind-ups. In raising expectations so high, it is inevitable that many people will be disappointed when they face the reality of the FAS.
The Government also appear to be badly informed about the scale of the problem. In a written answer, they revealed that they do not know how many occupational pension schemes started winding-up in each year since 1997:
"Figures on schemes starting to wind up between 1997 and 2000 are not available as the register does not contain information on whether the schemes that started to wind up before 2000 started before or after 1997."[Official Report, 20 July 2005; Vol. 436, c. 1821W.]
In a further written answer, the Government revealed that they do not know how many occupational pension scheme members face losses to their pension savings due to their schemes being wound up by their employers:
"We have not made any estimate of the total number of occupational pension scheme members who are facing losses to their pension savings due to their schemes being wound up by their employers."[Official Report, 21 July 2005; Vol. 436, c. 2023W.]
In recent years, we have also seen plenty of debate, but little action, on the reform of the local government pension scheme. Much of the contention has been focused on the 85-year rule. The system allows anyone whose age, added to their number of years of service, comes to 85 or more to retire on an unreduced pension, even if they have not yet reached the age of 65. Last year, the Government attempted to standardise the pension age by removing the rule. However, on 18 March 2005, faced with an imminent strike, the Deputy Prime Minister announced that he would revoke the regulations with retrospective effect.
Local authority employers estimate that that U-turn cost councils an extra £450 million a year, and private businesses have complained about it bitterly. Private businesses are outraged by the high cost of protecting public sector pensions, while private sector pensions face increasing pressure. David Frost, director general of the British Chambers of Commerce, has highlighted the disparity:
"On the one hand, we have the private sector workforce being told it must work longer and put more money into their own pension pot, but here we have the public sector workforce who can still retire at 60".
The crisis was reignited last week after union leaders, fed up with the lack of progress in the resumed negotiations with local authority employers, decided to ballot members. The unions are seeking a similar deal to that agreed between Ministers and unions last autumn, under which the pension age for public sector workers would be raised to 65 for new recruits but kept at 60 for existing employees. Dave Prentice of Unison has warned:
"The local government employers, the LGA and the Government should be in no doubt of how serious we are . . . The clock is ticking, but there is a window of opportunity and I would urge everyone concerned to make the most of it".
Mr. Philip Dunne (Ludlow) (Con): I declare an interest, which is in the register. I am the director of an investment management company, which, while it is not directly involved in pensions, has some relevance to the debate.
I welcome the debate and the Turner commission's contribution to it. The lack of attention to the pensions crisis, which has been growing over the past eight years, is one of the major failings of this Government. I am delighted that they now plan to make some proposals, which we will study with interest when they are released.
I agree that there is a dire need to address the lack of savings in this country. The savings ratio has more than halved under this Government, from 9.3 per cent. in 1997 to 4.25 per cent. in 2004, according to the pre-Budget report. The UK has a substantially lower savings rate than our main European competitorsFrance, Germany and Italyall of whom have a rate in the range of 10 to 11 per cent. The Secretary of State referred to the level of under-saving; indeed, some 10 million people in this country are not saving. It is clear that this group in particular need to increase their level of saving in order to make some contribution to providing for their old age.
My contention is that accelerating the means-testing of pension credit has significantly accelerated the disincentive to save that we have witnessed under this Government. I know that they do not agree with me because earlier this month, when I raised this issue with the Minister for Pensions Reform in this place, he said:
"There is very little evidence that means-testing, under the previous Government or this Government, has reduced saving on the part of pensioners, but since 1997 there has been much greater confidence in the economy . . . In 1992, when there was deep anxiety about the future of the economy, people saved more. Today they are more confident."[Official Report, 9 January 2006; Vol. 441, c. 14.]
Well, I am pleased that the Minister is here to respond and I urge him to read, if he has not already done so, the contribution of the Association of British Insurers. A report that it commissioned from the Personal Finance Society
In looking at Lord Turner's proposals, it is important that the Government are a bit more ambitious than Lord Turner has been in reducing the proportion of pensioners covered by the pension credit, given its means-testing nature. Currently, some 40 per cent. are on pension credit. That figure is supposed to come down by a mere 7 per cent., to 33 per cent., through the report's recommendations. I regard that reduction as insufficient if we are to change this country's savings culture.
I invite the Government, in considering the report's recommendations, to address the issue of consumer protection, which was touched on by the right hon. Member for Birkenhead (Mr. Field). The Secretary of State mentioned in his opening remarks the difficulties that the pension mis-selling problems of the past pose for the culture of saving and for the credibility of the pensions regime. I agree that they undoubtedly contributed to a lack of public confidence in pensions and in saving for retirement. I also agree with Lord Turner that introducing greater simplicity into the pensions industry is a desirable objective, but simplicity does not equal suitability. Means-testing, by definition, gives rise to the need for a suitability test. As we have heard, individuals will need to be willing and able to save a substantial amount of money to be confident of an adequate return in their retirementone that will exceed funds available from the state under the proposed arrangements.
I raised this issue with Lord Turner when he appeared before the Select Committee last month. I asked him whether he had consulted the Financial Services Authority regarding the mis-selling risks associated with his proposed national pension saving scheme. He said:
Consumer protection is, I assume, of considerable concern to all hon. Members. I therefore urge the Government to address the issue when they consider Lord Turner's proposals. We all know of people across all income groups, particularly the lower paid, who, at various stages of their lives, have other commitments and are not in a position to set aside money to save. For those people, some element of consumer protection and advice should be available.
Another problematic aspect of the national pension savings scheme is asset allocation. Who is to decide whether it is appropriate for some individuals to have their assets invested in predominantly fixed income returns, compared with equities? Other hon. Members referred to that earlier. It is difficult to produce a one-size-fits-all investment policy for the entire population. That is why I agree with other hon. Members who recommended a mixed approach. There may need to be some form of state-sponsored provider, but there must a role for private providers to come up with alternative schemes to allow choice. That again raises the question of suitability and advice. If suitability and consumer protection can be ignored, as Lord Turner suggests, is that appropriate Government policy? Does it not leave the Government exposed to the risk of mis-selling? It is a risk that the Government must consider carefully.
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In the remaining few minutes, I shall highlight specific issues relating to the NPSS. In the absence of compulsion, the combination of auto-enrolment and a very low cost offering will replace existing pension schemes. That is not just my view; it is the view of leading consultants in this area, Cazalet Consulting, who were quoted in the Financial Times earlier this week. I shall read one conclusion from their report on pensions profitability, which states that
"the Turner NPSS system, if implemented, would be likely to cause a surge in life company pension plan lapses as consumers move to take advantage of the very low proposed pricing levels. We doubt whether the NPSS could ever work as planned, however, as the best case persistency assumptions used in that report anticipate a dramatic improvement in persistency, which is at odds with the current reality of steadily deteriorating lapse rates."
To put that in layman's language, the current average lapse rate of pension schemesboth individual and group corporate schemesis about 18 per cent. a year. In other words, 18 per cent. of people contributing cease contributing. In the Turner report that rate is estimated to be 10 per cent. a year, and the heroic assumption is made for the NPSS that the lapse rate will fall to 2.5 per cent. a year. That seems an ambitious assumption, to say the least. It raises the question whether employers will put pressure on employees to encourage opt-outs from a voluntary system, and whether it is feasible to achieve adequate investment management skills to manage funds on such a low commission basis. With a 30 basis-point charge, at least 22 per cent. would go in administration costs, which leave only eight basis points
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