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Members on both sides of the House have pointed out that we are living longer, that this is not so much a political issue as a biological one, and that during our working lives we will have to contribute more to our pensions pots if they are to provide us with meaningful pensions throughout our retirement years. However, if we could turn the clock back to 2002 and double the amount of money that went into the UK pensions industry, we would simply have doubled the amount of
money that was lost. That is because we were locked into a pensions framework that had become obsessed with the pursuit of equities. More money was chasing equities than there was meaningful value in the equity market.
It was a certainty in the pensions industry that the bubble was going to burst. The only gamble was knowing when it would happen. When it burst, what disappeared was the real value of people’s lifetime savings, and the contrast between our position in 2002-03 and our position 40 years earlier is stark. In 2003, 71 per cent. of pension savings were invested in equities, and 17 per cent. in UK national Government bonds. In 1962, by comparison, 51 per cent. of pension savings went into UK Government bonds. Those savings went into public investment in our infrastructure, but the truth about today’s national requirements for reinvestment in infrastructure is that we would not need a single private finance initiative in the land if we returned to the prioritisation of meaningful investment in current and future infrastructure needs, rather than pursuing speculative activities on casino markets that will collapse at some point. The disappearance of that sanity and safety-net provision is a tragic weakness—an Achilles heel—in the framework of pension thinking.
We have to restore confidence in our ability to direct our pension savings into secure pensions that will deliver not only pensions sufficient for people to retire on but quality-of-life dividends every year rather than speculative dividends in pursuit of goods that may, or may not, have any real value in the global marketplace. We must tackle, too, the issue of people whose pensions have been stolen. I am grateful for the Secretary of State’s offer of a further meeting, because every time that Government claims are tested by independent judges in courts in the UK or in Europe or by the ombudsman, they do not stand up. We must bring some honesty to our claims because, so far, that has been missing. It is not true to say that the financial assistance scheme will deliver 80 per cent. of the core pension, because in practice the core pension deducts all inflation linking that workers were promised, it deducts the tax-free lump sum that they were promised, and it deducts the revaluation that they were promised. It also deducts many benefits to which widows were entitled, it deducts ill health and early retirement benefits; and it ignores the retirement age that was built into the scheme. Once all those entitlements have been deducted, 80 per cent. of the lowest figure is taken and 22 per cent. of tax is deducted at source. In reality, therefore, the 80 per cent. claimed figure becomes much less.
In practice, that has to be tested against the experience of those who are entitled to full payments under the financial assistance scheme. Of the 125,000 people whose pensions were stolen, 10,000 have reached retirement age, of whom only just over 1,000 have received anything. So far, payments amounting to £4 million have gone to pensioners, but £5 million has gone to the people administering the scheme. It is barking mad to run a scheme if we end up paying less to contributors than to those who are charged with its administration. The other place has made sensible, constructive amendments to the Pensions Bill, which I
genuinely hope that Members on both sides of the House have the courage and wisdom to support when the Bill returns to the Commons.
This is not just about the 125,000 pensioners whose pension contributions have been stolen. We have to restore confidence in the pensions system. If future generations of young people are to believe in the security of the system and contribute more to the collective pension pot it is important that we restore credibility. At the moment, their parents and grandparents tell them, “It’s a mug’s game.” The kids who are now entering employment and whom we are asking to contribute more have direct experience from their own homes, families, streets and communities, where people are saying, “Don’t do that. I did that all my life, and what happened? They stole it. So if you want to be sensible now, just go ahead and spend it. You’re a fool if you sign up to a system that doesn’t give guarantees that the money you think you’re putting aside as savings will actually be there for you when you need it—when you come to the end of your working life.”
This issue is therefore as much to do with confidence in our future pension schemes as it is to do with justice for those who have been lifetime contributors to previous schemes. I do not seek to imply that the Government were responsible for the losses, but we were responsible for setting the rules of the game and leaving people with the belief that their pension contributions were guaranteed when they were not.
When we return to this matter, I hope that we will not only get caught up in the to and fro of debate and exchanges of half-truths about pension commitments, but that we will also have the courage to address the inequalities and injustices that currently exist and set out a framework of visionary changes in pension provision that will allow the young and the old to stand proud and to endorse what we claim to be doing.
8.51 pm
Mr. David Laws (Yeovil) (LD): I am pleased to be able to contribute to the debate, and I should like to start by welcoming to their posts the new Secretary of State and the Minister of State with responsibility for pension reform, the hon. and learned Member for North Warwickshire (Mr. O'Brien). In all parts of the House, there is a view that they are taking over from two very competent predecessors who helped to forge a pensions consensus on some aspects of pension reform; I do not say that without qualification, but I hope that the pensions consensus will last. It illustrates the political skill of both predecessors that one managed allegedly to say very rude things about the former Chancellor and still to be included in his Cabinet now that he is Prime Minister, while the other is now a Secretary of State at an early age. I wish the Secretary of State and the Minister all the best, as I do the new Conservative spokesman, the hon. Member for Epsom and Ewell (Chris Grayling). He comes to his role with a reputation as a parliamentary Rottweiler; he has had clashes in the past, and perhaps we will witness more in the future.
I also wish all the best to my successor. Members will no doubt have been closely following today’s Liberal Democrat reshuffle. My hon. Friend the Member for
Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) will take over from me from tomorrow morning. I can therefore make this speech rather more reflective in tone than it otherwise might have been, and more forward-looking in content without too much political knockabout.
One of the achievements of the predecessors of the new Secretary of State and Minister was to have forged the pensions consensus, along with Lord Turner and his excellent commissioners. How far that moved forward pensions policy is not to be underestimated. It required all three major political parties, and the minority parties, to accept the following changes to pensions policy, none of which was in its entirety in our 2005 manifestos: the increase in the state pension age, which was politically sensitive and economically important; the permanent restoration of the earnings link; the introduction of personal accounts and the acceptance that the state’s role in second-tier provision would be lessened; the introduction of automatic enrolment; and the agreement on compulsory employer contributions. All of them are major changes, and I hope that they will last. They were the reasons why we backed the Pensions Bill, notwithstanding the concerns we have about the detail of the reforms and our genuine worries that in spite of the agreement that we have, the pensions proposals might not prove to be as successful in practice as Ministers hope.
Today, rather than going back over some of the arguments about who did what in 1997 and 1998, which—I agree with the Secretary of State—are not the explanation for the downturn in occupational pensions and, in any case, do not seem to be relevant in terms of the implications for pension policy now, I wish to highlight three issues of future pension policy that should be of concern and interest to Ministers in the future.
The first, and easiest to deal with, is the compensation for those people presently in the financial assistance scheme, which the hon. Member for Nottingham, South (Alan Simpson) mentioned. I was pleased to hear the comments by the Secretary of State today, although he has had only a short time to reflect on these matters. I hope that in the cautious and constructive way in which he made his comments about the financial assistance scheme and the Pension Protection Fund, he is signposting the fact that he will take the initiative in that area and bring to an end the long period, lasting a couple of years, in which the Government have ended up making major concessions, usually as a consequence of external pressure from the other political parties and their own Back Benchers, the courts, the parliamentary ombudsman, the Public Administration Committee or—at the moment, at least—the other place. All that has meant not only that the Government have extracted the minimum possible political benefit from the largest possible economic concessions, but that those people who are waiting for decent and fair compensation have had to wait a very long time. As the Secretary of State will probably know already—and if he does not, he will find out in time—those waiting for a fair settlement feel great bitterness.
It is felt to be almost inevitable that the Government will reach the PPF level of benefits to which we all aspire. Even in their own terms, they have gone almost
three quarters of the way there through what has already been allocated. Many of us hope that the Government will, in the next couple of months, go the whole way. When we look at the remaining cost of delivering the rest of the reform, it is—especially over a period of 50 or 60 years—modest and affordable. The Secretary of State will already have noticed that the figures that his Department is using do not include any reduction in the cost of means-tested benefits, or the revenues from taxation that would reduce the costs. That is the first issue, and I hope that we will hear something positive on it from the Secretary of State.
The second issue is in many ways the most important for the success of the Government’s reforms. I have been teased on this point by the hon. Member for Eastbourne (Mr. Waterson) who has been a Front-Bench spokesman on this issue for several years. He teased me about the potential parallel consensus between the consensus to which we are signed up in the House and those areas of disagreement that we have constantly flagged up. I said to the hon. Gentleman the last time he raised that point that I entirely agree with him that there is a parallel consensus outside this place. The Secretary of State and the Minister will also discover that. Although most hon. Members and, to some extent, those outside think that the main planks of pension reform are sensible, they also think that the excessive reliance on means-testing, which is still part of the system, will be a major problem for the Government.
The existing generation of pensioners also feel that pension reform is irrelevant for them, because the earnings link will not be restored until 2012 or 2015. By that time, as many as a third of the existing pensioner population will no longer be with us, and the Secretary of State will discover that pensioners in the real world outside this place do not think that those “great” reforms are nearly as exciting as we do. I hope that the Secretary of State will not give up on the idea of persuading the Chancellor, no doubt at an appropriate moment in the electoral cycle, to consider bringing forward the restoration of the earnings link, because most people would regard that as sensible. It would also be very popular.
Mr. Weir: I am very interested in what the hon. Gentleman is saying. Although the restoration of the link is valuable, does he agree that it does nothing to improve the value of the basic state pension? Many people, especially those on low wages, rely on the basic state pension, but its value has fallen since the link was first broken by the Tories back in 1980.
Mr. Laws: I entirely agree and, as is always the way with such interventions, I was about to develop precisely that point.
People are very bitter that the introduction of the earnings link will be delayed for so long, as that will mean that the state pension will continue to wither even further in relation to earnings. However, the problem is that we are building from a very low base: one suspects that the Chancellor signed off the deal only because the figures for the cost of state pension reform show that, even in 2020, we will be spending on the state pension architecture a lower share of gross national product than we spend today.
The price that the Chancellor extracted is that we have a very low basic state pension, with the result that everyone who relies on pension credit and means-tested benefits will be in poverty. I hope that the new Secretary of State will not believe his Department’s spin about pensioner poverty. It is true that it has declined considerably since 1997, but it is also true that Britain is one of the worst countries in the European league table when it comes to our residual level of pensioner poverty. The EU figures published by the Department in a written answer earlier this year show that almost a quarter of our pensioner population still lives in relative poverty.
I hope that the Secretary of State will continue the process of pushing down pensioner poverty. In contrast, the formal position of the Government under his predecessor appeared to be that the decline in pensioner poverty had to be consolidated, but that it did not need to be taken further.
A consensus does exist outside the House to the effect that, because we are building on such a low basic state pension, we may end up undermining the personal accounts that are so vital to pension reform. When the Secretary of State’s predecessor announced his major pension proposals and the great consensus on pensions, he said to many people, both publicly and privately, that everything he was doing in respect of the state pension was designed to make personal accounts work. He added that the success or failure of all the reforms would be determined by whether personal accounts could be made to work. However, the fact that we are building on a very low basic state pension means that almost 50 per cent. of the people who are to be the target audience for personal accounts will face means-testing—for pension credit and housing benefit, and for all the other means-tested benefits.
The promise offered by Lord Turner was very attractive, and the former Secretary of State offered it too, until he realised what he was saying and the size of the liabilities that he was building up for the future. The promise was that people would get back £2 for every £1 that they put into their personal accounts. It was a no-brainer, suggesting that everyone should have a personal account, but the promise simply cannot be delivered. It may be that some people—perhaps 10 to 20 per cent.—could end up not getting a decent return and even losing money if they go for a personal account, while a significant number will get returns of between £1 and £2 only for every £1 that they put in.
The people involved in personal accounts are likely to be on very low pay already, probably with high mortgage and credit card debt. Many, and especially the women among them, will be unable to predict their future work patterns, which means that they will not be confident about whether personal accounts are right for them. The problem for the Government is that, if they describe the risks in too much detail, the take-up of personal accounts could be very low, whereas if they do not describe the risks in enough detail they may end up being accused of Government-sponsored mis-selling that will come back to haunt us later on.
The answer must be to increase the basic state pension, but I suspect that Ministers will try to introduce changes such as trivial commutation to offset
some of the effects of means-testing. The result will be an extremely complex system, and the Pensions Policy Institute has said that the Government will also have to spend something like £500 million on changing the rules. The total could come to more than £1 billion, and all it will achieve is that less than a quarter of the people who might otherwise have been hit by means-testing will be removed from its effects. So solving the problem by changing the rules and allowing people to take lump sums rather than affecting their means-tested benefits could be messy, could dissuade people from saving and could undermine the personal accounts.
In spite of the consensus on the major elements of pension reform, I cannot predict whether personal accounts will have been a success when we look back in 10 or 20 years. All of us know that in the great pensions consensus of the 1970s, there was not even a Division on the state earnings-related pension scheme. The Labour Government pushed it through and the Conservatives did not move on it. Only a handful of people were in the House. Only a few years later, because the scheme had not been well worked out, the whole thing unravelled. Our fear is that that might happen to personal accounts.
The other big concern is about occupational pensions. There is an increasing gap between the private sector and the public sector, and there is a bitterness about it. The right hon. Member for Birkenhead (Mr. Field) said in evidence to the Select Committee that it was about time that hon. Members on both sides of the House stopped rehearsing our prejudices about public sector pensions and started to focus on the substance of public sector pension reform. After all, many public sector pension schemes are affordable; others are not. Some, usually low-paid, public sector workers have lousy pensions. Usually higher-paid public sector workers, including MPs and judges, have good pension schemes.
We have argued that we ought to have a Turner-type independent commission to do what the Turner commission did and put the evidence in the public domain so that we can reform public sector pensions in a sensible, managed way rather than ending up reforming them in a hurry in five or 10 years because they have become unaffordable. We are watching carefully and so is the Conservative spokesman. Ministers know that the cost of public sector pensions is going up all the time. The Government have been holding back the latest set of statistics, presumably because the discount rates on the cost of public sector pensions will inflate the figures.
I hope that, if the Government are trying to look to the Turner consensus as a basis for pensions reform, the Secretary of State will look at what Lord Turner said on 11 June in another place, when he was critical of the way in which the Government had handled public sector pension reform. He said:
“the deal that the Government reached with the unions in 2005 is inadequate and will need to be revisited”. —[ Official Report, House of Lords, 11 June 2007; Vol. 692, c.1559.]
He has mentioned before, publicly as well as privately, that this is not just a right-left issue. It is much more complex. Many low-paid public sector workers get a bad deal. Many of those people who are going to join public sector pensions in the future, who have had a
rather bad deal as a consequence of the way in which the unions have negotiated, will suffer. Women who have many career breaks and are existing members of public sector pension schemes may lose their right to retire at 60, whereas men who stay on will be able to keep it. There are all sorts of aspects which are not simple issues of right and left.
The final aspect of occupational pensions that worries me a lot comes back in some ways to the point that the hon. Member for Nottingham, South made. With the exception of a lot of well-paid people in the public sector, including MPs, an immense risk transfer is going on in pensions. In the past, many of us could rely on public sector pension schemes, private sector pension schemes and state pension schemes that delivered not just the basic state pension but some kind of earnings-related pension. That meant that many not very financially literate or affluent people could rely on a second pension, often from their employer. In the future, we shall be asking many of those people to provide for themselves through a defined contribution scheme that few of them will understand, will involve a lot of market risk and will be uncertain in relation to the impact of means-testing. We are already seeing a levelling down of employer contributions and an axing of salary-related pension schemes. There is a real risk as a consequence that we will have a generation in 20 or 30 years retiring on really inadequate pensions, including those people who will be saving in personal accounts, who will be saving nothing like enough if they are saving at the default extremely low rates, which will produce inadequate returns for people.
The hon. Member for Nottingham, South was right to say that much pension provision in the past was based to some extent on employers’ perceptions of their responsibility. Given the way they have suffered recently from what has happened to pension schemes and the enormous amount of money they have had to put in, they will understandably be happy to wash their hands of that responsibility. Many of them will be happy to reduce their contribution rates to the personal account level, to as little as they can get away with, which will be devastating, especially for people who will have to rely on personal accounts, because they will probably be the least able to manage their finances.
I hope that, as well as making personal accounts as accessible and easy to use as possible, and not prone to employers’ dodging, the Government will talk to businesses and others about what they can do to maintain good occupational schemes—perhaps not final salary schemes, but salary-related schemes. All is not necessarily lost for those schemes, but there is a risk that the introduction of personal accounts will lead to a further stampede out of occupational pensions in a way that we may regret in the future.
The predecessors of the Secretary of State and the Minister had some major achievements, on which I hope their successors can build, although in some senses they have been left with the difficult bits of turning some good planks of reform into something that will actually deliver the goods. I wish them all the best in that.
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