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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham): My Lords, with the permission of the House, I should like to repeat a Statement made in another place on occupational and private pensions. The Statement is as follows:
"Decisions on pensions are some of the most important of our lives. Since coming to office in 1997, this Government have faced three specific challenges on pensions: the challenge of affordability, of pensioner poverty, and of expectations. Rising longevity poses important challenges for the affordability of pensions systems right across the developed world. The old age dependency ratio is expected to more than double in the European Union, with even greater increases in other developed economies such as Japan. People living longer is good news. However, if people want to see continuing rising standards of living in retirement, they either have to save more, work longer, or a mixture of both.
"The United Kingdom is in a stronger position to meet this demographic challenge than most other developed countries, not only because our dependency ratio is expected to increase by half as much as the European average, but because of the choices we have made over the past five years to ensure that the UK pensions system remains affordable.
"We rejected the demands of those who said we should link the basic state pension to earnings because this short-term solution would not have been sustainable over the long term. Instead, because of our targeted approach, projections show that public spending on pensions in this country will remain stable over the next 50 years at around 5 per cent of GDP. In contrast, EU forecasts show that other European countries such as Germany and Spain will require increases of between 40 and 80 per cent in public spending on pensions over the next 50 years in order to meet their pension liabilities.
"It is this same targeted approach that has enabled us to meet the second challengethat of pensioner poverty. Since 1997, we have strengthened the foundation of basic state support through the introduction of the minimum income guarantee and, from next October, the pension credit. As a result, next year, the poorest third of pensioners will be on average £1,500 a year better off.
"I can tell the House that we continue to reject calls from the pensions industry and others that all targeted support for pensioners should be scrapped and instead added to the basic state pension. Such a move would mean an increase in the maximum basic entitlement of £10 a week for some pensioners, but
"Over the past five years, as we have taken action to tackle pensioner poverty, the pension contributions of people on high incomes have risen by 40 per cent, increasing the incomes they can expect in retirement. The challenge facing society today is therefore one of the expectations of middle-income earners, people who expect to see continuing rising standards of living in retirement, but who in order to do so will either have to save more, work longer, or both.
"Evidence shows that perhaps 3 million such people are currently not saving enough for their retirement. And others may not be saving enough to provide the pensions they want. At the same time, occupational schemes have come under pressure from rising costs and increasing complexity. Some employers are closing schemes or cutting the level of contributions, and many people are leaving the workforce earlier.
"There is a choice to be made about how we meet these challenges. There are some who believe that a radical strengthening of the voluntarist approach to pension provision can never be made to work and that the UK should move beyond it, for example, adopting further compulsory pension contributions. We believe that the partnership between government, individuals, employers and the financial services industry has long been a strength of the pensions system in the UK and that the proposals we are setting out today will renew this partnership and reaffirm the responsibilities of each member.
"Our proposals show how, with all partners playing their part, the voluntarist approach can work to maximum effect. The test will be whether, with this radical strengthening of our approach, employers and employees can rise to the challenge voluntarily or whether we will need to introduce more compulsion.
"In a voluntarist system, over and above the level of support provided by the state, individuals are best placed to judge their own long-term savings needs and aspirations for retirement. However, the success of this approach rests on the information and understanding people have and the clarity of the options open to them. It will fail if the complexity of products and the cost of financial advice mean that people are deterred from saving.
"Since 1997 we have taken action to rebuild trust in the financial services industry, to clear up pensions mis-selling, and to introduce new savings products, like ISAs and stakeholder pensions, opening up opportunities for more people to save. However, for too many people, pension planning has remained an incomprehensible maze. As I said to the House in July,
'Pensions simplification has to be at the heart of any strategy to encourage greater pension provision'.[Official Report, Commons, 11/7/02; col. 1053.]
"So today I can announce a radical simplification of these rules. We propose to sweep away the eight existing pensions tax regimes, with their associated limits on annual contributions and benefits. In their place, we propose a single lifetime limit that is assessed once only, at the point of retirement, and we propose to set that limit at £1.4 million.
"The lifetime limit will be complemented by a light-touch compliance regime, based on an annual limit of £200,000. This limit will not affect the vast majority of people. Further details are set out in an Inland Revenue consultation document, published today by my right honourable friend the Chancellor. And, as my right honourable friend announced in the Pre-Budget Report, the tax free lump sum will remain. Existing tax reliefs for pension contributions for employees, the self-employed and employers will also remain.
"These proposals will help people to make clear and confident decisions, encouraging more saving and enabling more people to build up a bigger tax free lump sum. They mean far greater individual choice and flexibility about when and how much to save in a pension.
"Over 99 per cent of the population will be able to save more in a pensionwith tax incentivesthan under current rules. The proposals will reduce administrative burdens on employers and pension providers alike. Taken with other measures I am announcing today, they could save employers between £150 million to £200 million a year in pensions administration.
"We shall match this radical simplification of pensions taxation by breaking down other barriers to pension saving. We shall provide individuals with more information about their own circumstances. Our proposals would increase the availability of state pension forecasts and extend the coverage of combined state and occupational pension forecasts.
"We shall promote total benefit statements in the workplace, and highlight the additional value tax relief makes to saving in a pension. To broaden access to advice, we shall work with the financial services industry to develop mass-market financial advice in high street banks, and shall consult on options for a possible requirement on employers who do not provide pensions to provide financial advice free of charge through the workplace.
"I can confirm to the House that we shall implement the recommendations of the Sandler report to make it easier to save through simpler products, dramatically stripping out regulation and sales costs. We propose to offer the self-employed
"The proposals we are setting out today will also reaffirm the role and responsibilities of employers in the pension partnership. Many employers recognise the important benefits to recruitment, retention and staff motivation that good pension provision brings. But, elsewhere, some employers have been reducing their financial commitment and contribution to workplace pensions, causing anxiety and damaging confidence in pension saving. There is a difficult balance to strike here. We want to increase member protection without imposing burdens on employers.
"I can announce today that we propose to create a new proactive pensions regulator to focus on schemes where there is a high risk of fraud, bad governance or maladministration. We are also setting out proposals for a fairer sharing of assets when schemes close, with more priority for workers closer to retirement or those with more years of contributions. We propose stronger protection for members where employers wind up schemes, and the capping of provisions to prevent executives abandoning ship and taking the lifeboat with them. We recognise, as good employers already do, the vital interest employees have in their pension arrangements, so we propose requiring employee consultation before schemes are changed. We can expect to enhance protection for employees only if we make it simpler and easier for employers to run schemes.
"Following Alan Pickering's report we propose radically to reduce the regulatory burden on occupational schemes by simplifying the contracting out rules, including reforming the reference scheme test and ending restrictions on how and at what age contracted out rights can be drawn. We shall also replace the minimum funding requirement with scheme specific funding requirements, saving companies £80 million a year and consider allowing employers to make membership a condition of employment. I can also announce our aim to consolidate all pensions legislation into a single pensions Act.
"These radical reforms mean big cuts in the administrative burdens on employers and schemes. We shall also work with a new employer-led task force, including trade union membership, to identify and promote good practice.
"Enabling people to work a few years longer can make a huge difference to retirement income. The 1980s and early 1990s saw the employment rate for older male workers decline. That trend has been reversed, with 900,000 more people over 50 now in jobs than in 1997. But we must go further, doing away with inflexible and outdated approaches to retirement. Our proposals will allow people to choose to work for longer if they want to.
"We propose to promote flexibility in retirement by building on the success of the New Deal 50+; legislating against age discrimination; ending compulsory retirement ages; and raising the normal pension age for most groups in the public services to 65 for all new entrants.
"To smooth the cliff edge between work and retirement we propose to allow people to carry on working while drawing an occupational pension. And to improve the incentives for those who want to work past state pension age, we shall bring forward increases to the extra state pension people get by deferring. This means that a single pensioner who has accumulated £100 a week state pension and second pension entitlement could choose to take their pension at 70 and get £150 a week instead.
"We are also consulting on the chance for those who defer to take a lump sum instead of the enhanced pension. For a single pensioner, this would be a one off payment of £20,000 on top of their normal pension, or £30,000 for a couple.
"I have one further announcement to make on the state pension age. We have received representations for a significant change, with persuasive arguments to move to a higher state pension age, releasing resources for use elsewhere in the pension system. I have carefully considered this option and have concluded that it would impact disproportionately on the poorest workers most dependent on the state pension, many of whom have had hard working lives. As well as being forced to work for longer they would, because of lower life expectancy, see a bigger than average slice of their retirement taken away. I have therefore decided that we should not raise the state pension age. Our measures to give people far greater choice about flexible retirement are the right way to address this issue.
"The proposals we are setting out today seek to renew the pensions partnership in the UK. They show how, with all partners playing their part, the voluntarist approach can be made to work to maximum effect. As I have said, there are some who believe that the voluntarist approach to pension provision can never be made to work and that the UK should adopt a system of compulsory pension contributions. There is a choice. The case for compulsion has not yet been made. But because of the magnitude of such a decision and the need to help build a wider consensus on the way forward I am today establishing an independent pensions commission reporting to me as Secretary of State on whether the current voluntary system is sufficient to ensure that employers and employees rise to the challenge.
"I can tell the House that Adair Turner, former director general of the CBI, has accepted my invitation to chair this pensions commission. It will report to me regularly on whether there is a case for moving beyond voluntarism. The time has come for all the partners in the pensions systemgovernment, employers, employees and financial servicesto rise to the pensions challenge. I commend the Statement to the House".
Lord Higgins: My Lords, I thank the Minister for repeating the Statement made in another place in a way that suggested not only that she believed it but also that she understood it. I declare an interest as chairman of a company pension scheme.
This is the second Green Paper produced by this Government. The previous one, Partnership in Pensions, was not as large as the current one and had a foreword by the Prime Minister. The current one merely has a foreword by the Secretary of State. I am not entirely clear as to the significance of that. Since that time we have had about 38 consultative documents. A whole mass of new material arrived today which we shall wish to study carefully.
We welcome the proposed simplification of regulations and pensions taxation, always provided, of course, that that does not conceal some stealth tax. We shall consider that matter very carefully indeed. A key feature of the previous Green Paper was that the Government wished to move from a situation where 60 per cent of pension provision came from government and 40 per cent from private sources to a situation where 60 per cent came from private sources and only 40 per cent from government. I ask the Minister: is that still the Government's objective? Time and time again government action has applied pressure in the opposite direction. Either it has an adverse effect on private provision or such measures as have been introduced to increase private provision have produced poor results. The result is that the industry and pensions provision generally are in a state of crisis. I am glad to see that I have support in the form of nods from the Benches opposite.
The Green Paper published today shows remarkable complacency. The main attack on private provision was, of course, the notorious action with regard to ACT of the Chancellor when he entered office. As a result pensions have been deprived of some £5 billion a yearnow £25 billion in total and risingwhich has seriously affected their available resources and is a major contributory factor in the closure of many final salary schemes to new members. The rate of closure has doubled in the past year. However, one does not get that impression from the Statement. Some 55 per cent of leading companies have now closed final salary schemes to new members. Indeed, a number of companies have closed schemes completely, even to existing members. Against that background, it is also the case that some schemes have been wound up or closed. I am glad to welcome the proposals in the Statement that suggest that action will be taken to prevent members of schemes, who had expectations with regard to their pensions, being adversely affected, as some have been.
I also welcome the change being made, at long last, with regard to the minimum funding requirement. However, I am not at all clear how changing to a scheme-specific proposal, as mentioned in the Statement, will save companies £80 million a year. Perhaps the Minister will explain.
In addition to the adverse effect that the Government's policy has had on company schemes and private provision, their attempt to increase that provision has not been successful. It was expected that some 5 million people would take out stakeholder pensions, but I believe that the figure is less than 1 million. Will the Minister tell us what the actual figure is? I believe, too, that 46 per cent of the schemes imposed on companies by the Government have no members at all. Furthermore, I fear that even those in tracker funds, for example, will not produce a satisfactory return for those investing in them. That is a considerable deterrent to people engaging in schemes as the Government wish them to do.
As for the state second pension, a whole range of bodies including the NAPF, the Pensions Policy Institute and the IPPR have suggested that it is not ideal. As the Minister implied, they would prefer to have an improvement on the basic state pension. With regard to the state second pension, the Statement did not mention when the change would come from graded to flat-rate places.
The Government have included proposals allowing people to work longer if they want to, and the idea that people can draw their pensions while still in employment. That is scarcely a new idea; indeed, I believe that it has been proposed at least five times. It is a question not of "Have I Got News For You", but of "I Have Not Got News For You". We have found considerable doubts about the proposal, but we shall consider it with interest.
The Government have made the interesting suggestion of changing to a lump sum proposal if people defer the drawing of their state pension. The figure of £20,000 was suggested. Will the Minister explain where that figure comes from and whether it will be a tax free lump sum? I give an example from the experience of my family. My sister deferred her pension for a year in the hope of getting an increased return, but found that it took more than 18 months to get paid the increase that had been deferred for a year. Administration of the pension system is lamentably bad; it has not significantly improved over the lifetime of the Government.
No mention was made of the requirement for people to draw annuities at the age of 75. It will be a disappointment that no such provision is included in the Statement, given the fact that an amendment has been carried twice in your Lordships' House. It is all the more important because pressure on annuity rates will be upwards due to the Government's proposal to increase borrowing. Therefore, people who are unable to defer the drawing of their annuity will have to draw it in January, if they reach the age of 75 at that time, although annuity rates are likely to rise thereafter.
The complexity of the Government's proposals with regard to tax credits has resulted in an appallingly low level of take-up. The NAO report, recently issued, suggests that no less than 20 per cent of pensioners fail to take up their entitlements. Since 1997, the crucial
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