Memorandum submitted by Age Concern




Pensions Bill


1. Age Concern

1.1 Age Concern is the UK's largest organisation working for and with older people to enable them to make more of life. In England, we are a federation of around 370 independent charities which share the same name, values and standards.


1.2 Age Concern England would be happy to provide supplementary oral or written evidence to the Public Bill Committee. If further information is required please contact Parliamentary Officer, Angela Cheyne, on or 020 8765 7299 or Government and Parliamentary Affairs Manager, Hilary Evans, on or 020 8765 7509 who will contact the Incomes Policy Manager.


2. Summary

2.1 Age Concern England is delighted that the Government has brought forward the second Pensions Bill arising from Lord Turner's Pensions Commission recommendations. This is a positive package of reforms that will change the face of retirement saving and finally make pension saving worthwhile for the majority. We strongly welcome the introduction of auto-enrolment into a qualifying pension scheme and the new system of personal accounts. The Bill will give hundreds of thousands of people, including many women, access to a decent pension for the first time. Auto-enrolment and the minimum employer contribution will greatly improve the retirement prospects for many people.


2.2 The principle of auto-enrolment for all eligible employees into a work place pension

must be maintained and there should be no loopholes that would enable employers to use group personal pensions to avoid auto-enrolment.


2.3 The Personal Accounts Delivery Authority's (PADA) governing principles should not restrict its ability to carry out its core function of providing low cost, accessible, personal accounts.


2.4 We welcome PADA's Members' panel - it should have sufficient resources and access to information to carry out its work effectively.


2.5 It is essential that people benefit from saving - good quality information and advice about pensions and savings should be available to everyone and the interaction between means tested benefits and personal accounts should be carefully considered.


2.6 To meet the needs of members with low and interrupted earnings there should be a lifetime contribution limit alongside the annual limit.



3. Group personal pensions

3.1 Clause 3(5) creates a power to make regulations that would exempt employers from the requirement to offer personal accounts if they offer group personal pensions (GPPs). Current European law means that it is not possible to auto-enrol into GPPs and this could fatally undermine both the Government's pension reform and existing high-quality defined benefit schemes.


3.2 Without auto-enrolment, some employers may try to avoid having to pay pension contributions for their employees by setting up a GPP and dissuading employees from joining. We could end up with a system similar to the model that was tried - and failed - with stakeholder pensions, where 82% of employer-sponsored stakeholders remained empty shells two years after their introduction[1]. We understand that one proposal is to give employers a set period to reach an 80% participation rate, but this will be difficult and expensive to monitor. For example, how would a staff member who joins for two months be classed? There are some people who would not benefit from a personal account, and having a target rate could incentivise employers to push people into the scheme irrespective of its suitability.


3.3 Even if participation is measured across all employers, rather than by individual employer, some employers may choose to move from occupational schemes to GPPs, rather than incur the cost of running auto-enrolment and regular re-enrolment. It could also mean that the financial services industry is strongly incentivised to sell GPP products to employers irrespective of the suitability of the scheme.


3.4 Age Concern's calls:

The Bill should be amended so that there is no future exemption for employers who offer personal pensions plans without auto-enrolment.

The financial services industry should develop personal pension plans set up as master trusts that would allow auto-enrolment.



4. Personal Accounts Delivery Authority Principles

4.1 As currently drafted in clause 62, the principles to which PADA must have regard could be very restrictive, and may conflict with each other. In particular, there is too much emphasis on minimising the burdens on employers and other pension schemes, and not enough on meeting the needs of personal accounts members. The principle that cost should be minimised is very important and should remain, but choice and cost are not the only factors in assessing scheme quality. The scheme will also be judged on how far it meets people's needs.


4.2 We have particular concerns about the following principles:


Participation in qualifying schemes should be encouraged and facilitated

An individual's decision whether or not to join a pension scheme should only be taken in the context of his or her overall financial situation, and there may be some people who should be 'discouraged' from saving through a pension. We agree with the Thoresen Review interim report that it does not make sense to separate out personal accounts from pension planning in general. PADA should be required to provide good information about personal accounts but not to promote pensions in general, and as drafted this suggests that members of the scheme would have to bear the cost of promoting all qualifying schemes, including workplace pensions.


Any adverse effects on qualifying pension schemes......should be minimised

The impact of personal accounts on good-quality existing pension schemes should be minimised, but this should not be a role for PADA. If there is an adverse effect - and in particular a reduction in employers' contributions to existing schemes - PADA itself is unlikely to be in a position to mitigate it, but the principle would require PADA to continually assess itself against other pensions in the market-place, driving up administration costs and the costs to scheme members.


The preferences of members and future members should, so far as practicable, be taken into account in making any provision about investment choice

There is considerable danger in widening investment choice to meet every preference. The evidence is that too much choice confuses people[2] and it is also likely to increase the cost. If investment choice is permitted, any extra cost should be 'ring-fenced' and borne by the minority of people who want to make their own choices, not by the members of the default fund.


4.3 Age Concern's calls:

Clause 62 (2) (a) PADA should be empowered to inform members and future members about personal accounts, and to facilitate membership where appropriate, but not required to promote pensions in general.

Clause 62 (2) (c) referring to the adverse effect on the pensions industry should be deleted.

Clause 62 (2) (e) (preferences about investment choice) should be replaced by a requirement to meet the needs of members and future members.

An adequately funded generic financial advice service should be established to help individuals make financial decisions in general, including decisions about retirement planning.



5. Consultation of Members' Panel

5.1 The Pensions Bill makes provision for the establishment of a Members' Panel and Employers' Panel to represent the interests of those groups to the scheme trustees (Clause 52). Age Concern welcomes the establishment of both of these panels and believes that the involvement of members' representatives in the future development of personal accounts is vital to ensure they remain accessible and appropriate to the saving needs of the public. However, Age Concern is keen that the Members' Panel should have adequate resources and access to information to allow them to challenge the activities of the trustees, similar to the rights given to the Financial Services Consumer Panel under the Financial Services and Markets Act 2000. The Employers' Panel will certainly have adequate access to resources provided by the pensions industry - it is important that the Members' Panel has similar access to resources, including payment for members' time, a research budget and a right to receive information from the scheme trustees and the DWP. By failing to put these provisions on the face of the Bill, the Government raises the possibility that in the future the power of the pensions industry will have a disproportionate effect upon PADA's decisions and that future consultations may not adequately present the views of personal account holders.



5.2 Age Concern's calls:

The Members' Panel should have the right to pay members for their time, the right to adequate staff resources and a research budget - allowing them to raise issues of concern with the scheme trustees on an informed basis.

The Pensions Bill should be amended to grant the Members' Panel the right to call for information from the scheme trustees and from the DWP, the right to make recommendations to the trustees and, if the trustees do not act on the recommendation, the right to a statement in writing of their reasons for disagreeing.



6. Ensuring it pays to save

6.1 For the majority of people contributing to a personal account or another type of occupational pension will help provide a higher standard of living in retirement. However there are concerns that some people may find that they are little better off from saving because of the interaction between means-tested benefits and private provision. Age Concern believes this is an important issue but not a reason to delay or reconsider the policy of auto-enrolment into a personal account or other type of occupational pension. Instead the Government should look at the policies that need to run alongside pension reform to ensure saving pays. We would like to see a much higher state pension so that fewer people need to rely on means-testing. However if this is not currently an option we believe that the risks of inappropriate saving can be minimised through: the provision of good personalised information and guidance; a review of the trivial commutation limit; and a review of rules and disregards in means-tested benefits.


6.2 We support the approach set out by the interim report of the Thoresen Review which suggests a service open to all providing information and guidance on financial matters including retirement planning. We also agree that this should be provided through a 'hybrid model' with a national scheme that builds on and complements existing national and local provision. Generic advice would not recommend that people opt out or stay in a pension scheme but could help people look at their financial situation broadly and make appropriate decisions about saving.


6.3 Saving would be more worthwhile for people who have limited opportunities to build up pension funds if the amount of fund that could be taken as a lump sum (the trivial commutation limit) was increased and/or a modest amount of private pension was disregarded for means-tested benefits and/or savings disregards were increased. There is no one simple way of reforming current systems and there are trade offs that need to be considered but more that can be done to explore options.


6.4 We have produced a paper which explores these issues in more detail[3]. We believe it is essential that people can feel confident that they will be better off from saving and that messages that it does not pay to save do not deter the vast majority of people who will benefit from contributing to a pension.


6.5 Age Concern's calls:

The Government should commit to setting up a review of options to ensure saving pays. This would include modelling of numbers of people likely to be at risk; an analysis of the range of options and consultation with interested stakeholders.



7. Contribution limits and the impact on decumulation

7.1 Currently clause 53 of the Pensions Bill makes provision for an order to establish an annual limit on the amount of money that can be contributed to a personal account in any tax year. In addition, Age Concern believes that there should be a separate lifetime 'top-up' allowance that would allow people to make occasional modest lump sum payments into a personal account in addition to their annual limit. We therefore welcome the power that clause 53 (3) gives to provide for more than one contribution limit. A lifetime limit could be subject to an order but the limit need not be high - perhaps a multiple of three or four times the trivial commutation limit. There are two main reasons why we think this is important.


7.2 Firstly, it would enable people who have irregular work patterns, for example having taken time off to care for an older relative, to catch up their payment contributions if they suddenly had a small windfall, for example an inheritance following a bereavement. This change would particularly help women and carers who are often have time out away from paid work or periods of low income due to caring responsibilities.


7.3 Secondly, it would help to make the process of decumulation - turning the fund built up into a pension on retirement - much more effective for lower-income savers. Currently, people with small pension funds get poorer value on the annuity market, with lower rates and a restricted choice of providers. There are only four providers offering annuities on the open market for a purchase price of 5,000, compared to ten providers for a purchase price of 50,000[4]. It is possible to take the whole of a small pension fund as a lump sum (trivial commutation), but this is not an option for people who have several small pension funds adding up to just over the trivial commutation limit (currently 16,000). They should be enabled to 'top up' their pension fund in order to be able to buy a better-value annuity.


7.4 The Government has stated that transfers between personal accounts and other schemes will be prohibited in the short-term and reviewed in 2017. While we understand why the Government has supported a ban on transfers we believe there is a strong case to allow small transfers - for example in order to ensure that people are able to consolidate small funds from pension savings and make clear calculations about how much money they will have available to them when they retire. Particularly for those whose personal circumstances have changed, for example as a result of divorce, it is important to retain flexibility in the system of personal accounts by allowing small fund transfers. Money transferred into a personal account could count towards the lifetime limit.


7.5 Age Concern's calls:

A modest lifetime contribution limit should be established to run alongside the annual contribution limit to allow additional, lump-sum payments into a personal account.

The transfer of small, existing pension pots into and out of personal accounts should be permitted, so as not to penalise people with several small pension funds



8. Protecting the interests of surviving partners

8.1 Measures were included in the Pensions Act 2007 to remove the rules for protected rights (built up by people who are contracted-out of the State Second Pension on a defined contribution basis), except for the requirement to buy a joint-life annuity with protected rights. We are aware that there have been calls to amend the current Pensions Bill to remove this rule. This would simplify pension providers' administration. We accept that a joint-life annuity is not always the best option for couples. However, we have grave concerns about sweeping away the right to a joint-life annuity without some effective means of ensuring that surviving partners, who may have no private savings of their own, are adequately protected. In the 2007 Pre-Budget report, the Government committed to improving access to information in this area.


8.2 Age Concern's calls:

Before amending the Bill to remove this important protection, the Government should put in place an effective strategy for informing scheme members and their partners of the need to provide for survivors, and provide access to an adequately funded advice service to help them choose the right type of annuity.



9. Compliance

9.1 The Bill introduces new obligations on employers to enrol eligible employees into a qualifying pension scheme and, if the employee does not opt out of the scheme, to maintain membership and to make a minimum level of contributions. Most employers will fully implement the new legislation and many support its introduction. However it is essential that there is an effective regime of compliance and enforcement to protect those whose employer wishes to discourage staff from being in a pension schemes or who delays implementing the new provisions. There will need to be effective information and publicity to ensure that employers are aware of their obligations.


9.2 We are concerned that some employers may offer inducements to people who opt out of pension provision. The legislation does not prevent this happening but the effect of clause 49 is that any agreement between a worker and their employer where a financial incentive is given to opt out of a pension scheme is not enforceable. This means the worker could subsequently decide to opt back in and receive the minimum employer contribution. We find it difficult to see how this will work in practice and as a minimum, employees will need to be made aware of these provisions.


9.3 Age Concern's calls:

There needs to be an effective regime of compliance and enforcement accompanied by publicity and information that ensures employers and employees are aware of their rights and obligations.



10. Current pensioners

10.1 The Bill mainly focuses on future pensioners but it does include welcome proposals to simplify Pension Credit for older pensioners by extending the assessed income period for those aged over 75. This means that claims for people over 75 will not need to be reassessed every five years. These changes should be warmly welcomed.


January 2008

[1] Association of British Insurers press release 24 August 2003

[2] For example, 'Nearly all felt that they were not equipped to make this sort of [investment choice] decision and that they would prefer to leave these sorts of decisions to an 'independent financial adviser' or pension provider.' DWP Research Report No. 357, Pensions and pensions reform.

[3] Personal accounts and means-testing: making sure it pays to save, Age Concern England, 2007

[4] FSA Comparative Tables, 13 December 2007