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Baroness Hollis of Heigham: My Lords, we thank the Minister for explaining the regulations to us. They show that personal pensions remain a bad deal for so many people that the Government are artificially having to make them more attractive by bribing existing and potential personal pension holders with more of our--the taxpayers'--money to keep them.
We all want people to hold a second-tier pension. It is the only way of ensuring and enjoying an old age above the margin of poverty. We all accept that a good occupational pension is the most desirable of second pensions. For those on lower incomes, SERPS may provide the same kind of security; or it would have done if, since 1979, the Government had not progressively raided it, both to save government money and to make private pensions artificially and comparatively more attractive. In consequence, under this Government we have seen SERPS cut from the best 20 years to 40 years, every year but five, as well as an annual rather than an end-of-scheme valuation. Together, those have almost halved the value of SERPS. Even so, SERPS remains appropriate for people on relatively low incomes in secure occupations without an occupational pension. However, in future SERPS may have to be made more secure against government raiding.
The third option has always been personal pensions. Again, no one disputes that they meet a real need in the market, for the better off, for those who are self-employed and for those who are highly mobile. In other words, they are for those who do not have a conventional employer and have to or can afford to dispense with the employer's contribution. Had that niche market been addressed and had personal pensions been properly regulated, there need have been no problem with either approved personal pensions or the right to recycle the standard SERPS rebate. Instead, we have seen hungry, commission-only salesmen whose companies have willingly turned a blind eye to dubious practices.
A similarly blind eye from an indulgent Government has put us in the following situation. First, we have seen the marketing of approved personal pensions to the wrong people: those on low incomes who were persuaded out of good occupational schemes and out of SERPS, to their disadvantage. Secondly, as a consequence, those APP providers have been found to be so inefficient that even the best providers top-slice at least 15 per cent. in charges and the inefficient double or nearly treble that in some cases. Thirdly, some two-thirds of those holding APPs only, and merely, recycle their rebate. Many are in and out of work and cannot keep up regular premiums. Therefore, sadly, many people will find that APPs will not float them off poverty in old age.
Therefore, finally, the Government have realised, as pension holders themselves are realising, that for many it would be financially prudent to rejoin SERPS because of the poor deal that they get from APPs. As the Government are anxious that SERPS should not become an ambulance to casualties of private pensions, they are throwing additional rebates at APPs, not because APPs and their providers are good providers of pensions but because they are bad; not because they are efficient but because they have proved inefficient; not because people want to remain in them but precisely because people may not. Consequently, the taxpayer is having to contribute some £300 million, we suspect, this year to
Let me spell out those points a little further. First, personal pensions (APPs) have been sold to the wrong people. Those with personal pensions may be worse off if their income is low--say, below £10,000 a year; if they are too old to benefit because the pension does not have time to accrue; if they cannot maintain regular contributions; if they are in and out of work; or if they are women, who tend to get lower private pensions for the same level of contributions or annuity rates. As my honourable friend Mr. Denham made clear in another place, every one of those fears has materialised. We find that something like 3.6 million people--60 per cent. of all personal pension holders in 1993-94--had less than £10,000 a year in average income. For women holding personal pensions the average income was £6,300. We also find that nearly half a million of the holders are over 45. In addition, since 1987-88, nearly half of those who bought personal pensions have failed to make regular contributions each year since.
In consequence, if APPs are funded merely by recycling this rebate, they will be insufficient to take people out of poverty. We fear that that may apply to something like two-thirds of those holding such pensions. As we found when we discussed the Pensions Bill last year, the best advice was that unless people can afford to make voluntary contributions over and above a rebate taking them up to something like 15 per cent., it will not be sufficient to provide for their old age. By definition, those who are poorest, those who are often unemployed and women with interrupted work, are least likely to make voluntary contributions and least likely to benefit from APPs in their old age, and may still need income support.
This situation has been made worse by charges. It would be bad enough, pensions having been sold to the wrong people, if APPs were efficiently provided. But the record has been disastrous. According to the Government Actuary, the typical figures (not the most efficient provider, but not the least efficient either: presumably the median) suggest that, on an income of £10,000 with the SERPS rebate being recycled, between a quarter and one-third of the money saved is being top-sliced in charges if a person is around 40 with 25 years to go to statutory pension age. We should remember that the average income for women is only £6,300; and for someone on £7,000, charges can take anything from 25 per cent. (the more efficient) to 40 per cent. or more of the payments at the age of 40. Some will do better, some will do worse, according to age, gender, income and provider. But in all cases where we are dealing with incomes under £10,000 we are likely to see at least a quarter of the savings top-sliced, and nearly half of the savings top-sliced in costs. For those who put in simply a single premium or an intermittent premium, the whole of that will be taken out in charges. It is a straight gift to the commission-hungry salesman and to the company, and nothing remains in the bank.
As for women, they are hit three times over by the Government's personal pension schemes. First, they are more likely to have low earnings--as I say, the average is £6,300. Secondly, their income is more likely to be interrupted as a result of work patterns and family responsibilities, while charges nonetheless continue to top-slice what they have put away. Thirdly, women will receive a lower pay-out because, unlike SERPS, where the same is received whether a person is male or female because there are no actuarial considerations involved, in APPs the payment will be less. So women are hurt because they are more likely to have lower incomes, because the charges continue when they are not so likely to be in work and because at the end of the day they will receive a lower sum. These are the people the Government have encouraged the personal pension providers to take into portable personal pensions. It has been an absolute disaster.
This means that, as the Government have belatedly woken up to the fact, if such people are not to rejoin SERPS the Government have to increase the attractiveness of staying with the personal pension by increasing the rebates that can be recycled to fund it. In other words, in a desperate effort to keep personal pensions afloat, the Government are having to pay for the management costs and charges of inefficient providers so that more of the rebate stays as savings and less is grabbed by the company. That might be fine--except that they are doing it with our money, the taxpayers' money: £300 million of it. So far the Government have spent over a billion pounds of our money to persuade low earners to leave SERPS, even though, alas, many will remain in poverty.
The Government have got themselves into the most awful mess. We see their pensions policy unravelling before our eyes. They are having to throw additional money at the problem. (This is one area where the Government clearly think that the problem is solved by throwing money at it.) But it will not be solved. Although additional money is being provided, it will still not be enough--nor can it be--to remedy the plight of those who are with the worst providers. Even with the additional rebates they will still find themselves facing poverty in old age--all to avoid a return to SERPS which this additional rebate may not postpone.
At considerable cost to the taxpayer, we have ended up with a scheme that pays to the poorest more taxpayers' money to take them out of SERPS into APPs, while still almost certainly having to give them additional money when they reach pension age because a recycled APP will not float them off income support. What a waste of taxpayers' money and their money. And what a desperate situation for those who will see their savings whittled away by the false promises of government and the false prospectuses of providers. It is a sad and sorry story.
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