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Noble Lords: And another there!
Lord Bach: My Lords, there are now many others but not many were here when some of the perhaps "un-Lords-like" remarks were made about the Treasury. Some of those remarks were unfair, although a number of references to decisions made this summer were welcome.
I would have liked the time to answer the noble Lord, Lord Vivian, on what I fear has ridiculously become a party political issue; that is, the decision to retire increasingly obsolescent Royal Navy Sea-Harrier aircraft. Time does not allow for that now but the noble Lord, Lord Lyell, will be pleased to know that they are being phased out between 2004 and 2006. The fact is that that decision is sensible and capability-driven and will certainly not leave our Royal Navy in any danger. We on this side of the House greatly resent the fact that in another place that issue was used in such a politically partisan way.
Having concluded, I hope, not on a sour note, I thank the noble Lord, Lord King, and apologise to him for having left him little time in which to respond to the debate.
6.40 p.m.
Lord King of Bridgwater: My Lords, I wish very briefly to thank the Minister for his response. I am sorry that at the end he got into a little deep water on former Treasury Ministers—he found that they were rather thicker on the ground than he had realised.
I shall start by apologising to and thanking my noble friend Lord Burnham. He initiated this debate and I am most grateful for his appreciation in spite of the mix-up over the printing. That, at least, is better than what has happened to my noble friend Lord Fowler, who as "Baroness Fowler" has been given 15 minutes to open his debate. At least we were not given a change of gender in our arrangements.
At the start of the debate I had hoped that it would be one of real quality. I appreciate all those noble Lords who have taken part. Perhaps I may pay particular tribute to my noble friend Lord Black of Crossharbour. He made an outstanding maiden speech. If this House means something, then it is to bring to this place people of real experience and considerable knowledge who can contribute to our debates in the forceful and interesting way in which my noble friend has done today.
I wish simply to say this to the Minister. When I was Secretary of State, there were always complaints about lack of funds. Sometimes, however, those concerns grow larger and more real. I would ask the Minister to do one thing. Will he ask his private office to ensure that tomorrow's Boxes for the Prime Minister, the Chancellor and the Secretary of State contain copies of this Hansard? A number of people have spoken in this debate whose advice the Government used to be pleased to receive when they were operating as Chiefs of the Defence Staff and in other capacities. They have given serious warnings, along with the chair of the Armed Forces Pay Review Body, the noble Baroness, Lady Dean of Thornton-le-Fylde.
Having served in the other place, I have to say that that House could not have matched the quality of the debate we have heard today. I hope that Ministers will not read only the Hansard from the House of Commons tomorrow, but that they will read the House of Lords Hansard as well.
Once more, I am grateful to all those who have taken part in what I think has been an excellent and most worthwhile debate. I beg leave to withdraw my Motion for Papers.
Motion for Papers, by leave, withdrawn.
Pension Policy
6.42 p.m.
Lord Fowler rose to call attention to pension policy; and to move for Papers.
The noble Lord said: My Lords, like my noble friend Lord King I, too, noticed the use of "Baroness". I have to say that at least in the other place they did get my sex right, if nothing else.
This is an important debate on pensions. My first serious introduction to the world of pensions took place back in 1975 when, suddenly and surprisingly, I was appointed to the Shadow Cabinet of my noble friend Lady Thatcher. My first debate was the pensions Bill, introduced by Barbara Castle, who we particularly remember today. Although I did not always agree with her solutions, by any standards she was an outstanding fighter for better pensions. She will be very much missed.
A decade later, as Secretary of State for Social Services, I introduced my own pension changes. In the 1990s and to date I have served as a trustee on a number of pension funds. If there has been one constant feature of that time, basically it has been this: perhaps because of the complexity of the rules and regulations, and because for many retirement seems a distant prospect, pensions policy never receives the public attention that it deserves. In spite of the huge importance of pensions, too many people ignore the policy area altogether.
Perhaps it is because of that attitude that we have almost drifted, like sleepwalkers, into the biggest crisis for pensions this country has seen for half a century. Policy changes like the abolition of tax credits, that have had a profound effect on the position of future pensioners, but are difficult to summarise in a 30-second soundbite, have slipped through only partly noticed. Equally, changes that should be made, such as in my view changes to the terms of annuities, do not get the mass support that they deserve because people do not understand precisely how they can affect their lives.
All this has taken place in spite of the brave efforts of the financial and money pages press—to which I pay genuine tribute—to heighten public awareness in the area. So in this short debate I want to concentrate on occupational and personal pensions: the final salary scheme; the money purchase scheme. All too rarely have these matters been debated at Westminster. Obviously, state provision is vitally and vastly important. We had the opportunity to debate the State Pension Credit Bill a month or two ago. I supported that Bill. Indeed, I notice that my support has been called in aid by Ministers in the other place to such an extent that one veteran Labour Back-Bencher
protested that it was all very well knowing I was in favour of it, but he had spent his best years opposing my policies.Nevertheless, I still believe that we should aim to reach maximum agreement on policies because, in terms of pensions, policies do not affect only the next three or four years, they affect the coming 30 to 40 years. The challenge we face today is, I believe, profound. The danger lights are all flashing very brightly indeed. Today we are in the position where people are not saving enough and where the personal savings rate has dipped alarmingly, back down to the levels of the 1930s. We are in a position where many final salary schemes are being closed to new members or closed altogether. These are not small companies. We are talking about Marks & Spencer, ICI, Safeway, Ernst & Young and many other like companies.
We are also in a position where contributions to money purchase schemes are insufficient to ensure a good future income, not least because the incentives to save are inadequate. In human terms, I believe that we have here the makings of a tragedy. As one commentator put it: in the future, people in retirement will live "lives of quiet desperation".
I think that there is another danger. My theory is that we are in danger of moving towards becoming two nations in terms of pensions. One nation will have inflation-proofed, final salary schemes, while the other nation will scrape along on inadequate pensions. That, again, would be a vast tragedy. My aim is not to set one nation against the other, but to see how we can move closer to a single nation where more and more people have the pensions and the savings to give themselves a good life in retirement.
The declared policy of both governments over the past 20 years has been to promote personal provision. That makes obvious sense so far as concerns the individual; it is sensible for him to make provision for his future and give himself some security in that future. But in fact it also makes sense for the Government, the Treasury and those in charge of the nation's finances. People are living longer. The ratio of the working population to the retired population is set to worsen, and the state retirement pension is a pay-as-you-go scheme. There is no invested fund on which to draw, just the ability and willingness of future taxpayers to pay for future pensions. From any government's point of view, therefore, it makes sense to encourage people to save.
That is one reason why the demise of so many final salary schemes is extremely serious for this country. In this respect we were once the envy, certainly of Europe and perhaps of the world, because we had such a wide range and prosperity in our final salary schemes. I do not claim that government policy alone has been responsible for so much decline. Obviously the financial reporting rule, FRS 17, has had an impact in this area, in particular the way in which it treats fluctuating investments as a market force. There is no question that it has had an impact. One needs only to talk to anyone who runs a pension scheme to know that that is the case. No one claims that FRS 17 has been helpful to occupational schemes.
Frankly, however, I rather doubt that, had it not been for the Government's action in abolishing tax credits paid to pension funds in the 1997 Budget, that the financial rule would have had quite the impact that it has had over the past 12 months to two years. Confidence has been affected and much more. The Chancellor had pledged himself to making no direct income tax increases, so instead he made a tax change which directly hit the future incomes of millions of pension savers. It sounded technical—doubtless that was an advantage in the Budget presentation—but its direct result was to reduce the income received by pension funds directly. It costs pension savers £5 billion a year. I emphasise that it is £5 billion a year and continuing; it is not a once-and-for-all saving.
Unlike pensions mis-selling—which we all deplored—there is no prospect of putting this matter right. It is a permanent change for the worse. The timing was such that it coincided not with a buoyant stock market, as the Chancellor apparently thought it would, but with a serious downturn in the market. It was a policy which affected not only final salary schemes but money purchase schemes such as the personal pension. Those funds were hit in exactly the same way.
To rub salt into the wounds of people with personal pensions, the Government also abolished the carry forward provision which enabled self-employed people who had not contributed to a pension to their full entitlement to carry forward six years' entitlement—to catch up, if you like, at the end of their working lives. I could never understand that particular change of policy. It seemed a petty and unnecessary act.
But worst of all, people with money purchase schemes were impacted not only by the reduction in income going into their fund but by a dramatic reduction in the pension that they could buy. Annuity rates have fallen dramatically. In the past 10 years, the income that a newly-retired person can receive for the same accumulated fund has halved. According to the Library note provided for me, in 1990 a £100,000 fund would buy for a 65-year old man, a 50 per cent widow's pension and a pension of £10,871. That figure is now in the region of £5,400.
Not surprisingly, people in this position argued that the rule that compelled them to take an annuity—a low annuity; the lowest annuity for decades—by the age of 75 was unjust. In précis, the argument they put is that, provided they can prevent themselves slipping back on state support, they should not be so compelled. Regrettably, the Government have set their face against such change. They say that people can shop around for better annuities, but annuities they will have and nothing else.
The Minister for Pensions, Mr McCartney, rejected any move for reform on the ground that it was only a problem for the rich and the very wealthy. Let me say, in the strongest terms that I can, that this is not only an issue for the rich but for the hundreds of thousands of people who do not remotely consider themselves wealthy.
Government Ministers, who are also Members of Parliament, should be very careful about lecturing anyone on the subject of wealthy pensioners. The House of Commons and Ministerial Pension Scheme was already a generous scheme when I left the Commons last year. Since then, Members have voted for an accrual rate of one-fortieth in spite of the recommendation of the Senior Salaries Board. They have given themselves a full pension after 27 years as compared with the 40 years standard.
To give a comparison, an MP who retires on a full two-thirds pension will receive more than £30,000 a year. The pension will be index-linked and there will be a generous widow's pension—and a Minister will receive a pension additional to that. To match that kind of pension as an annuity if you have a money purchase scheme would need a fund of well over £500,000. I suggest that few of those pressing for change have that size of fund. I hope that Ministers will not use the argument that wealthy pensioners are the only ones who are impacted.
I hope that the Government will reconsider their policy. It is one of the few steps open to them to change the atmosphere surrounding saving for retirement. A move along the lines suggested in David Curry's Bill would be widely welcomed and enable us to move on to consider the many other important issues in regard to pensions—for instance, how to bring people who at present have no other pension but the state pension into having pensions of their own; how to improve the position of working women whose careers are interrupted by looking after their children. That is a point that I feel I should mention given my description on the list of speakers. I am sure that it is a point that Lady Fowler would wish to make.
Even raising the maximum retirement age to 70 could be considered. I gather that the idea of retiring at 70 is regarded as "political dynamite". It may perhaps be easier to say this in this House than down the Corridor, but many of us want to go on working until 70 and beyond. In my review of pensions in the 1980s I advocated a decade of flexible retirement between the ages of 60 and 70. We could go back to that.
There are big issues to face. In my view, the first priority is to re-establish a savings climate. Confidence has gone. Removing the rule on compulsory annuities would be a giant step towards changing that climate back again. It would act as an incentive, not a disincentive, to savers. We should recognise that we face a crisis in pensions. Government policy should be aimed at re-establishing confidence and providing incentives to save. My Lords, I beg to move for Papers.
6.57 p.m.
Lord Lea of Crondall: My Lords, I welcome the debate but, to use the old phrase, it is all in the way you tell it. In his introduction, the noble Lord, Lord Fowler, put a somewhat one-sided take on many of the problems which undoubtedly face us all. For instance, retiring at 70 would be all very well if everyone had a
job until 70 and a magnificent pension at the end of it, but I suspect that some of the people who say these things in a glib and facile way think that it is another way of cutting the pension provision.To say that this is all to do with government policy is, again, a gross distortion of the reality. It implies that it has nothing to do with rapacious directors who, for example, double their own pension—and it is not now peanuts, as I shall explain in a moment—and then cut the provision for everyone else.
I shall refer to the tax regime and make some comments on the lack of balance in the reporting of the difficulties in regard to final salary pensions and so on.
We need to revisit the structure of tax expenditures but a problem that has not yet been mentioned is that tax expenditures cannot be isolated from the growing inequality of original income in society. It is very difficult to lay on the pension system the ability to regress the inequalities of the original income system.
Original income inequality has been growing. We have now gone back to the immediate pre-Second World War distribution so far as concerns the top decile/bottom decile ratio of original income. I say the Second World War, but I fear that if things carry on as they are some people may say that the free market, world-globalised economy requires us to go back to the pre-First World War distribution of income. That would have devastating consequences for the subject we are discussing and make it more difficult to address the problem of poverty traps.
In speaking about the problems of the current taxation system, I draw on the work of Dr Ros Altmann. At present tax relief is over 1 per cent of GDP—around £13 billion a year. About half of that sum goes to the top 10 per cent of taxpayers. That amount of £6 billion is greater than the expenditure on means-tested benefits for the elderly and around one-third of the cost of state pensions. Using the tax system as a means of encouraging savings, as at present, is regressive, inefficient and illogical. It lacks transparency to those contributing to pensions and to those trying to evaluate or change the effects of government expenditure.
Far more public money is being spent on incentivising the highest income groups—they would probably save anyway—than on lower income groups who need the most encouragement to save. We need to improve the incentives to saving and to move away from the present tax system to incentivising savings. We should use the £13 billion currently spent on tax relief for pensions to finance an equal benefit or cash payment into the system. It could be based on monetary amounts of saving, with annual, or even lifetime, limits. Those government payments and saving limits would not be determined by income level or age. Everyone would receive the same financial incentive to save.
I can give noble Lords an example of how that works and how tax relief exacerbates wealth inequality. Let us take a 20 per cent taxpayer who puts in £12 a month for 30 years and a 40 per cent taxpayer who puts in £12 net a month for 30 years. For the
20 per cent taxpayer, the Government put in £3 a month on top; for the 40 per cent taxpayer the Government put in £8 a month on top. Over 30 years the 20 per cent taxpayer receives £1,080 and the 40 per cent taxpayer receives £2,880. So at 5 per cent growth for the 20 per cent taxpayer, the pension pot is £12,280, an increase of 184 per cent; and for the 40 per cent taxpayer, it is £16,373, an increase of 279 per cent.I put it another way. If one takes a pension fund of £10,000, with £2,500 taken as a lump sum, the 20 per cent relief gives a £500 subsidy; the 40 per cent relief ultimately gives £2,500 subsidy. In other words, some formerly high income groups receive five times more subsidy from tax relief on pensions than low income groups.
I turn to the problem of final salary schemes. For an employee on average wages, an employer typically pays over £2,000 less a year into a DC scheme than a final salary scheme. An employee would need to pay an extra £40 a week to match the level of the employer contribution, but the DC scheme does not guarantee the same level of benefits on retirement.
In 1991 there were 5.6 million private sector employee members of final salary schemes. Projecting the decline forward, the figure has probably fallen to about 3.8 million. In most cases employers are replacing final salary schemes with defined contribution schemes, group personal pension schemes or stakeholder schemes. In a few instances such as Tesco, Nationwide and Pensions Trust different benefit approaches have been adopted. However, if current trends continue, the UK is heading towards a system in which DC dominates—where the employer pays much less into the pension.
A large number of companies have said that final salary schemes have become too expensive to run. It is true that with a background of poor investment returns, increased longevity and low inflation pension costs have risen. But it must be remembered that such schemes have in the recent past been very cheap. Most employers running final salary schemes have used the surplus generated in their fund by investment returns to reduce or stop altogether the contributions they pay in. According to Inland Revenue statistics, between 1987-88 and 2000-01 the employer took contribution holidays of £18 billion. That means that employers saved around £4,000 per employee scheme member. It is striking how contribution holidays typically favour employers over employees. Overall just over 94 per cent of surplus was used either to reduce employers' contributions or give them a contribution holiday.
The shift away from defined benefit schemes is often talked about in the same breath as longevity. Because people are living longer it is becoming more expensive, and so on. But the reality is that simply changing the type of pension provision does nothing to address the problem. An employee in a typical DC scheme will still work for the same number of years as a colleague in a DB plan and hence will have the same time to contribute. All that happens when the switch to DC is made is that the responsibility for dealing with longevity and associated costs is shifted from employer to employee.
7.6 p.m.
Lord Freeman: My Lords, the House will agree that this is an important subject. I congratulate my noble friend Lord Fowler on raising the issue. I pay tribute also to the innovation which was entirely his responsibility in the early and mid-1980s—the introduction of what were then called portable pensions. We now know them as personal pensions. Despite the problems of mis-selling—those are nothing to do with the concept—they have proved of great value in an economy where there is much greater mobility of the labour market. I do not wish to repeat any of the points made by my noble friend Lord Fowler but to deal with some of the practical issues which the Government and society need to address in order to increase our savings for retirement. I declare an interest as chairman of the trustees of a number of pension funds in industry.
Perhaps I may make some points to strengthen the powerful argument deployed by the noble Lord, Lord Fowler. Markets are changing. It may be that the cult of the equity that we knew for almost 30 years from the early 1970s may be drawing to a close and that the real rate of return available for those who were saving through a pension fund—their own or a company's—will fall in real terms which have nothing to do with inflation. I am struck by the fact that if the real rate of return on equity investment falls from the 7 per cent annual compounded rate which existed for 30 years up to the year 2000 to, let us say, 4.5 per cent, a man aged 30 contributing 10 per cent of his salary would receive only a quarter of the final salary in real terms on retirement at 60. So if one contributes 20 per cent and is taking only a personal pension with perhaps a modest employer contribution, 20 per cent is a very sizeable chunk of disposable income. A 20 per cent contribution rate would get one to something like half one's final salary on retirement.
Those are worrying figures. My noble friend Lord Fowler and the noble Lord, Lord Lea, referred to the fact that defined benefit schemes may be on the wane and defined contribution schemes are being more widely used by industry. The gross contribution rate by the employer and employee on the defined contribution schemes is by no means as significant as it is for defined benefit schemes—final salary schemes—and there is, therefore, a reduction in the volume of saving. That is also worrying.
It is sometimes suggested by those who have studied the problem that the answer is greater compulsion for us all to save over and above national insurance contributions. I am not sure that that principle would command very much support on these Benches partly because it would be bound to be redistributive and it is better that that should be done through the tax system; and it is unclear how much the state would pick up in terms of obligation for those who cannot or would not pay a much higher compulsory level of saving. As my noble friend Lord Fowler said, the answer lies in encouragement: we should try to encourage private sector schemes.
I shall deal briefly with four aspects. The first is the confidence that savers have in our system; secondly, the need for simplification of pension provision, which is one of the most regulated aspects of our lives; thirdly, improved marketing; and, finally, some innovation. On the subject of confidence, I should mention the Myners report. Paul Myners wrote the Review of Institutional Investment, which is an excellent report. It was accepted by the Government last year in full. I believe that some aspects of that report have been submitted for consultation. In her response, perhaps the Minister would be kind enough to indicate the sort of timetable that we could expect following the end of the consultation process on legislative change, the responsibility of trustees, the independence of the custodian, and the activism by investment managers—and, indeed, trustees—in dealing with their investments and their responsibilities for them. Can the Minster also say when we are likely to receive a conclusion, and how the Government intend to legislate?
Secondly, on the subject of simplicity, noble Lords will recall that Mr Alan Pickering was appointed to study the simplification of regulation. I believe that he is due to report back in the summer, but it would be helpful if the Minister could confirm that that target date still applies. Can the Minister also confirm that the Pickering review will march alongside—and, indeed, take note of—the conclusions of the second Inland Revenue review that is also under way?
The calculation of the guaranteed minimum pension, and the annual assessment of the minimum funding requirement, are, I believe, outdated. I believe that the Government have indicated that the minimum funding requirement administrative burden will shortly end. Both have done their job; and, in my judgment, should go. There are requirements for an independent financial adviser in most pension decisions, including some very simple stakeholder pension provision. For example, if a company wishes to make a contribution to a stakeholder pension for an employee without the latter having to make a contribution in, say, the building trade industry, that company cannot explain the significance and benefit of that contribution without an independent financial adviser being brought in. That is another example where we need to reconsider the need for an independent financial adviser in all circumstances.
Thirdly, I move on to marketing. I very much welcome the Secretary of State's interest in encouraging competition in the annuity market, and the provision of simpler pension products. We await the report of the Sandler committee with great interest. The reported interest of the Secretary of State in trying to emulate the former PEPS, and now the ISA concept, for pension provision, both of which are very simple mechanisms by which people can save a modest amount each week or month, is excellent. I shall be interested to hear the Minister's observation—if not today, then perhaps in writing—as to whether the Government would reconsider the proposal that all those who are in pension schemes should receive a
reminder when they reach the ages of 30 and 40 of the prospective pension provision that they have so far earned.Finally, on the question of innovation, I believe that a little lateral thinking is required in terms of the tax regime. Most of us accept that changes must, or should be, made—at least on the basis of tax neutrality with no loss to the Exchequer. However, a little lateral thinking would be welcomed in terms of restricting the relief on ingoing contributions—perhaps from the marginal rate to the standard rate for the higher rate taxpayer—in return for greater flexibility of annuity payments. I am speaking personally here, and obviously not for my Front Bench. I very much look forward to hearing the Minister's response.
7.14 p.m.
Lord Oakeshott of Seagrove Bay: My Lords, I declare my professional interest, as noted in the register, as an investment manager for pension funds for the past 26 years. I start with a direct question to the Government about the financial crisis facing pension funds that the noble Lord, Lord Fowler, described so clearly in his opening remarks. In March, I tabled two simple Questions for Written Answer. The first asked Her Majesty's Government:
- "How much income pension funds in the United Kingdom have lost through the abolition of dividend tax credits on their holdings of ordinary and preference shares in each of the financial years 1997-98, 1998-99, 1999-2000 and 2000-01?".
- "What has been the outturn of the estimated year-by-year revenue effects of the July 1997 Budget tax measures to abolish payable tax credits for pension schemes and United Kingdom companies from Budget day and changes for everyone else from 6 April 1999, as set out in Table 2:2 on page 40 of HC 85 (1997-98)?".
- "The Government's package of corporation tax reforms included measures to boost corporate investment by removing tax distortions. The withdrawal of payable tax credits on dividends was just one part of these measures. Pension funds and others will share in the long-term benefits from these changes to corporation tax. The overall effects of these changes on pension funds will depend on a variety of factors, including the type of scheme paying the pension; the take-up of private pensions; the level of future pension contributions; pension schemes' asset allocation and investment policies; and investment returns generally".—[Official Report, 19/3/02; cols. WA 131-2.]
Until the year 2000, the Chancellor got away with his raid on pension funds because the markets were riding high and funds were still enjoying the cushion of the surpluses build up in the prosperous 1980s and 1990s. Indeed, he put it very well himself in the 1997 Budget speech in defending the abolition of tax credits when he said:
- "Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays".—[Official Report, Commons, 2/7/97; col. 306.]
The period 1980-2000 was a golden age for UK equities, with returns averaging 12 per cent a year real, above inflation—the only 20-year period on record since reliable statistics began in 1870. But now we are in the lean years. It looks quite possible that 2002 will provide a third consecutive year of negative real returns on UK equities for the first time in 40 years, now that the surpluses from the fat years have all been used up. The change in accounting standards, to which other noble Lords referred, with the adoption of FRS17 (so that companies have to show the effect of changing pension fund surpluses or deficits on their balance sheet each year), is not in itself the problem: it merely highlights it.
How should society adjust generally to the dramatic increases in life expectancy that we are witnessing throughout the western world? Last week, some noble Lords may have noticed that the Guardian reported an amazing statistic; namely, that a baby girl born in France on that particular day had a 50:50 chance of living to the age of 100. The other key statistic in that paper by scientists at Cambridge and Rostock was that life expectancy in most developed countries has risen in a straight line by one year in every four—that is, three months of life expectancy for every year going by—over the past century and a half, ever since a study showed an average life expectancy of 45 for Swedish women in 1840. Governments, on received actuarial wisdom, keep believing that this trend is about to change. Well, it might. However, on this evidence that is not the way to bet.
It seems to me that no political party has begun to come to terms with this change in life expectancy. We on these Benches officially favour a flexible decade of retirement, as mentioned earlier by the noble Lord, Lord Fowler, rather than a fixed retirement age—that is a start. But if these trends in life expectancy continue, there is no way that people will be able to save enough for their old age, or, indeed, that society will be able to care for them if they are in poverty or need long-term residential care, if we expect to be able to spend 30 or 40 years on average in paid work and then live on a pension for almost the same time again. The numbers just do not add up.
Speaking for myself, I make three suggestions that I hope may help solve the pensions problem in the longer term. First, and most simply, 75 is now far too early an age for people to be forced to turn their pension money into a fixed annuity.
Secondly, to make some amends for the money grabbed from pension funds by the abolition of the dividend tax credit, standard rate taxpayers should be made eligible for higher rate tax relief on their contributions to approved pension schemes. We must encourage people on average and below average incomes to save much more. Why should not all employees receive the same tax break for their hard-earned pension contributions as higher rate taxpayers whose needs are less?
Thirdly, all compulsory retirement ages should be abolished. A person of 65 or 70 today may well be in far better health than a typical 55 year-old a generation ago. Fixed retirement ages are nonsense. Why are people not allowed to start drawing the pension that they have earned while continuing to work for the same company, perhaps in a less senior or demanding job, where they can still make a useful contribution?
Twenty-six years ago, when I was about to start my career in pension fund investment, I went for an interview with the chairman of Warburgs. I thought he had a lively mind and asked penetrating questions, and I got the job. He was then 68, so I was glad that he had not been compulsorily retired. Last year, I joined the Select Committee on Economic Affairs and saw a familiar face. The noble Lord, Lord Roll of Ipsden—who I am sorry to see is not in his place—is now 94, and is still at least one jump ahead of the rest of us. I hope that he will not mind my using him as the supreme but not the only example in this House, with an average age of 69, in terms of the invaluable contribution to our society of people above retirement age. How much poorer we are both financially and in every other way if we bind ourselves in the straitjacket of compulsory retirement at fixed age limits.
7.21 p.m.
Lord Desai: My Lords, I have no practical experience of anything. Therefore, I shall stick to the high ground of theory in relation to pensions—except in so far as I look forward to my pension in a couple of years' time; and I hope that my pension fund does not renege on the agreement.
As was pointed out in the excellent introduction by the noble Lord, Lord Fowler, and in speeches thereafter, we face the impossible problem of guaranteeing the next generation of people who will retire the sort of pension income that we shall enjoy. There is no way to hide the fact that they will not have it as good as we do. We are the last lucky generation. We need leadership to be able to explain to people that the pension contract was conceived at a time when people worked for many years and lived for only a few years after retiring, so as a way of rearranging one's lifetime income across a consumption stream which lasted beyond one's working years it was a doddle. People lived about six years beyond retirement age when Beveridge introduced his scheme.
Now, we have the much bigger problem of financing a longer retirement from a shorter working span—because of higher education needs
and so on—but also in most cases from interrupted rather than continuous employment, especially at the lower end of the scale.The numbers just do not add up, no matter whether the sums are done by government or by business. Therefore, we all have the task of explaining to people in words of one syllable, first, that they will have to save more and that the state will not bail them out—there is no way in which the state can bail them out; and, secondly, that they will have to work many more years, thus shortening their retirement age—they may be able to work half of the time or part-time. Thirdly, we must explain that almost any long-term promise that is made to them will not be fulfilled. What we have learnt over the past 30 years is that the kind of pension contracts that firms thought they could offer are not sustainable. That is the story of Equitable Life: the company offered a contract that was not sustainable. What seemed rational when the equity markets were very high and rates of return were either 7 or 12 per cent, depending on the number of decades, is no longer possible.
It is not that we are not going to recover easily; but even if we do recover, all we can say is that life in 10 or 20 years' time will not be as it is now. Therefore, when someone offers a 30-year or 35-year piece of paper, it will need to be examined with great care. The same is true of endowment mortgages.
One reason for this, apart from longevity, is low inflation. We worried so much about high inflation that we did not think of the bigger problem that would be brought about by low inflation. To some extent, while the real rates of return in the economy at large have not gone down that much, in terms of financial portfolios things have changed remarkably in equities and bonds.
To some extent, as has been said in debates on globalisation, we are in effect going back to how things were in the 19th century. In those days, people saved in consols, which yielded some 2.5 per cent. We have returned to that world, and we must revive Victorian savings habits—or, at the other end of the scale, Victorian habits of poverty. I am sorry to put it so bluntly, but I do not know how we are going to manage. I have the occasional sleepless night over the fact that no one has explained these matters.
We are far too caught up in institutional details—decisions about types of schemes or what the Government did or did not do. This is not only a British problem; it is a problem for the entire developed world. We have made promises. Our children will see that their parents had a good time and will want the same. We just have to tell them that it is too late; it will not happen.
There are two possible saving graces. First, it is to be hoped that our money can be invested in the third world, where there is a young and growing population and a skilled labour force. If we can match our capital with third world labour, we can achieve a slightly higher rate of return than we can achieve at home. It is not foolproof, but perhaps in the long run that is the
only strategy for the developed world. Secondly, the cheap manufactured goods that have arisen as a result of globalisation are giving us a higher real income than we should otherwise have had.So it is not unreasonable to expect the younger generation to save more. We have been through a period of hyper-inflation. They will not go through such a period. That is one reasonable long-term guarantee that one can give—unless the globalisation process is massively disrupted. We must engage in a partnership with the third world and sustain a free trade regime. But we must also tell the next generation—and leadership is needed to say this—that the only solution to their problems is themselves. No one else will help them.
7.28 p.m.
Baroness Greengross: My Lords, this is a timely and important debate. I thank the noble Lord, Lord Fowler, for introducing it. Perhaps I may add my tribute to Lady Castle. To the very end of her life, she was the most doughty campaigner—and in particular for the state pension. Her legacy must be that that remains the bedrock of pension provision, because so many people believe in it.
Perhaps I may comment briefly on the acres of newspaper coverage of the crisis and the dire warnings that we have all read. They are there. We are dealing with the implications of increased longevity—eloquently referred to by the noble Lord, Lord Oakeshott. I want to add two points.
In this country, by 2026, we there will be more people of 65 and over than there will be children under 16. With regard to people reaching their 100th birthday, at present there are 7,000; by then, there will probably be 36,000. If the Queen continues to send telegrams to congratulate anyone who reached his or her 100th birthday, she will have to send 100 every day. That illustrates what is happening. This is something to celebrate, not just something to be desperately upset about. Most of us would like to live for as long as we can be healthy and active. The big change is that most of our older population can do so. That is excellent news, but I agree with the noble Lord, Lord Desai, and with everyone else who has stressed that we have to plan how we are going to cope with this huge change.
That is our challenge. We have to plan for the longer term, which is usually difficult for governments because everyone is preoccupied with the next five years. There have been some recent examples of long-term planning, such as the DTI's Foresight Panel on Ageing which looked a long way ahead. That is an example of what needs to be done more.
The Government have a good record of looking at the needs of today's older people. They are beginning to do quite a lot. Many of today's older people are far better off through increased state pension, benefits and additional resources poured into the NHS, from which they will benefit without having to contribute if they do not pay national insurance. We have only just sent the State Pension Credit Bill to another place. There is a lot of concern about its cost and complexity, but it is
an attempt to meet the twin aims of rewarding thrift and providing a higher minimum income. Despite the complexity, the Minister and the Government have not been given the credit for the reform that it represents, getting rid of the assumed income calculation, capital limits and the feelings often eloquently expressed by older people to me and to many others wondering why they bothered to save because they would have done better had they spent all their money.This Government, in line with all their recent predecessors, have tried to target help where it is needed most. I hope that the reforms that have been made will mean that we now move away from the language of means-testing to that of entitlement. That is very important. That is where the new Pension Service must work.
I note that targeting has been somewhat diluted by the amount of money now spent on the winter fuel payments and free TV licences. Wealthier pensioners benefit from those payments, too. Raising the tax allowances for pensioners benefits only those who are wealthier, because the vast majority of older people still do not pay tax.
It is wrong to think that the state pension was ever very generous. Even before the link with earnings was broken, the state pension was not adequate on its own. I am rather disappointed that the Government have not found some compromise way of meeting the legitimate concerns of British pensioners who live abroad where the state pension is not uprated. It would be a shame if the Government were forced to do that by the recent High Court case rather than because they felt that it was correct to do so and would be discriminatory not to. Can the Minister tell us any more about that?
It would be wise if the Government would make public what they consider to be a reasonable income for older people. Many organisations, including Age Concern, which I represent, believe that it would be helpful to give people an indication of what they can expect, what they need to save and how the future for them and their longevity can be better planned. Knowing what a reasonable income for older people should be does not mean that the Government have to provide all that income. It would be prohibitively expensive to do so and would act as an even greater disincentive to saving for retirement. People need to know well in advance what they need to do.
There is a great deal of misunderstanding about pensions. We need a massive programme of education to explain what pensions are and what they are not and cannot be. We know that they are a form of saving and deferred pay to live on after paid work ceases, but pensions seem unnecessarily complicated and a lot of people are very confused by them—including, very often, the so-called experts.
I share the concern expressed by the noble Lords, Lord Fowler, Lord Oakeshott and Lord Freeman, about annuity rates and their fears for the future of the private pensions sector. I am very worried about the lack of flexibility on when someone can draw part of
their pension. The Government have been promising for a long time to look at that and we are still waiting to hear about it. We need flexibility on how and when we retire and on taking part of our pension without being penalised for doing so.People are understandably and justifiably anxious about the switch to defined contribution schemes. I share those feelings. The good thing about such schemes is that they will encourage greater flexibility in the labour market, as we increasingly move towards a situation in which more people leave one job, are out of work for a while and then go back into work. However, that is only one good thing and there are many other reasons for anxiety.
The Government have added to that complexity—inadvertently, I am sure. That is a shame. We need simplification. We have to rethink fundamental issues such as the age of retirement, which should be higher, and the age until which people can work. Age discrimination legislation will make it undeniably certain that we cannot continue to have a fixed age at which people stop work. We shall have to look at competence testing and not defining people by their age. We need to look at the age at which people can afford to retire or be allowed to take pension benefits in a really flexible way. We also need to encourage community interest and volunteering, not only paid additional work.
We all know that the answers are very difficult, but they are essential. We need a blueprint for longer-term action. It is essential that we get that in time for us to be able to celebrate increased longevity instead of thinking of it as a disaster.
7.37 p.m.
Lord Varley: My Lords, I am grateful to the noble Lord, Lord Fowler, for introducing the debate. Everyone who has spoken so far is an expert in their field. The noble Lord, Lord Fowler, is a former Secretary of State. The noble Lord, Lord Freeman, still has day-to-day experience in the pensions industry and the noble Lord, Lord Oakeshott, has vast experience of occupational pension schemes as a fund manager and investment manager.
I am not sure that I subscribe to the use of the word "crisis" by the noble Lord, Lord Fowler. I do not think that the situation is necessarily yet irrevocable. Things can be put right, but there is certainly cause for concern at the present situation. Hardly a day goes by without some comment in the newspapers about pension policy. The controversy in the main is about the occupational pension scheme policy. There is speculation about whether more companies will abandon their final salary schemes for an inferior alternative and about whether whatever replaces final salary schemes will provide adequate pensions and whether the pensions in payment will hold their value in the years ahead.
There is a great deal of solid evidence, already referred to by the noble Lords, Lord Fowler and Lord Oakeshott, that people are not saving enough to ensure adequate resources when they reach retirement
age. The savings ratio—the proportion of household income that we save as a nation—has gone down to a paltry 3.75 per cent and is now at the lowest level on record. People are spending practically up to their limit. If the debt on credit cards is anything to go by, they are going over their limits. People are not attaching due seriousness to the need to make provision.If the current strain on final salary occupational pension schemes is not relieved, if more schemes are withdrawn, and if action is not taken now, the problem of inadequate income in old age, to which the noble Baroness, Lady Greengross, referred, could place an intolerable burden on the state. However, it is wholly unfair to place the blame on the Government for the fact that companies are abandoning final salary schemes and opting for inferior schemes. The most significant factor putting final salary schemes under strain is the collapse in the value of pension fund investments. That is by far the largest factor.
Two and a half years ago, the Financial Times index of 100 leading companies stood at almost 7,000 points. Today, the FTSE is just over 5,200. So, in a relatively short time, 35 per cent—more than one third—of the value of equities in pension funds has been wiped out. As the House knows, pension funds invest heavily in equities. Between 1992 and 2000, there was an unprecedented growth in stock market valuations. In fact, the noble Lord, Lord Oakeshott, produced an even better figure to demonstrate how successful equities had been in an earlier period. Only five years ago, many occupational pension schemes were not only well funded, but taking a contribution holiday—an employer's contribution holiday or an employee's contribution holiday, and in some cases both. If the stock market improves as the global recession is overcome—and there are some signs, I hope, that that is happening—the value of occupational pension fund investments will improve also.
Some noble Lords, including the noble Lords, Lord Fowler, Lord Freeman and Lord Oakeshott, have harked back to the changes that the Chancellor made in his first Budget to advance corporation tax, or tax credits, as they are called, which took £5 billion annually out of pension funds. At the time, however, I did not hear great howls of anguish coming from pension fund managers or pension fund trustees—
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