Pensions


The Committee consisted of the following Members:

Chair: Mr James Gray 

Baldwin, Harriett (West Worcestershire) (Con) 

Blenkinsop, Tom (Middlesbrough South and East Cleveland) (Lab) 

Corbyn, Jeremy (Islington North) (Lab) 

Crabb, Stephen (Preseli Pembrokeshire) (Con) 

Hopkins, Kelvin (Luton North) (Lab) 

Jackson, Glenda (Hampstead and Kilburn) (Lab) 

McClymont, Gregg (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab) 

Paisley, Ian (North Antrim) (DUP) 

Selous, Andrew (South West Bedfordshire) (Con) 

Smith, Henry (Crawley) (Con) 

Spencer, Mr Mark (Sherwood) (Con) 

Tomlinson, Justin (North Swindon) (Con) 

Webb, Steve (Minister of State, Department for Work and Pensions)  

Kate Emms, Committee Clerk

† attended the Committee

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European Committee B 

Tuesday 10 July 2012  

[Mr James Gray in the Chair] 

Pensions

4.30 pm 

The Chair:  Before we begin, I thought it might be helpful to remind hon. Members of the procedure for these Committees. I will ask Henry Smith, a member of the European Scrutiny Committee, to give a brief introduction of up to five minutes. The Minister will then have 10 minutes to give a largely factual statement of the purpose of the document under discussion, during which there will be no interventions. Following that there will then be up to an hour of question time when Members can question the Minister. When that is concluded we will move on to a standard delegated legislation-type debate. The Minister moves the motion; it is then opposed and so on and so forth. Normal procedure then clicks in after that has progressed. 

4.31 pm 

Henry Smith (Crawley) (Con):  It is a pleasure to serve under your chairmanship, Mr Gray. It might be helpful if I take a few minutes to explain the background to the White Paper and the reasons why the European Scrutiny Committee recommended it for debate. The White Paper follows on from a Commission Green Paper, published in 2010, which sought views on how the EU could support member states in reforming their national pension systems to take account of a rapidly ageing population and increased public expenditure on pensions, health and social care, while also ensuring adequate, safe and sustainable pensions. 

The White Paper recognises member states’ primary responsibility for the design of their national pension systems but suggests that the magnitude of the macro-economic, social and employment challenges affecting pensions necessitates a more comprehensive and co-ordinated approach at EU level. It proposes a range of initiatives involving a broad mix of EU policy instruments: policy co-ordination; “soft law” measures, such as codes of practice; EU funding; and legislative intervention. EU action would pursue two principal objectives: rebalancing the time spent in work and in retirement by linking the retirement age to life expectancy and increasing the incentives and opportunities to work longer; and encouraging the development and take-up of safe and cost-effective supplementary pension schemes, which are suitably adapted to the demands of a flexible labour market and job mobility. 

An annex to the White Paper summarises responses to the Green Paper consultation and says that 

“the bulk of Member States want efforts to concentrate on improving or deepening the existing European policy framework on pensions rather than extending it.” 

That framework includes cross-border co-ordination of social security systems, which enables retired workers to move to another member state and draw their pension

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there. There are minimum EU standards on prudential rules which seek to ensure that the providers of occupational pension schemes are financially sound, as well as insolvency rules which provide some protection for employees’ pension rights. The White Paper suggests, however, that EU activity to date has been somewhat piecemeal. 

The Government’s response to the 2010 Green Paper foresaw a role for the EU in strengthening joint analysis and policy exchanges between member states as well as sharing best practice on such matters as information disclosure and risk sharing, but cautioned strongly against the introduction of further regulation. The Government have also emphasised the need for EU action to respect the principle of subsidiarity. While a number of the initiatives proposed in the White Paper envisage greater practical co-operation and exchange of best practice between member states, it is clear that the Commission also intends to propose new or strengthened regulation in some areas. 

The Government highlight the proposed review of the 2003 directive on institutions for occupational retirement provision—the IORP directive—which, they fear, may unnecessarily increase capital requirements and have a detrimental impact on the supply and cost-efficiency of employer-sponsored pension schemes in the UK. They say that the CBI, TUC and National Association of Pension Funds share their concern. 

The Minister’s explanatory memorandum does not, however, set out the Government’s position on the other initiatives proposed in the White Paper. I trust that he will take the opportunity to do so in today’s debate. The European Scrutiny Committee considered that the White Paper raised the prospect of increased EU involvement in the development and supervision of national pension policies, and expressed concern that any action at EU level should not encroach on areas of competence which should properly remain with member states. Perhaps the Minister can also tell us whether the Government share this concern and, if so, highlight particular initiatives proposed in the White Paper which he believes would either exceed the EU’s powers, or infringe the principle of subsidiarity and should therefore be dealt with at national rather than EU level. 

4.35 pm 

The Minister of State, Department for Work and Pensions (Steve Webb):  It is a pleasure to serve under your chairmanship, Mr Gray, and to discuss a vital issue not just in the United Kingdom but across the EU. It is perhaps appropriate to read out the first two sentences of the White Paper: 

“An ageing population presents a major challenge to pension systems in all Member States. Unless women and men, as they live longer, also stay longer in employment and save more for their retirement, the adequacy of pensions cannot be guaranteed as the required increase in expenditure would be unsustainable .” 

Many common issues are raised in the White Paper for both accession states and long-standing members of the EU which are relevant across the European Union. The Government welcome the opportunity to look at these to see what the United Kingdom can learn from other member states and perhaps also where we are a bit ahead of the curve to share some of our experiences with other countries. 

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In that spirit, I have recently returned from a very short trip to the Netherlands and Denmark—the countries that had just been knocked out of Euro 2012 as one of my colleagues put it. I then put the kibosh on by coming back to England. As my hon. Friend the Member for Crawley said, one of the issues we wanted to look at was risk sharing. That is something where other European countries have a very different approach which we can perhaps learn from. We see this as two-way traffic. I will come on to the important point that my hon. Friend mentioned, which is the fundamental area where we are concerned that the European Union will require us to do something that is both profoundly not in our national interest and has no apparent justification in terms of a single market or harmonisation across the EU. 

Page 9 of the White Paper discusses linking the retirement age with increases in life expectancy, something the Government have already indicated that they will do. It talks about supporting longer working lives. The Government have abolished the default retirement age, which means that people can no longer be sacked for the crime of turning 65. It talks about equalising the pensionable age for men and women, a process that was already in train and which we have speeded up. It also talks about supporting the development of complementary retirement savings, in other words savings on top of state provision to enhance retirement incomes. Using the state pension as a foundation, we will encourage private pension saving through automatic enrolment into workplace pensions. That starts this October and some firms have already begun the process. It is a five or six-year process to take the 10 million to 11 million people in the work force who have no complementary pension provision at all and place them in workplace pensions. They will still be free to opt out, but we will try to make sure that many more people are building on top of the state pension. 

We have also set a goal of a decent income in retirement founded on a simple decent state pension and then built on by workplace pension provision. Traditional occupational pensions based on final salaries have a crucial role to play, which is why we are particularly concerned about the Commission’s review of the current EU directive for IORPs, and the Commission’s belief that new capital requirements based on those developed for insurance firms by the Solvency II directive would improve pension provision. That is the key point. Solvency II has been applied so far to insurance and to apply it lock, stock and barrel to occupational pensions would have profoundly damaging effects. 

While successive UK Governments have supported the development of Solvency II, we consider the profound differences between occupational pension schemes and insurance firms—insurance companies compete for business while pension schemes are provided voluntarily by employers for their staff—mean that far from improving occupational pension provision, a Solvency II-type capital regime for occupational schemes would greatly damage the pension system in the UK. To give a feel of scale, from the modelling that has been done we estimate that a Solvency II-type regime would require employers that sponsor traditional DV—domiciliary visit—schemes to inject huge amounts of money—at least £100 billion—into their schemes. That is a modest estimate, and some commentators have put the cost at nearer £600 billion. As they say in the trade, “You will soon be talking serious money”. 

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It is impossible to see what benefits the schemes would bring as members already enjoy security, including through the employer covenant. If there is a shortfall, the employer undertakes to fill it and in the event of the employer becoming insolvent, the Pension Protection Fund provides compensation. If, on top of that, we required employers to provide an increase in capital we would put at risk their commitment to maintaining their schemes, or the capital would not be available for investment elsewhere which, in extremis, could force the employer into insolvency. 

As my hon. Friend the Member for Crawley said, the proposals have drawn widespread criticism domestically from the CBI, the TUC and the National Association of Pension Funds. Across Europe, the Commission has been struck by the fact that the joint voice of BusinessEurope and the European TUC have sent a letter on similar lines. Our counterparts at the Irish, German and Dutch finance ministries have written a joint letter with the Treasury to make our position clear. 

While there are signs that the Commission is now listening, by postponing plans for draft legislative proposals until mid-2013, it is equally clear that we need to maintain the pressure, to build alliances with like-minded member states and to take every opportunity to engage with European institutions to ensure that the UK system is understood, and to reinforce our objection to those options—principally Solvency II— that would seriously damage occupational pension provision in the UK. 

The Chair:  Members now have until 5.30 pm to ask the Minister questions. Perhaps it is worth reminding them that questions should be brief and to the point. At my discretion, it may be possible to ask more than one question should the supplementaries appear to be in order. 

Kelvin Hopkins (Luton North) (Lab):  It is a pleasure to serve under your chairmanship for the first time, Mr Gray. There are serious concerns that this might be the beginning of a European Union move towards long-term harmonisation of pensions, so that the EU can get a grip of national schemes and policy is determined by it, rather than by member states. Is that something that the Government will resolutely oppose? 

Steve Webb:  I am grateful for that question and the answer is yes. I do not know if I mentioned that I went to Denmark, but on my visit I was struck by the fact that whereas we have a strong tradition of defined benefit, final salary-type pension provision in the UK, in Denmark, the corresponding percentage was, I think, 2%. Only 2% of all their pensions were of the sort that would be affected by this measure, whereas for us it is a very large part of the employment histories of people who have worked for big companies. 

These are totally different countries and totally different pension regimes, and the idea that one size fits all seems to us absurd. Absolutely, we can learn from one another, but the idea of centralised imposition of common processes of that sort seems to us—and to a number of other member states as well—entirely unjustifiable. We will absolutely resist it. 

Kelvin Hopkins:  The Minister has mentioned some of the differences between member states. There are some very stark ones, in particular employment rates for

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older workers. In Sweden, it is 70%, but it goes down to the 30s in southern Europe. Those are dramatically different figures, and trying to impose some sort of regime that covers the whole European Union would be nonsense. 

Steve Webb:  I entirely agree. The United Kingdom has a relatively high rate of employment for older workers but, as he says, not as high as some Scandinavian countries. Not only are the pensions systems very different, so are the labour markets. What struck me in both Denmark and the Netherlands was the way in which their pension arrangements operate on a collective basis, with the social partners coming together. In a sense, the Government are a passive participant. It is very different from our set-up, as we often have employer-specific, not industry-wide, arrangements. That tends to lead to very different processes for changing pension schemes when the world moves on. Again, that is why a rigid common framework simply would not work. I entirely agree with the hon. Gentleman’s point. 

Kelvin Hopkins:  Another difference, I suspect—I have been looking for the figures but I cannot find them—is in birth rates, which are very different in different countries. In Britain, we have a high rate of teenage pregnancy and a high birth rate among recent immigrants, mainly from third-world countries. We are not going to have the same problem as those countries where birth rates have plummeted and the proportion of older people is increasing more rapidly. 

Steve Webb:  Indeed. The hon. Gentleman is right to point out yet another social and economic difference. The need to move state pension ages and ensure a rise in the age of exit from the labour market is more acute in countries where the replacement rate is lower and the ratio of workers to pensioners is becoming more unfavourable much more quickly. Some countries may feel that they have more breathing space because of a higher birth rate, but to be honest that only puts off the evil day, as it were. It may give more time for gradual adjustment, but the pace of adjustment is a national thing, not something that can be standardised for the reasons already set out. 

Glenda Jackson (Hampstead and Kilburn) (Lab):  My hon. Friend the Member for Luton North referred to differences with the European Union, but are there not two major similarities? One is the free movement of labour, and the other is the vast number of people who have made no pension contributions at all. We have taken major steps to ameliorate and alleviate that situation in our country. What is happening in the rest of the European Union? 

Steve Webb:  On the hon. Lady’s second point, one of the differences in the United Kingdom is that historically, membership of a pension scheme has been voluntary. We have to auto-enrol 10 million or 11 million people because firms did not have to provide pensions, and even when they did, people did not have to be in a

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scheme. That is why we have relatively low rates of coverage, although as the hon. Lady rightly says, we are doing something about it. 

A number of other countries have had schemes of largely mandatory coverage, including some Scandinavian countries and the Netherlands. If people join a firm, on the whole it will be part of a certified industry-wide scheme, and provided that there is such a scheme, people generally have to be part of it. That varies a great deal from more traditional countries that have long-established social partners and deals between unions and employers, and some of the newer member states in which coverage is much lower. They are interested in our experiment—perhaps that is an unhelpful word—in our auto-enrolment initiative. They can see that if the power of inertia is used and people are brought in, on the whole most think it good to be in such a scheme and will stay in it. If we wish to fall short of compulsion, that is a good way of getting most people in. I hope we can set a trend that others will follow but, as I have said, we started a long way behind some other countries in terms of our rates of coverage. 

On the point about the free movement of labour, some people argue—I do not think the hon. Lady was arguing this—that because of the movement of labour across Europe, we need pan-European pension legislation and regulation. Often, however, people may move across Europe but they work for the same firm, and their pension arrangements carry on as they were. Furthermore, the extent of movement across Europe is remarkably limited and the proportion of people who work outside their home region is remarkably small. I certainly feel—as, I am sure, does the hon. Lady—that the wholesale standardisation of European pensions for the relatively small number of people who spend significant amounts of time away from their home country is probably not justified. Even when firms span more than one country, they often have a different pension scheme in those different countries and life goes on. 

Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab):  It is a pleasure to serve under your chairmanship, Mr Gray. No one who pronounces “Kirkintilloch” so perfectly can have anything other than a close relationship with Scotland. 

Is the Minister worried that the UK Government’s—how shall we say this?—fragile relationship with the European Union at times might be a barrier to building the alliances and coalitions necessary to ensure that Solvency II does not have a dramatically damaging impact on the UK pensions industry? 

Steve Webb:  We are working hard with countries that have a common interest—principally the Netherlands, Ireland and, in particular, Germany. We are trying to find other allies, but those countries account for the vast bulk of the sorts of pension rights about which we are talking. Whatever other conversations are going on between member states, there is a strong, enlightened self-interest in working together on these matters. To give an example, as I said earlier, the four Finance Ministries have written a joint letter raising our concerns, and the pension regulators in each of those countries are working on a co-ordinated basis. A lot of international work is going on. I had a conversation a couple of weeks ago with my Dutch counterpart, who is absolutely

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on the same page. Although our relationship with the rest of the European Union varies from time to time, there is a lot of common purpose in this area among the affected countries. To be honest, the issue is not on the radar of most other countries—it does not affect them and they are thinking about other things. We may have a French Commissioner, but even the French employers’ organisation has registered its concern, so we have a good prospect of building the sort of alliance that we need, notwithstanding the tensions that exist at times. 

Gregg McClymont:  I thank the Minister for that informative answer. We have heard the view from our side of the fence but, on his travels around Europe, what has he heard our European colleagues say about the UK pension system and its structure? 

Steve Webb:  I would not claim to spend a lot of time travelling around Europe, but I think that people are intrigued by the individualistic British tradition. As I mentioned, there is a tradition in many Scandinavian and European schemes of collective provision—pooling the risk between generations and across industries— whereas we have tended to have firm-level schemes, and individualised, defined-contribution schemes. I think that that strikes people as a different approach. Obviously, both approaches have different strengths and weaknesses. 

We are in the mainstream on the state pension age. We have already announced the time scale for the age of 67. If we look at other countries, I suspect that we will see that France is an outlier in that regard, but a number of other European countries are going to the same sort of level at the same sort of time. 

The other main difference, as I have said, is the consensual nature of pension debates in many other countries, where there is a tradition of the social partners deciding things together. That is not a strong feature of our pension history, although the Turner commission, which was chaired by Adair Turner, with members including Baroness Jeannie Drake, who is from a trade union background, did this country a great service, so perhaps we have learned some lessons. 

The fact that we have large funded pension schemes—large occupational pension schemes—makes us very different, and that presents us with different challenges. We are seen as leading the way on things such as state pension age and auto-enrolment, but we also have things to learn. 

Gregg McClymont:  I thank the Minister for that interesting answer. Do our European colleagues have a view on the costs and charges associated with UK pension schemes? The Minister chose his words very wisely, but the word “intrigued” is ambiguous in this context. Do our European colleagues associate the individuated nature of the UK system with higher costs to the pension saver? 

Steve Webb:  It is clear that scale is important. On average, a big scheme will have lower charges. I was reflecting on going to countries with populations of 15 million or 5 million and being told about the importance of scale, so it is true that if we can achieve greater scale, we will get greater economies. 

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The other thing that makes things really cheap is compulsion. If we forced everybody in, we would not have to go through the faff of opt-outs and so on, and we would get scale automatically. It would be fair to say that successive Governments have chosen not to go down that route. There is a gain to be had through compulsion, but the UK has not thought that that is the right option. 

Harriett Baldwin (West Worcestershire) (Con):  Is this the appropriate time to catch your eye to make a few remarks, Mr Gray? 

The Chair:  No, this is question time, but you can make some remarks during the debate. 

Gregg McClymont:  The Minister talked about the important point of scale, and given that we are discussing the EU, this seems to be the perfect time to ask whether he has been to Brussels to talk about removing the restrictions on the National Employment Savings Trust. Opposition Members believe that removing those restrictions would be an important step to increasing the scale offer that that non-profit scheme could deliver. 

Steve Webb:  I have been to Brussels, albeit not to talk about the NEST constraints. One of the first of my limited number of foreign trips was in late 2010 to a Brussels conference on the very issues under discussion, where I set out the UK’s concerns about Solvency II. On the hon. Gentleman’s substantive question, there is clearly an EU dimension. When the previous Government set up the NEST constraints, that was part of a package that the EU agreed was acceptable state aid. NEST is subsidised in the sense that we have helped it to be established and lent it money at favourable terms. NEST has a public service obligation as part of the package, but part of the deal to reassure the EU that NEST was not a subsidised competitor to the private market was to constrain it to a target market of lower earners and to focus it particularly on smaller firms. 

As the hon. Gentleman knows, auto-enrolment has not yet started. It is difficult to say to the EU "Three or four years ago we thought that NEST would need constraining as part of a package, but we have not yet started. There are new entrants in the market that we did not anticipate, but we have decided to lift the constraints". 

The hon. Gentleman knows that I am sympathetic to trying to ensure that NEST does its job. I am keen to ensure that it is there for the people for whom it is meant as a way of making sure that unpensioned people have access to good-quality, low-cost pension provision. We are continuing to consider how best to do that, but it is not a straightforward matter of simply lifting the constraints, precisely because of the EU dimension to which I referred. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Document No. 6715/12 and Addenda 1 to 3, relating to the Pensions White Paper: An Agenda for Adequate, Safe and Sustainable Pensions; supports the Government's objective of an adequate and sustainable pension system; and shares the Government’s concerns that UK occupational pension schemes would be at risk from new solvency requirements arising from the review of Directive 2003/41/EC on the activities and supervision of Institutions for Occupational Retirement Provision. —(Steve Webb.)  

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4.55 pm 

Gregg McClymont:  We are all learning, or I certainly am, as we go along. 

In general, we share the approach of the Minister and the European Scrutiny Committee to the Commission’s White Paper. The Commission proposes to act as a co-ordinator for the promotion of best practice across member states in responding to increasing longevity and changes in working patterns, to which the Minister referred. It has a valuable role to play in that broader pensions debate but, as the Minister recognised, when the Commission proposes to legislate—there is some indication at this stage of its intentions—there must be grave concerns about the approach that it is considering. 

The declared intent in the White Paper is to revise the IORP directive to create a level playing field with Solvency II. That is inappropriate, as the Minister suggested, and it would seriously damage pension schemes and their corporate sponsors in the UK. Given the Government’s fractious relationship with allies in the European Union, we are worried about their ability to build the coalition necessary to ensure that such a damaging piece of legislation is not imposed on the United Kingdom. I welcome the Minister’s encouraging remarks about the alliances that the UK Government are trying to build. We can only hope for a successful outcome and that the Minister’s efforts are not undermined by rather difficult relations at a higher level. 

On three other areas—cross-border pension mobility, measures to improve information for consumers on packaged retail investment products, and additional measures to ensure a more effective protection of workers’ occupational pension rights in the event of insolvency—it is not yet clear what the Commission will propose. While we may prefer that subsidiarity applies to such issues, we may find that the Commission has support for the principle of legislation from a sufficient number of member states. As the Minister recognised, the UK’s pension system is rather different from those in Europe, with its individuated nature, which is the product of our long history of a strong private insurance market. That means that we are in a different place than most members of the European Union. 

In the event that there is a coalition strong enough to move towards legislation on cross-border pension mobility, measures to improve information for consumers and additional measures to protect workers’ rights when occupational pensions schemes become insolvent, it is important that Parliament maintains a watching brief on proposals that emerge from Europe. It is also extremely important that the UK Government engage us before such legislation is forthcoming, which I have no doubt that the Minister intends to do. The Government must proactively build coalitions. 

If we are honest, there are clearly aspects of some of the matters at hand that are not always perfect in the UK system. Some parts are not consumer-friendly and might require Government intervention in the future. In that context, it is important that any EU legislation does not impede Parliament’s regulatory scope. 

For example, the disclosure of costs and charges to employers and savers in the UK is currently inadequate. It is important for reviving a savings culture in this country that transparency on costs and charges is dramatically improved. If there are to be EU rules, they

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need to be consistent with any consumer-friendly UK legislation. We will need to be vigilant to ensure that UK industry lobbyists do not influence technical details in Brussels to place blocks on the disclosures that are necessary in the UK. That is obvious, but given today’s stories in the papers about the lobbying—it is unsurprising, of course—undertaken by some of the interests in the pensions industry and wider financial services, it is important. 

I take the points that the Minister made about NEST, but the Opposition’s view of NEST is that four criteria must be met for it not to be state aid. NEST has always met three of those Altmark criteria—Altmark was the test case judgment—and the fourth, to which the Minister alluded, is the ability for it to show that it is operating in the low-cost part of the market. NEST could not show that until it was operational. Our view—this is suggested by all the evidence—is that NEST is operating in that part of the market, and we will have the roll-out of auto-enrolment in October. I make a plea to the Minister that the political will is there to remove the NEST restrictions. There are those in the pensions world who want the restrictions on NEST to remain, but there is overwhelming evidence that there is a competitive market in the auto-enrolment space. Indeed, not a day goes by without an announcement that one of the large private pensions companies in the UK is winning a significant auto-enrolment contract. 

The Minister mentioned scale, which is so important in the pensions game. Crudely put, scale means lower charges—that is a simplification—but the greater the scale, and economies of scale, that can be achieved, the more diversity there can be in the investment strategy. Those things mean that scale is critical. The Opposition’s view is that if we can get rid of the NEST restrictions, we will be in a position to scale up the lower-cost part of the pensions market. 

5.2 pm 

Harriett Baldwin:  It is a pleasure to serve under your chairmanship this afternoon, Mr Gray. I want to make a few points based on evidence that members of the Select Committee on Work and Pensions, including the hon. Member for Hampstead and Kilburn, heard on 23 April. The transcript is available on the Committee website for those who have an obsessive interest. 

We took evidence from Mr Ralf Jacob, who is in charge of the unit dealing with active ageing, pensions, health and long-term care in the European Commission’s directorate-general for employment, social affairs and inclusion, and from Karel Van Hulle, who is in charge of insurance and occupational pension funds at the DG for the internal market and services. I do not want to speak for the Select Committee, but it is fair to say—and I urge hon. Members to read the transcript—that we asked a range of critical questions. Speaking personally, I think we share the Government’s concerns about the approach taken to applying Solvency II, in particular, to a UK pension fund system that does not bear much relevance to it. 

It is worth pointing out the context in which the Commission is publishing its White Paper, because one might observe that there is an issue with the solvency of some countries in the European Union at the moment. That led to an interesting line of questioning, because

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one of the first steps that the Commission will have to take if it moves further with measures in the White Paper is making a quantitative assessment of the black hole in the balance sheets of pension providers across the EU. Of course, in order to make a quantitative assessment, particularly of the liability side of the equation, it will be necessary to value those liabilities against a risk-free rate. Mr Gray, what would you consider to be the risk-free rate to value liabilities in Greece at the moment? 

The Chair:  I do not have the faintest idea. 

Harriett Baldwin:  I submit, Mr Gray, that you would struggle to answer that question; I think the whole market would struggle to answer it. I think that we can all agree that it would be a very challenging calculation for the Commission to make. Indeed, when we questioned Commission officials in the Work and Pensions Committee, they acknowledged that they had not really managed to come up with an answer to that question, and that that would delay their ability to come up with any kind of impact assessment of these proposals. 

Of course, what we would point out to those officials is that it is not actually necessary to legislate in this area to create a great cloud of uncertainty over the defined benefits system in this country. Just the threat that there might be legislation in this area could cause a great deal of uncertainty for the trustees of the pension plans that we have been discussing. I strongly urge the Government to continue the excellent work that they are doing in explaining to the Commission that these ideas are not helpful, are not likely to be resolved any time in the immediate future and that while there is a large cloud of uncertainty hanging over the defined benefit pension system in this country we are putting at risk a pension system that used to be the envy of Europe and which, I am sure, will be the envy of Europe again when the Government’s proposed changes are implemented. 

I wanted to draw the Committee’s attention to the work done by the Select Committee and to agree that there are some very significant concerns that we would like to add to the Government’s concerns. I think that those concerns are best recorded in the transcript of the Select Committee meeting on 23 April. 

5.7 pm 

Kelvin Hopkins:  I have a rather different view of our pension situation. Although I am not an enthusiast for European regulation or harmonisation, that is not to say that I do not think there are things that are profoundly wrong with our pension system. 

I have the honour to be the chair of a small parliamentary support group for the National Pensioners Convention. It was certainly the case some years ago that, setting aside all the small additions such as the winter fuel allowance, our basic state pension was right at the bottom of the European league. It still is, and the people who live on the basic state pension, particularly when it is heavily means-tested, still have a pretty poor life. The basic argument is that there should be a massive increase in the basic state pension, first of all. My argument is that all the extras—such as means-testing and the winter fuel allowance—should all be rolled into

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one much bigger basic state pension, which would at least be above the minimum poverty level. That increased pension should be available to everyone automatically. 

Beyond that, there are occupational schemes and they are—well, they are not fine, but they still exist in the public sector. Those public sector schemes are hopefully relatively secure, although Governments have been chipping away—and, in fact, taking great chunks out of them. In the private sector, however, many occupational schemes have simply died. There is little incentive for companies to introduce occupational schemes because we do not have a labour shortage any more. The reason why so many companies, particularly large companies, introduced occupational schemes was to hold on to their workers. Those pensions were not transferrable. Vauxhall in Luton—it is part of General Motors in the greater conurbation, as the hon. Member for South West Bedfordshire will know—used to employ 38,000 people when I first moved to the area 43 years ago. Now it employs 2,000 people. 

The company used to canvass door-to-door for workers, because it was so desperate. Once it had employed those workers, it got them into the pension scheme, which was so good that it held on to them. That is how it was, but that is no longer the situation. The pressure now is on shareholder value and profit, rather than on holding on to workers. When the Vauxhall car plant—not the van plant—closed 10 years ago, manual workers who had worked on the track all their lives walked out saying, “I don’t get out of bed for less than £25,000 a year”, and they were told, “You’ll be lucky to get £14,000 a year. You’re in a different world now.” The world has changed. 

Adair Turner did a good job in trying to come up with recommendations, which were the best that one might expect the Treasury to accept. In the best of all possible worlds, he would have liked to go a lot further—and I would certainly like him to have done so—but the view of my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), who was the Chancellor at the time, was very much towards means-testing, and there was a time when it looked as if we were going to go for a diminishing basic state pension and an increasing proportion of means-testing over a very long period, finishing up with virtually the whole of the state pension as a means-tested benefit, which would have been disastrous. 

My own view is that we should have a compulsory occupational scheme for everyone—automatic enrolment, which is optional, is very different from a compulsory scheme—and it should be a state scheme. My hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East rightly talked about scale. The best scale is the national scale, and a national scheme with automatic enrolment would be easy and cheap to administer, with guaranteed defined benefits at the end of someone’s working life, but at the same time with compulsory payments and contributions. There would be problems. For example, labour-intensive companies would have to pay more if it was on a payroll basis. We would have to have employer contributions not simply related to payrolls, because a bank employing three people making millions compared with a labour-intensive manufacturing company would be unfair. All sorts of questions are raised. However, I am sure that across Europe we could literally pick the best schemes and make our own best-of-all-possible-worlds schemes. That is what I would do. 

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I want to know a lot more about what other countries provide. We need a collective approach to ensuring that everyone at the end of their life knows that they will have a decent standard of living and that they will be secure. There was a radio talk about Sweden a couple of weeks ago, which other hon. Members may have heard. Sweden provides generous pensions and free long-term care for elderly people, for example, to take all the pressure off the individual and put it all on the state to give people a sense of freedom, so that they are no longer dependent, fearful or insecure. 

That is the kind of world that I would like. I think that they call it social democracy, but I would use a stronger word: socialism. It is also what most people would want, but the problem is that there are financial interests involved, such as the market in private schemes, and they have much more influence on the Government than ordinary people. I hope that I am not offending any hon. Members who might be associated with the industry, but for many years private savings schemes have not been worth the paper that they are printed on. The vast proportion of costs involving administration, advertising and so on, especially for the smaller schemes, mean that they are not worthy of mention. Of course, they are subject to the vagaries of the stock market, interest rates and so on. 

A state scheme would overcome all those problems, because there would be a guaranteed return and a defined benefit at the end of someone’s working life. People would know what they had to pay in and what they were getting out. It would be democratically accountable and very efficient to run. I have argued for it for a long time, but my own side became converted to the religion of neo-liberalism some 20 years ago. I never was; I am a definite believer in an alternative view, which one might call social democracy. I am certainly not a believer in neo-liberalism. 

We are starting to move in the right direction. I pay tribute to the Minister, who possibly knows more about pensions and pension provision than anyone else in the House. Although we might have differences of view—and he is in a coalition, so he may not be free to indulge his own view entirely—I find a fair amount to agree with him in some respects. 

Whatever we say about the European Union—I am a Eurosceptic and want individual countries to decide their own future democratically—that is not to say that our pension system is good, because it is not. One of my offspring, like many people, works in the private sector with poor pension provision; he is okay now, but if he is not careful he will end up living on a low income after he has retired. My daughter works in the public sector, with a proper public sector pension, and she will be all right. I should like all people to have a guaranteed income in old age, sufficient to live a decent life. In some countries—Germany in particular and perhaps others—pensioner demand is a powerful, significant part of the economy. That is not a dependent, poverty-ridden part sector; it is a rich sector with great demand and can make a real difference to how economies work. 

Although I am not going to convince many Committee members, I hope that in time Britain will move in that direction, pick the best ideas that are on offer in other countries, looking towards Scandinavia, perhaps. It is

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not that countries in southern Europe do not have wonderful schemes, but they do not put enough money into them to make them work. However, in Scandinavia, they do put enough money into such schemes and I would like to think that we would move in that direction over time. A big basic state pension plus a compulsory state earnings-related pension scheme for everyone would guarantee a decent life in old age, which is what we really need. 

5.16 pm 

Steve Webb:  It is good that we talk about these issues. There was a good deal of consensus in the three speeches that we heard and I shall respond briefly to several of the points that were made. 

To respond to opening remarks made by my hon. Friend the Member for Crawley, the focus is on Solvency II, but a lot of the propositions in the White Paper are aimed at countries that have less developed pension systems than the UK. My notes about each of the 20 main propositions say in various places things like “Does not apply to the UK” or “UK already complies”, so some would not be directly relevant. Many of the provisions are about monitoring and research. One is about reviving the portability directive—not a lot of people know about this, Mr Gray; I did not until a few moments ago—that was initiated under the UK presidency in 2005, so the White Paper is reviving something that we initiated for the benefit of the wider labour market. We are content to engage with that. 

Apart from Solvency II, we would be most reserved about the proposition on soft regulation, which my hon. Friend mentioned, which would not be helpful or relevant to the UK. That proposition should be about helping countries without adequate regulation, so it is not relevant to the UK, which has quite a sophisticated regulatory regime. Although there is always room for improvement, we would not regard the EU as having a valuable nexus on such issues. 

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East gave his and the official Opposition’s support for the Government’s stance on Solvency II, for which we are grateful. This is not the capitalists saying one thing and the socialists saying another, or the workers saying this and the bosses saying that—there is remarkable unanimity. The fact that the European TUC and Business Europe spoke with one voice suggests that the Commission is getting this wrong. I welcome cross-party support for that position. 

I assure the hon. Gentleman that the UK is building strong alliances with other countries. Leaving aside the politics of this, there is pretty strong economic self-interest in working together, and I believe that that is happening. 

The hon. Gentleman talked about NEST. His view is that the legal position shows that there is now no problem with lifting the constraints. I raise him my lawyers against his lawyers, but that is certainly not our legal advice. He says that there needs to be the political will to lift the constraints, but if we just ploughed in and took them off, and then immediately faced a legal challenge from an insurance company, we could be unable to lift them, because we might be stuck in court processes for 18 months or two years. It is great to be bold, and it is tempting to make a big dramatic gesture, but if that got me a great headline on day one and a

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terrible headline on day two, because we were then stuck in the courts for 18 months meaning that nothing happened, it would not be helpful. I assure the hon. Gentleman that there is the political will to ensure that NEST does its job. Given the constraints that were placed on it, which we inherited, we continue to consider the best way to go forward. 

Gregg McClymont:  The Minister raises an important point. I am certainly not suggesting that the Government should go ahead and lift the restrictions without speaking to the European Union. Some interested parties—there has been some dubiety about this, particularly in the pensions press—have suggested that the Government would have to go through another full state aid negotiation process, but my point is that that is not the case. As I understand it, the Government have to make the case to the Commission that the four criteria of Altmark are met, meaning that it is not state aid, but an acceptable form of intervention in the market. 

Steve Webb:  I appreciate that that is the hon. Gentleman’s position. He will not be surprised to learn that we have an ongoing conversation with the European Commission about these and other matters. 

The hon. Gentleman said something in his speech that felt a bit contradictory, although perhaps I misunderstood him. He said that we were hearing about new providers and new entrants every day and that there could be no doubt that there is now a competitive market. Arguably, that might undermine the case for NEST, because the point of NEST was to say that the market will not deliver because there are not enough providers that are interested in the low-paid and small firms. New entrants and a vigorous competitive market make it harder to persuade someone that a state-subsidised provider is needed in the market, so I am not sure that I follow the hon. Gentleman’s logic that lots of new entrants strengthens the case for such a provider. 

Gregg McClymont:  The Minister makes a fair point, but my response is that we need to look at the UK pensions landscape in the broadest context. Until there is full transparency on all the costs and charges for a pension scheme, it is unlikely that we will have a perfectly functioning market. What I mean by that is very simple. The point of NEST is not just cost; it is to push the market in the direction of full transparency and best practice. As the Minister will be aware, Otto Thoresen himself suggested that NEST was working in that direction in the marketplace. 

Steve Webb:  I have a lot of sympathy with the hon. Gentleman’s position, so I hesitate to undermine his arguments, but if NEST is doing its job and bringing charges down, it makes it harder for us to argue that the constraints are preventing it from doing its job. If it was not driving down charges, one could say, “Oh, we’d better lift the constraints,” but the hon. Gentleman is actually making the other argument. 

Gregg McClymont:  Let me clarify things further. My view is that NEST is playing a good role in encouraging competitors to do a better job of delivering in the marketplace. The danger is that it will not achieve the

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scale necessary to be a real player in the market, meaning that the industry, having been forced to compete on a fairer basis, may retreat back into something rather less than best practice if it does not have NEST as the model. 

Steve Webb:  Obviously, there may be a difference between the market in the short term and the market in the long term. We are certainly seized of the issues that the hon. Gentleman raises. We want NEST to achieve the purpose for which it was intended and we keep it under review. 

I come now to the very helpful remarks made by my hon. Friend the Member for West Worcestershire. I am grateful to the Select Committee for its investigation of these and other pensions issues. I, too, have met Karel Van Hulle. He is a very reasonable chap, but one cannot help feeling that we speak a different language, although I mean that figuratively. I have yet to understand to what question for occupational pensions Solvency II is the answer. Simply saying, “Well, so that everything’s the same,” is insufficient justification for a massive upheaval. My hon. Friend made the crucial point that if such a measure were to be taken even to the next step, we would need a rigorous, quantitative impact statement and a proper impact assessment. I am afraid that what normally passes for such a thing at EU level is wholly inadequate in this case. We are working to ensure that if the measure were to be taken forward, its full impact would be highlighted earlier rather than later because it would be far-reaching. 

My hon. Friend raised important points about the solvency of nations and the question of how to define the risk-free rate of return. As she knows, Solvency II works by valuing liabilities on not just the normal prudent basis, but a much more low-risk basis. That is added to the amount that has to be covered by assets, and further capital requirements are added on top of that, which is where the £600 billion figure comes from. She is right to say that that adds uncertainty. The people who want to run good occupational pension provision should be encouraged and rewarded for doing so, not penalised and faced with threats of cost. That is certainly not something that we would want to see. 

I am grateful to the hon. Member for Luton North for his generous comments, although I am not sure that my credibility in the coalition was helped by his remarks. He is entirely right that the UK pension system is far from perfect. I agree that there are many things that we can learn from other European countries. Obviously, as he says, the headline rate of the basic state pension is one of the lowest relative to average earnings in Europe, but he will appreciate that that is but part of overall provision for older people. For example, in some Scandinavian countries, a pensioner who wants to see a doctor has to pay, but pensioners do not have to pay here. 

We spend many billions of pounds a year on tax relief on pensions. Many retired people with decent incomes in old age have benefited from that relief, which does not count in these simple comparisons of basic state pensions. Comparing like with like is therefore a bit of a challenge. As the hon. Gentleman knows, part of the reason why Scandinavian countries have Scandinavian levels of benefits is because they have Scandinavian levels of taxes, which are not something that any of our parties has been willing to put to the electorate. 

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Kelvin Hopkins:  The Minister makes a strong point about taxation. Some argue that high levels of taxation mean weak economies, but I do not think that one could call the Scandinavian economies weak. 

Steve Webb:  I was simply observing that none of us has been willing to test the hypothesis that such levels of taxation are saleable at an election, notwithstanding the benefits they pay for. 

Given the hon. Gentleman’s goal of a basic state pension above the level of the means test, he will be pleased to know that we will be bringing forward proposals for a single-tier state pension that is clear of the basic level of means-testing, precisely because we want to see less means-testing and more pension. That is the balance we are trying to strike, so we have that in common. 

The hon. Gentleman described the strength—even post-reform—of public sector occupational provision. Although we have been through the Hutton review process and the future costs are being reined in somewhat, it will still be overwhelmingly the case that someone with a life service in the public sector will get some of the best pension provision relative to what they have earned that is available to anyone, certainly in the private sector. Although there have clearly been problems with private sector pension provision, I would set against his counsel of despair the fact that the vast majority of people who worked in the private sector and had access to decent occupational schemes have done pretty well out of them. He suggested that private schemes—I suppose he meant personal pensions and so on—are “not worth the paper they are printed on”. Even with the charge levels that we have seen in the past, a process of locking in to the long run of stock market growth has still seen pretty good returns for a lot of people, but we can do better. I entirely agree with the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East that bearing down on charges is important, and the work of the NAPF and others on that is very valuable. 

The hon. Member for Luton North portrayed a position of pensioners in the UK living in penury. Although one pensioner living in poverty is too many, the poverty rate among pensioners in the UK, measured in the normal way, is below the poverty rate for the working-age population. Although we are not at all complacent, basic state pensions, second-tier state provision, occupational provision, personal pensions and all the

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additional benefits that we pay have made a significant difference to living standards of pensioners relative to the working-age population. 

Kelvin Hopkins:  I accept that that may be true of present pensioners, including myself—I receive a fairly generous pension from my previous employment—but if we look forward 20, 30 or 40 years, the world may be very different indeed. 

Steve Webb:  That is a good point on which to draw my comments to a close. I often tell people that my ministerial responsibilities are quite narrow: today’s pensioners and tomorrow’s pensioners, which is everybody. We want to ensure that the pension system is fit for today’s pensioners by restoring the earnings link and other changes, but we are absolutely focused on the next generation, many of whom will not have had access to decent final salary pension schemes. That is why our state pension reforms are so important, why auto-enrolment is so important, why we want to remove regulatory burdens from companies that want to provide good schemes, and why we are looking at risk-sharing and at defined ambition pensions, which are somewhere in the middle. There is a full, forward-looking agenda to tackle the future challenges. We value the White Paper’s focus on learning from other countries, but we absolutely do not believe that one size fits all. We also do not believe in what the Commissioner said he will not do—I hope that he is true to his word—which is cutting and pasting solvency requirements on to a UK system when they do not fit. On the strength of that, I commend the motion to the Committee. 

Question put and agreed to.  

Resolved,  

That the Committee takes note of European Union Document No. 6715/12 and Addenda 1 to 3, relating to the Pensions White Paper: An Agenda for Adequate, Safe and Sustainable Pensions; supports the Government's objective of an adequate and sustainable pension system; and shares the Government’s concerns that UK occupational pension schemes would be at risk from new solvency requirements arising from the review of Directive 2003/41/EC on the activities and supervision of Institutions for Occupational Retirement Provision.  

5.31 pm 

Committee rose.  

Prepared 11th July 2012