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Mr. John Greenway (Ryedale) (Con):
It is a great pleasure to be able to speak in the House at all. In recent months, I have spent so much time in the Council of Europe Parliamentary Assembly that one of my new years resolutions was to try to speak in the House more often. Tonight was the first available opportunity to do
so, but this is an issue of which I have some knowledge as a result of my long association with the insurance industry and my chairmanship of the all-party insurance and financial services group since 1992a long period, throughout which issues relating to pension reform have been high on the agenda, and have often been raised by the industry and pension groups.
I wish to begin by telling the Minister that there is genuine good will among pension providers towards the initiative, and they want it to succeed. In the spirit of the contribution by my hon. Friend the Member for Epsom and Ewell (Chris Grayling), however, may I tell him that good will is not enough? We have to face the fact that the issue of pension reform has dogged successive Governments for 25 years, and it is critical that we learn the lessons of past mistakes. It is not yet clear whether all the lessons of past failures have been fully taken on board in the Bill. When the previous Secretary of State, the right hon. Member for Barrow and Furness (Mr. Hutton), announced just over a year ago, in December 2006, the Governments intention to proceed with the Turner proposals for personal accounts, I asked him two questions. First, who would be responsible for information, advice and explanatory literature under the regime? Secondly, what would be the impact on existing schemes of the new floor of 3 per cent. of contributions? It is absolutely clear from todays debate that the answers to both questions remain unclear, so I want to concentrate on them in my brief remarks.
The issue of information and advice is crucial. People need to make properly informed judgments about how much to invest in their pensions, whether to invest at all, or whether, difficult though the Secretary of State has reminded us it will be, to opt out of auto-enrolment altogether.
Much has been said in this debate about the impact of means-tested benefits, and that is undoubtedly important. However, there will be a deterrent if people think that saving is not worth the sacrifice. We must address the issue, and I hope that the Minister will have something more positive to say in his winding-up speech.
We should be in no doubt that it is difficult to judge in advance whether low-paid employees should stay in the schemes, because there are so many unknown and imponderable factors. What will the contributions during a working life be worth come retirement age? How much income will those contributions then generate? What will annuity and interest rates be like? What will be the impact of inflation at that time? What type of annuity should people buy? Will employment experience and record over a long period enable an individual to build up a worthwhile investment record through their fund? Those questions are critically important, but the answers are extremely difficult to predict in this debate today.
Not only the Government but Parliament and the country are in a Catch-22 situation on the issue of means-tested benefits. It is clear to meand I think this was what the Secretary of State was trying to hint at in his robust exchange with my hon. Friend the Member for Epsom and Ewellthat unless people make provision for their retirement in much greater numbers, pressure to provide help through means-tested targeted benefits will remain. It will be there for all Governments. However, affordability will eventually be the issue. How much
longer can we afford our expectations, given that there will be two employees per pensioner to fund everything on pay-as-you-go? Clearly, we will not be able to.
In a sense, we should not be debating whether the existing structure of means-tested benefits will continue indefinitely but whether the principle and philosophy should be that people must realise that they should save for their own provision because there will be limits on what the state can provide in the future. That has nothing to do with whether one political side or the other wants to be more generous or has a greater feel for low-income pensioners problems; it is the reality that we are beginning to face.
When I first came to the House more than 20 years ago, I thought that that was the only issue. However, today we face what in principle is a good idea and scheme, but one that, if we are not careful, will be wrecked or undermined because of the expectation that the state will always provide in the end. The right hon. Member for Birkenhead (Mr. Field) was exactly right, and I shall come to his point in a moment. We have to address the issue before this Bill leaves the House. Unless people who invest in the personal accounts and choose not to opt out believe that they will be better off as a result, the provision will failfor exactly the reasons given by the right hon. Member for Birkenhead. It is not rocket science. The Help the Aged briefing note makes clear a number of ways in which the issue could be resolved. I urge the Minister to take them on board.
Past initiatives came unstuck when retrospective judgments rightly concluded that people took wrong actions. When those had been subject to advice, compensation had to be paid, at huge cost to the financial services industry. That means all of usall of us contributed to that compensation in one way or other, if only through the reduction in the value of the residual funds of life insurance companies and pension funds.
All that has induced a climate in which providers seek to avoid giving advice. Advice also adds to cost, which undermines return and value. The Government themselves were criticised by the parliamentary ombudsman for the misleading nature of Government leaflets on occupational pensions. The Secretary of State made a comment about sending messages, and that is precisely the point. The Conservative Government in office in the Parliament before I was elected, when I was working in the financial services and insurance industry, actively encouraged people to get out of occupational pensions and into personal pensions. Even the state said that portable pensions were the things to have. However, that turned out to be completely wrong and we are in danger of doing the same thing again.
Ideally, advice should be available, but it is unlikely that it can be given on an individual basis in the current regulatory framework. The all-party group on insurance and financial services keenly awaits the outcome of the Thoresen review on generic financial advice. I am not as pessimistic as some of my hon. Friends, including my hon. Friend the Member for Epsom and Ewell; I think that Thoresen may provide a solution. We need to foster greater understanding of what people do with their pension investments, insurance products and so on. They should be absolutely clear, but for that the detail must be right.
My hon. Friend made a point that concerns me. There is an opportunity for people, without advice, to put lump sums into personal accounts instead of, with advice, putting lump sums into other investments that may not be pension investments at all. That concerns me.
I shall deal briefly with my next point, because my time is going. The Secretary of State said that most employers were unlikely to reduce existing contribution levels. I would like to share his optimism but, as the right hon. Member for Birkenhead clearly said, the future is less certain and if employers are under financial pressure, they may reduce them.
However, my greater concernand the point that I made in my intervention on the Secretary of Stateis the continuing demise of defined benefit provision. There may be reason to believe that the haemorrhage has been stemmed for the moment. However, the signs are crystal clear: remarkably few young workers in the private sectorour childrenwill enjoy a final salary or defined benefit pension. That is an appalling shame, because such pensions were the bedrock of employment for the generation that preceded ours and our generation. What is the result? Comparisons with the public sector are already putting pressure on the retention of defined benefit schemes, our parliamentary pensions included. In defined benefit schemes, the employer takes all the risk; in defined contribution schemes, the employee takes all the risk. There must be a middle way. The Association of Consulting Actuaries proposal may not be perfect, but I say to the Minister that the Bill is an opportunity for further reform. Conditional indexation works in Holland; I am about to get married to a lady from Holland, and I recommend all things Dutch to the Minister.
Time does not allow me to address the many other issues. I agree with all that has been said about the group personal pension problem, which must be resolved. However, there is a lesson there as well. I believe that that problem is an unintended consequence of European Union rules on distance selling. Nobody thought that the rules would have that effect when they were approved in Statutory Instrument Committees. Similarly, we need to be clear that there will not be unintended consequences from the existing provision for the new personal accounts, the personal account delivery authority structure and the regulatory framework.
If good intentions and an aspiration for consensus and progress were sufficient, we would not be in this position. We have one last chance to get this right, and if we fail this time, we fail a whole generation and beyond of future pensioners. As many colleagues who know me are aware, I am an optimista glass-half-full person, not a glass-half-empty personbut the half-empty glass needs to be filled in Committee; otherwise, I share the concern of the right hon. Member for Birkenhead that we could stare further failure on pensions firmly in the face, not now, but in a generations time.
Miss Anne Begg (Aberdeen, South) (Lab):
I, too, am an optimist and a glass-half-full person; that is why I welcome the Bill. Some of the tone of the debate so far
has suggested that there has been a lot more criticism than one gets a sense of from all the briefings from various organisations in the financial sector and charities that work with older people. In most cases, those briefings welcome the principles of the Bill.
As the Secretary of State said, the issue of pensions is not about old people; it must be a young persons issue. For the first time in this House, the Bill looks far into the future, dealing with how future generations will make provision for the pensions system. As my hon. Friend the Member for Nottingham, South (Alan Simpson) said, this is about demographics and biology as much as anything else. As the hon. Member for Ryedale (Mr. Greenway) pointed out, we must make it easier for people to save for their retirement and make their own contributions to the pension pot. If the demographics determine that more and more people are not paying into their own pension provision, the state will not be able to deliver anything, no matter whether one believes that the state pension should be linked to earnings, that it should exist at all or that it should be uprated. We must ensure that it is as easy as possible for future generations to pay as much as they possibly can into their pension.
I want to concentrate on two areas that the Government have to get right in order for the system to work: first, preventing any kind of levelling down; and secondly, getting the costs right by ensuring that they are as low as possible. Several hon. Members have mentioned their fear of levelling down. Personal accounts will work only if they are targeted at the particular audience that they are aimed at, which is not the 40 per cent. of people who already have occupational or private pensions, but the 60 per cent. who have no extra provision other than that which they pay through national insurance contributions or the state second pension. The Bill will have done nothing if all it does is transfer people out of very good or even quite reasonable occupational pension schemes and into personal accounts. The scheme is not for them. We must be clear that the Government are not saying that all occupational pension provision should be delivered through personal accounts, because those who are in good occupational schemes with contributions of 16 per cent. or more are able to deliver up to two thirds of their earned income as their retirement income. Personal accounts must be a floor, never a ceiling. Eight per cent. is only half of 16 per cent. I hope that once the system beds down in the years to come, if the consensus is right and this is the way forward for pension provision, Governments of the future will try to raise the contribution level beyond 8 per cent. For the time being, however, it must be seen as a floor, and it is clearly not aimed at employers who already provide good occupational schemes.
The scheme will be aimed at those who are on low or medium incomes. A large number of the people who are missing out on occupational schemes are women. This will improve the coverage that women have in terms of pension provision. The whole system will fail if few people enrol in the new personal accounts and the savings ratio does not shift at all. We need more people to enrol and to make higher contributions than at present.
Mr. Graham Stuart:
The real failure of the system would not be the scenario that the hon. Lady paints, but one where many women, who are often part-time
workers with broken employment records, contribute to the scheme when they can least afford it because they are auto-enrolled and end up at the end of their lives no better off as a result. That would be the true disaster, not the fact that yet another Government initiative, like the stakeholder pension before it, has failed, because we are well used to that with this Government.
Miss Begg: Obviously the hon. Gentleman can see into the future far better than I can. We do not know what kind of Governments will come in, whether they will continue with any kind of means-testing or whether the pension credit will survive. We are looking up to 50 years into the future, not at the next 10 years or so. As we do not know what will happen, it must be right that we encourage young people to save as much as they possibly can today in order that the scenario that the hon. Gentleman describes does not happen in future.
Whatever the system with regard to the state pension, if we are dependent on all pension provision in future being down to the state, means-testing will grow, not lessen. To ensure that means-testing develops a much narrower focus, we must encourage more and more people to invest in their pension today so that when it comes to retirement they will already have lifted themselves out of any kind of means-testing. People do not know what their employment record is going to be. Since the second world war, there have been huge changes in the working patterns of women. The Bill moves us ever closer to individual entitlements and away from the old dependency culture that existed under the married persons allowance and the basic state pension. Pension provision and the working lives of women and men have changed so much in the past 60 years that I foresee that in the next 10 or 20 years they will change a huge amount more. The basic message that we have to get over is that it is important that individuals who are working today continue to save in an occupational scheme so that they will have more than just what the state is able to provide through the basic state pension.
It is important that we understand that this is about deferred wages. Many people have not opted into some of the very good occupational schemes even when they have not had to pay anything themselves. I remember speaking to one young man who had lost out on 10 per cent. of his wages because he had not got around to signing the form, although he was not even expected to add anything to his employers contributions. Compulsory opt-in is very important in getting over that inertia. We must ensure that there is auto-enrolment and that people do not have to make such decisions. We must also bear in mind low earners who have multiple jobs. As the hon. Member for Beverley and Holderness (Mr. Stuart) said, they are mostly women who have to find some way of increasing what they can contribute. I can understand why there is currently a contribution cap of £3,600it is obviously because the Government do not want people who are sitting in fairly good schemes to move their contributions across into personal accounts, which are not aimed at that market. I hope that once the scheme beds down, the contributions cap can be lifted.
The cost must be as low as possible. I would like it to be as low as three basis points. People say that 1 per cent. does not sound very muchit does not, but that
was probably partly the death knell of the stakeholder pension. It is 1 per cent. not as a flat rate of contributions but 1 per cent. of the pension pot; once someone has built a big pot, 1 per cent. becomes a viable amount to be taking out of it every year. I hope that we can get it down to 0.5 per cent., but if possible it should be even lower. If the scheme is going to work, it is crucial that costs are kept as low as possible.
Bob Spink (Castle Point) (Con): It is a pleasure to follow the hon. Member for Aberdeen, South (Miss Begg). She is right to mention the special problems that women face with regard to pensions, but perhaps that is not a debate for tonight.
Giving pensioners a fairer deal, which means a greater share of the nations wealth, is long overdue. I warmly congratulate the Government on the pensions review and their response to the Turner report. However, let me set the Bill in context. The incoming Labour Government in 1997 took over one of the strongest pension systems in Europe, which is now one of the poorest. They committed an appalling robbery on peoples private pensions, which still costs pensioners some £7 billion every year and has added to the downfall of many schemes. One of the most damaging and surprising failures of the Labour Administration since 1997 is that their policies have led to a fall in the share of British national wealth that goes to pensioners. Frankly, I expected better from Labour on that.
Pensioners see £25 billion thrown at the Northern Rock problem and wonder at the absence of the financial constraints that the Government always claim to be under when pensioners need help. What about the Governments failure on the Equitable Life debacle and their breach of trust on police pay? I put it to the House that this is no time for politicians to say, Trust me, Im a fairly straight sort of guy, as Mr. Blair once infamously did. It is time to get all-party consensus on a decent system to take politics out of pensions and to take more pensioners out of relative poverty. It is particularly galling to see, as we do, our pensioners share of Britains wealth falling, when they built Britains institutions and national wealth after they won national and international security in world war two. Hon. Members do not see things in that way, but pensioners do. It is against that legacy that peoples trust in Government policies, particularly on pensions and savings, must be viewed.
I acknowledge and welcome the fact that the Government have followed the Pension Commissions recommendations on the broad scheme design. While the Bill needs fine tuning, I support its key objectives to encourage more people to save in workplace pension plans and to create a new system of personal accounts.
I turn now to the specific principles of the Bill. It is right legally to force employers automatically to enrol their eligible employees. The Government should guarantee the quality of those workplace pension schemes and, through the Bill, deliver a strong framework for the introduction by 2012 of well-governed personal accounts.
The scheme must be flexible and avoid the baffling complexity that dogs the current pension saving systems. That will help to target specifically the needs of below-average earners, thereby ensuring the highest economically sound levels of participation. Savers must not lose because they have saved. That issue must be addressed.
It is crucial to ensure that the interaction between means-tested benefits and personal accounts does not lead to benefit losses and thereby act as a disincentive from saving for low earners. I accept that if it is designed correctly the scheme can give millions of low to moderate earners first-time access to secure and worthwhile workplace pensions savings with decent and affordable contributions from their employer. I believe that the 3 per cent. level given in clause 18 is right at the moment. There must be stability on that point, at least in the medium term if not for ever. As the hon. Member for Aberdeen, South and the right hon. Member for Birkenhead (Mr. Field) pointed out, the Government must find a way, if possible, to prevent employers from reducing the current contribution levels.
Clause 53 will enable the Secretary of State to set an annual contribution limit for personal accounts. I believe that £3,600 has been mooted. That may be inadequate; the figure should perhaps be higher. In addition, there should be flexibility so that individuals can, from time to time, pay in lump sums when they can afford to, if it is financially sound for them to do so and providing that they receive proper independent advice. The Government should find a way to ensure that they do. That would help people who start saving for a pension later in life, and who need to make up for lost time. Those people represent a significant number of workers.
I agree with Help the Aged, Age Concern and the Peoples Pensions Coalition that there should be a distinct lifetime lump sum limit alongside the annual contribution limit. That would allow people to pay money into their pensions from small inheritances, divorce settlements, redundancy payments and other windfalls. I do not see how that could be wrong provided that the peopleparticularly low earnerswho chose to do so received proper advice. We should also consider the transfer of limited existing pension pots into and out of personal accounts to help people with various small pension funds. Again, that is not an unusual situation.
The Government must deliver on consolidating peoples existing state pensions, including the state earnings-related pension scheme, graduated retirement benefit and the state second pension. We must enable people to see more transparently what state pension rights they have accumulated thus far, which should help to encourage further pension savings.
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