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Baroness Hollis of Heigham: My Lords, perhaps the noble Lord will allow me to intervene. I would not normally do so and certainly not during an opening speech. Is he now saying, contrary to Mr Willetts, that on behalf of his Benches he would now reinstate ACT?
Lord Fowler: My Lords, I shall address that specific point. I am not speaking, as the noble Baroness says, on behalf of my party, but as a Back Bencher. If I was speaking as a Front Bencher, I would be doing so from those Benches. If the noble Baroness does not understand that distinction, then I think that, with due respect, she might study the position a little more clearly. But I shall seek to set out my position on that.
I believe also that the Government should be blamed for short-changing funds on contracted-out rebates. It sounds a technical issue—which is why the Treasury love to make its savings in pensions, and that has always been the case—but what it means is that in 2002 pension funds received £1.5 billion less than was their due.
Above all, the Government should be blamed for their complacency, which—dare I say?—has just been exhibited. They have defended their inactivity on the basis that far more was being saved in non-state pensions than was the case. Thanks to some outstanding work by David Willetts—my party's very excellent spokesman on pensions—whom the noble Baroness has just mentioned, we now know that when the Government claimed that in 2001 £86 billion was put into non-state pensions the true figure was actually £43.7 billion—about half. That was a mistake that was made.
In short, I do not believe that around the country and in politics generally, there is any serious disagreement that in the pensions area things have gone very wrong. But politics—and I accept the challenge—is not just about criticism, it is also about suggesting answers. I suggest that the question now is whether from the ashes we can find some broad agreement on the way forward. I believe we urgently need a new consensus on pensions. Pensions policy is not just for a Parliament, it is for the next 40 or 50 years and preferably longer.
The search for such a consensus is not now some forlorn hope, as perhaps it was back in the 1970s when I first started taking part in pensions debates. What strikes me today is the amount of agreement there is on the way forward—not of course in every detail, but in broad approach. The Institute for Public Policy Research—not exactly a Conservative front organisation—and the National Association of Pension Funds reach very similar conclusions. I dare say that I and my Liberal Democrat neighbour in the Isle of Wight, the noble Lord, Lord Oakeshott, would find much that we could agree upon. The big
question—and the question the Minister needs to answer—is whether the Government will join in seeking such consensus.So what should the aims of pensions policy be? The first aim should be to provide an adequate pension for everyone in retirement. That is patently not achieved by the basic pension today. There is no argument about that; otherwise we would not have pension credit. Next we should aim to have a genuine partnership between state and private provision. Here there has been a radical shift by the party opposite, which I very much welcome, with Ministers aiming for 60 per cent private provision and 40 per cent state. I hope that the Minister will confirm in her speech that that remains the Government's aim. Our third aim must be to have a system which the public understand. Only if people understand what the state will provide and what it will not can we talk sensibly about individual saving.
No one can claim that the present state system meets the requirement of simplicity. I always remember from my own pensions review in 1985 that about half the people covered by the state earnings related pension scheme did not know and did not realise that they were so covered. Ironically it is this Government who abolished SERPS but of course they have added the state second pension and pension credit.
As far as the pension credit is concerned, I supported that introduction. But my view has always been that this should be a benefit for those who, through no fault of their own, did not have the opportunity to build up a pension. I do not believe it should be a permanent feature of the system for the rest of the century, as it would act as a disincentive when opportunities to build up a pension are provided.
It is here that we have the big question for future policy. It seems to me that a consensus is now forming on the basis that there should be one state pension, which is certainly more generous than at present and probably with a higher rate for older pensioners. To achieve that you would fold in at least the resources now going to the pension credit and the second pension.
You would then have a better pension but also a clear distinction between what the state provides through the taxpayer and what the individual should do in saving for his own retirement. It was this kind of solution that I sought to achieve in the mid-1980s. To those who say that this is a revolution, let me say that today it is being put forward by the pension funds and the actuaries, neither of which figure in the Che Guevara list of well-known revolutionaries.
Side by side with that policy, it is essential that governments should do everything in their power to encourage savings above the state level. That means, as the Green Paper says, better advice and adequate checks. But it also means the Government taking positive steps to promote saving. That could mean matching contributions from the Exchequer to encourage savings, especially for moderate earners. It should certainly mean removing absurd disincentives to save, such as the current rule that forces everyone
with a personal pension to take an annuity at the age of 75. The Government underestimate public feeling on that issue.As to cost, I need few lectures from the Minister on cost, having spent six years in charge of the biggest budget in government—I still bear the scars of battles with successive Chief Secretaries, most of whom still seem to inhabit the Benches here and some of whom, I notice, still keep an eye on me from the Back Benches. The Government are not on strong ground when they talk about cost when they are removing £5 billion a year in taxes—and also now spending on state provision less as a percentage of gross domestic product than almost any other European country.
The Government have unnecessarily boxed themselves in on cost. Pension age should also be brought into the equation. If the choice is between lower pensions and a slightly higher retirement age, I know how I would vote. The Government may want to encourage working after 65, but they have set their face against any increase in the state retirement age. If the United States can, over a period, move to 67, I see no reason why we cannot do at least the same during the next 20 or 30 years.
I emphasise again for the Minister's benefit that I speak for myself on the proposals. After a quarter of a century of speaking for my party—well, at least for some of my party—I value my independence. But I perhaps speak for more than myself when I say that there is a widespread feeling outside the House that the Green Paper is a lost opportunity. That feeling is shared by organisations in no way inherently hostile to the Government.
The public can see clearly enough the crisis in pensions. They are prepared for radical solutions. No one would claim that that is what the Green Paper offers, but the pensions debate should move on and seek wider goals than the Government has so far set out. I beg to move for Papers.
3.52 p.m.
Lord Haskel: My Lords, I congratulate the noble Lord, Lord Fowler, on moving the Motion and welcome him to the over-65s club. He spoke much about what the Government have done; I shall consider the private sector and see what are the feelings of people who work in business and industry about pensions.
The bull market of the 1980s and 1990s was a good time for pension funds and for company executives, because the rapid rise of share prices meant that companies could reduce and sometimes even eliminate their contributions to pension funds. The extra cash could be used for investment or increased dividends. So, as the market rose, pension fund surpluses increased and so did company cash flow and profits.
That encouraged fund managers to increase their exposure to equities, so that most had portfolios of about 80 per cent equities and 20 per cent bonds, even though their liabilities were for payments for pensions—a more bond-like liability. Amazingly, many actuaries concurred. They assumed that the
equity market would continue to rise and so, ignoring the risk, they valued equities higher than bonds, even though a pension fund has bond-like commitments.In three short years, the situation has been reversed. The fall in equities has been so great that if, during the past 16 years, interest and dividends had been reinvested, pension funds would be better off owning government bonds than equities. JP Morgan's UK government bond index has returned 448 per cent since the start of 1987, compared with a total return of 387 per cent from the FTSE all-share index. That seems to cast doubt on the calculations of most actuaries and the abilities of most pension fund managers and trustees. They failed to adapt to an era of low inflation. There must also be a case for examining whether the relationship between company executives, trustees, pension fund managers and actuaries had become too cosy, and whether conflicts of interest were forgotten.
In January, I was in the United States of America, and attended a meeting addressed by Mr Jack Grubman, who was the Wall Street analyst who was fined many millions of dollars for promoting the shares of his bank's clients rather than shares on their own merits. At this meeting, someone asked him how he handled the conflict of interest of being an analyst and also working for a bank. His response was:
- "What used to be called a conflict of interest is now called synergy".
On 20th February, the noble Lord, Lord Oakeshott, told us that the pension fund deficit of the FTSE 100 companies was £77 billion—the equivalent of 93 per cent of last year's profits. Monday's Financial Times told us that pension funds lost £100 billion last year. The extra costs associated with withdrawal of the advance corporation tax privileges—about which the noble Lord, Lord Fowler, spoke—pale into insignificance against that.
The Chancellor withdrew the privileges on tax on dividends but not on interest, bonds or other paper, such as loan stock or convertibles. As it has turned out, the encouragement to hold on to bonds, not shares, was exactly the right message.
Business must respond and we must find a way forward. I agree with the noble Lord, Lord Fowler: some schemes will have to examine their retirement ages and may have to raise them. Pension entitlements may be linked to average salaries, instead of final salary, which is usually at the peak of someone's career. Some companies are reducing their pension liabilities by closing their defined benefit plans to new employees. Others are switching to defined contribution schemes. But those are savings for the future. There is still the cost of tackling growing deficits by changing from equities to bond-like securities. Of course, that will affect investment in industry.
Employees may be prepared to pay more into their pension schemes. Current problems may encourage them to do so—provided that they can have confidence in their pension fund managers. I hope that
companies will consider the effect on staff relations of changing the rules—especially those companies that took pension contribution holidays during the 1990s. Trust and morale take years to build up but can be destroyed in days.Managers also need to convince savers of the need for hedge funds and complex derivatives. The role of those activities in our pension funds needs to be explained, explored and understood far better by regulators and pension fund managers, to convince us as savers that it is not just a sophisticated form of gambling with our money, and that nor are there any time bombs in five, 10 or 15 years when many such contracts run out.
I hope that, whatever is decided, the Minister can assure us that it will be facilitated by simplification of the tax regime that the Government have promised. It is nonsense to hold the Government responsible for the effect of all that on company profits. It is the result of mismanagement and misjudgment, which occurs in every sector of business. Managers must try to learn the lesson and move on.
4 p.m.
Baroness Barker: My Lords, I declare an interest as an employee of Age Concern England. As is often the case in this House, we are indebted to the noble Lord, Lord Fowler, for providing an opportunity to consider a matter of fundamental, immediate and long-term importance. It seems to be his special knack.
The context of the debate is an unprecedented degree of uncertainty about the future of pension provision. It could be argued that none of the factors commonly agreed to be the causes of the current pension crisis is new. Increased longevity, falling stock markets, a decline in employer contribution and failure by individuals to make adequate provision for their old age are all factors that have been seen before. However, the combination of all of them at once, coupled with the closure of defined benefit schemes, has led to widespread alarm.
Pensions have always been a settlement between the Government, employers and individuals on how best to manage the risk of incapacity and poverty in old age. At present, it seems that that settlement is being ripped up on all sides. Companies and governments seek to pass risk to individuals, with strong exhortations to save more at a time when investments are falling. Many who thought to remedy pension deficits by investment in property might be about to find out soon that what they believed to be a prudent course of action is just as insecure. Uniquely, the Government have the power to create the necessary climate in which to manage those risks in the long term.
The proposal to simplify the taxation regime has been universally welcomed. We on these Benches endorse it also. However, the reaction to the Green Paper has been mixed, as the noble Lord, Lord Fowler, said. When the CBI breathes a sigh of relief that the issue of compulsion on employers has been ducked
and Help the Aged castigates the failure to address the level of the basic state pension, it is a fair bet that the Green Paper aims for lots of targets and misses most of them.Our colleague in another place Steve Webb and we have advocated some of the proposals in the Green Paper for some time. We welcome the proposal to scrap rules that prevent people drawing down pensions while remaining in employment. The greater stringency concerning the winding-up of occupational schemes is also to be welcomed. However, the suggestion that there should be insurance to protect pension schemes should companies go into liquidation is likely to be so costly as to be unworkable.
Setting a new retirement age of 65 for new public sector workers from 2006 is a proposal characteristic of the Green Paper. Such legal protection for older workers is to be applauded. However, without similar provisions for the private sector or action to address both the unemployment and under-employment of people in the 10 years pre-retirement, it is unclear whether flexible retirement will become a reality or whether it will be an option for only the well-off.
One of the most interesting commentaries on the Green Paper was made by Will Hutton in the Observer on 16th February. He set out the demographic position, stating that the number of pensioners in Britain was set to grow over the next 40 years to 16 million, with many having a longer life expectancy than that of pensioners today. He then made a point that the noble Baroness, Lady Hollis, repeated in her statement on uprating last night. At present, the Government provide 5 per cent of the GDP for pensions, while occupational and private pensions supply a further 3 per cent. Even if the pension age increases, just to stand still the claim on GDP will have to rise by a further 4 per cent. In the Green Paper, the Government make the assumption that their contribution will remain at 5 per cent and that all further growth will come from private and company pensions. We already have inadequate state pensions. At a time when private investment is risky, the future looks bleak for many pensioners.
No doubt, the Minister will respond in her characteristically challenging and informative way about targeting and will talk again about the Government's approach to means testing, pension credit and the state second pension. I take to heart the changes in the nature of means testing. But study after study has shown that older people, particularly those with lower entitlement, do not claim means-tested benefits. The investment in the Pension Service may change that, but not if the experience of the noble Lord, Lord Fowler, is much to go by. The DWP's expenditure estimates for 2002 include an expectation that 1 million people will fail to claim pension credit. The complexity of the pension credit and the inadequacy of the state second pension are no solution to pensioner poverty. That is why we would scrap the state second pension, thereby removing the cost and complexity of contracting out, in favour of an increased basic state pension.
In the short time available, I wish to concentrate on just one element of the Green Paper: the position of women. The noble Baroness put the situation succinctly in our debate on 17th December, stating that,
- "most women work fewer hours for lower pay and for fewer years than most men. So they acquire less national insurance rights and have less occupational pension coverage. But that reduced pension income . . . has to last them for longer. Therefore at each stage of the way we have to intervene to ensure women's greater financial prosperity in old age".—[Official Report, 17/12/02; col. 584.]
Chapter 7 of the Green Paper is long in description and very short in proposals, particularly on state pensions. It glosses over in one paragraph an issue that, above all, has shaken women's faith in the state pension system: the married women's stamp. The noble Baroness will know that my colleague in another place receives hundreds of letters from women who paid the married women's stamp and now receive derisory pensions of a few pence a week. At a time when we need to promote faith not just in private pension provision but in state pensions, the 1.5 million women still working who have paid the married women's stamp should be written to in plain English and advised of their pension provision. That would allow them, while they are still working, to make advance NIC contributions that may enable them to retire with some dignity.
A group of people not mentioned specifically in the Green Paper are black and minority ethnic elders. Now and for the foreseeable future, they lose out in the pension lottery. The present generation of black and minority ethnic elders suffer because of the time of their migration to this country, broken contribution records and sometimes language issues. At its most stark, the position is as follows: if you are a Bangladeshi woman pensioner, statistically you are likely to be one of the poorest people in this country. Will the Minister tell us whether, at this key point, when we are considering overall pensions policy, work has been carried out in the Social Exclusion Unit and her department to find out whether that pattern will be repeated in future generations? If so, will her department take the position of future generations on board in any proposed pensions Bill?
It is time for the Government, employers and individuals to develop the new consensus about which the noble Lord, Lord Fowler, talked. Some immediate issues need to be dealt with to begin to build the necessary trust for that work. The Green Paper contains some interesting proposals but it is still incomplete.
4.8 p.m.
Lord Alexander of Weedon: My Lords, I, too, thank my noble friend Lord Fowler for drawing attention to the crisis in the pensions industry with such clarity and power. There are signs of the crisis every day. Yesterday, Rolls-Royce announced that its pension fund deficit was almost five times the amount of its annual profits. Today we read that the pensions watchdog OPRA is apparently approving emergency
rules that somewhat unmusically prevent employees from transferring their own pensions to another pension fund.I thought that it was policy to encourage portability of pension funds. I invite the Minister to deal with that point in her reply. The speed with which our perceptions on the soundness of the pensions industry have changed is remarkable. Five years ago, when I worked in the City, we congratulated ourselves on the fact that the industry in this country was well funded. Most leading companies, apparently well advised, took contribution holidays for several years running. Now that the position has changed so dramatically, it is not so clear how many of those companies have the will to increase their contribution substantially. Shareholders can hardly complain if they do. They took the benefit of the holiday in the good times, and they should not only recognise that but encourage companies to do all that they can to fund their promises. On that point, I agree with the noble Lord, Lord Haskel.
I am not optimistic that shareholders will do so. In my 10 years in the City, I found that there was a sublime disinterest on the part of institutional shareholders in anything to do with the welfare of employees. Their predominant interest in employees was whether the company could cut its labour force. The private industry will need great encouragement and, indeed, prodding to do what it should in that area.
I shall not go into the causes; they have been rehearsed. I agree with those who think that the initial £5 billion raid on pension funds in 1997 was unwise, even in the climate that existed then. I feel passionately that it would be iniqitous and obstinate of the Government to continue it. That would reveal that the Government were not prepared to play their part in grasping the problem and acknowledging the errors of the past.
Basically, as has already been said, final salary schemes are unfunded promises. They are particularly vulnerable to bankruptcy. The concept of a final salary scheme has virtually died for new employees, but the money purchase or defined contribution scheme offered instead is thoroughly unsatisfactory. Anyone who has saved for 10 years under such a scheme has had a negative return on their investment, except for the tax relief. They are understandably disillusioned and averse to further investment.
People work side-by-side, with the fortunate ones having a final salary scheme that may well be honoured and the unlucky ones having an inadequate money purchase scheme. That does not make for the best relationship between company and staff. One organisation that I chair is finding that about half of those offered the money purchase schemes refuse them. Those people are mainly the lower paid and more vulnerable workers, those who will be most disadvantaged on retirement. In that organisation, we must wrestle with a problem for which we have a clear responsibility. Fortunately, we can fund the deficit substantially, but there is no easy solution for the future.
It has never been easy to interest people in pensions for the future. The young have more immediate needs; the reward of investment is long deferred; and the topic is complex. When we add to that the fact that the returns look questionable, there will be even less interest. The Government have not necessarily been speedy to recognise that there is a crisis. However, if they regard the issue of retirement as fundamental to society, they will be speedy to act. I hope that, to seek best practice and involvement, they will set up a wide-ranging review to try to establish the facts, bottom out the extent of the black hole, predict the future and engage employers, unions, actuaries, pension providers and consumer representatives in a radical and urgently needed re-think of a problem that will not go away. They should do that regardless of whether it achieves a consensus, for the situation warrants it.
I hope that the Minister will not regard my speech as a party-political contribution. The issue of retirement transcends party politics. It engages with an enormous range of socio-economic and moral issues. It engages us all. That is the spirit in which we should approach it.
I feel that, for some reason, the clock has gone slowly while I spoke. Although I am well within time, I am grateful for the opportunity to make a contribution. I look forward keenly to hearing the Minister's reply.
4.15 p.m.
Baroness Greengross: My Lords, I hesitate to speak in the debate along with so many illustrious experts. I congratulate the noble Lord, Lord Fowler, who is one of the most experienced experts in the field, on securing the debate. It is timely for the House to debate the issues now, and the Green Paper was extremely important. I know that it has been much criticised for not grasping some nettles, but there is much good in it, and credit must be given where it is due.
The current pensions crisis is not caused just by falling stock markets; there are also the implications of rising longevity and declining birth-rates and the ensuing changes in the dependency ratio, an issue that I am always raising in the House. We must ensure that all departments are alive to the broad, worldwide and societal implications of ageing and longevity. We should be as aware of that as we are of the global implications of climate change, but that is not always the case. I remain to be convinced that the Government have taken that on board as they should.
I turn to what I think is good in the Green Paper: a simpler pensions framework and tax regime—it is time that we had that; clearer and better information about pensions and savings; and simpler products, as Sandler recommended. People do not understand pensions and savings, but they need to. There is agreement that we need a more proactive pensions regulator. That is vital, if we are to ensure that there is confidence in occupational schemes. The Green Paper also refers to the regulation of equity release, putting all types of scheme on the same footing. That is important, if the underdeveloped market is to develop as it might.
The Green Paper also speaks of the need to make retirement more flexible and give more encouragement to older workers. That is essential, but we need more detail on how it will work in practice. It has taken a long time for it to get here and for the Inland Revenue to consult on ways of enabling workers to draw part of their pension, while working for the same employer. That issue was highlighted by the Employers Forum on Age, which I was privileged to establish in the mid-1990s, so I am pleased that that is being done. Paying enhanced state pensions to people who defer retirement to 70 is very sensible.
The case for a rise in the state pension age has not yet been made, and I agree with the Government on that. However, if longevity continues to increase as it did in the last part of the past century, we will have to reconsider the issue, especially if more and more people aged 60 and over work longer, as we hope that they will.
There is the issue of compulsion on individuals and employers. The establishment of the Pensions Commission, chaired by Adair Turner, is welcome, as long as that is not a way of deferring a decision for too long. Sooner, rather than later, the commission or the Government will recommend that there should be some kind of compulsion on those who can afford to make provision for their retirement, particularly, perhaps, the self-employed or certain employers.
There are things missing from the Green Paper, however. We have not learnt what the long-term future of the basic state pension is to be and how it will interact with the pension credit, welcome though that is for rewarding saving and increasing the income of the poorest pensioners. We need to consider especially the issue of the take-up of pension credit, a point raised by Age Concern.
The Government's estimates assume that two thirds of people will take up the credit. We need some kind of assessment of what a minimum income in retirement ought to be. Again, I refer to the Age Concern modest but adequate model which is an excellent way of looking at this issue. It would have been better if the Government had found a way of ensuring that employers continued to contribute to employees' pensions schemes. What matters most is the level of contribution, not the type of scheme.
Defined contribution schemes can be more flexible and more appropriate for today's mobile work-force. However, the ABI says that the average employer voluntary contribution to defined benefit schemes is more than double that to defined contribution schemes—11 per cent as opposed to 5 per cent. Just 9 per cent of relevant employers are contributing to stakeholder pensions. Why is that? That was not dealt with in the Green Paper.
Equity release schemes do not just need regulating, they need developing. Little in the Green Paper looks at how equity release schemes might be an option to increase retirement income for the two-thirds of people who own their own home. For example, for specific uses they could be ring-fenced for care home fees, for home improvements, and so forth. Illogical
benefit rules on the treatment of capital, which is not included if it is tied up in housing equity but included if it is turned into income, do not help.The Green Paper proposes little on reforms to the current tax relief regime. I am attracted to the ABI's idea of additional pension tax credit. Does the Government need to provide more incentives? It cannot be right that most current tax relief goes to the wealthiest—namely, taxpayers paying 40 per cent. That seems illogical.
The Minister will not approve of one of my final points. I am sad that half of British pensioners who live abroad are unable to receive any uprating to their pensions—depending on the country in which they now live—even if they spent their whole working career in this country before retiring. It is illogical that a winter fuel payment is paid to people living in French Guadeloupe, but there is no compromise for people moving in retirement to live with family in another country—for example, in Zimbabwe.
As the noble Baroness, Lady Barker, said, there could have been more in the Green Paper about the position of women, who are most at risk of poverty in retirement. I am disappointed at the lack of specific proposals to tackle this and I am shocked by the ABI statistics that in 2000 men retired with, on average, two-and-a-half times the income of women.
To conclude, it is important to remember that the pensions crisis did not begin when the stock market crashed in 2000 or even when the Labour Government was first elected. In my time at Age Concern, it was there all along, lying hidden. Now we all know what the issues are—pensioner poverty, the savings gap, rising longevity, and so forth. The Green Paper tackles some of those issues and deserves credit for doing so. However, at the same time, it ducks other issues which I think we shall have to face before too long.
4.23 p.m.
Lord MacGregor of Pulham Market: My Lords, it is a great pleasure to follow the noble Baroness, Lady Greengross, whose knowledge of these matters is immense. I declare an interest as a non-executive director of Friends Provident. Until recently, I was chairman of the House of Commons Pension Fund. I am still the trustee of another pension fund and, of course, I am now a pensioner—a year earlier than my noble friend Lord Fowler. I must tell my noble friend that I have had a freedom pass for a year. On three occasions already it has failed to work. That is because the strip becomes demagnetised. Apparently, it does not happen often, so someone kindly suggested that it was because of the magnetic personality of the owner.
As the noble Lord, Lord Alexander, said, six to seven years ago we were proud that our pension provision was way ahead of most other members of the European Union. Tragically, we can no longer say that. The gap has considerably narrowed. The whole private sector, on which the Government rely, is in turmoil.
Noble Lords have mentioned some reasons for the turmoil. Clearly, they are not reasons for which the Government are to blame—namely, the demographic
position; the issue of longevity and early retirement; the dramatic decline in the stock markets during the past three years; FRS 17 which, although not wholly responsible, has added to the tremendous switch—the trickle of a few years ago has now become a flood—from defined benefit schemes to defined contribution schemes; and, of course, the black hole that we are constantly reading about in many company pension funds—again, partly due to FRS 17.I agree with my noble friend Lord Fowler, and others, that one of the major causes of the situation is the removal by the Government of tax relief on pension funds at a cumulative £5 billion per year. There is also the point made by my noble friend concerning the position on contracted-out rebates. There is a neat symmetry in the savings gap which the ABI has identified as £27 billion and the over £27 billion cash flow already taken away from pension funds by these government measures. I know that there are different elements involved, but there is a neat symmetry in that £27 billion has been lost and at least £27 billion extra is required.
The Government's solutions are simply not working. I suspected that the stakeholder pension would not meet its target of employees earning less than £20,000 identified by the Government. It is clear that the target is not being met. I understand that 90 per cent of companies which offered stakeholder pensions to employees had a nil response.
Therefore, stakeholder pensions are failing. But that may not be surprising. One of the biggest mis-selling scandals of all time would have occurred if the Government had encouraged people earning less than £15,000 per year to take up stakeholder pensions. Because of the minimum income guarantee and even allowing for the pension tax credit, that is clearly the position.
Recently, Mr Richie, of Scottish Equitable, made the point well when he said:
- "For the majority of low earners, the combination of pension credit and lack of scope to pay for persuasion and advice within the 1% charge cap looks toxic".
I understand that the Minister recently said in public that the Government are shifting their position on the 60:40 target of 60 per cent provision by the private sector and 40 per cent by the public sector—as opposed to the previous 40:60 ratio. Will the Minister indicate whether that is the case? If so, it acknowledges that the private sector is unable to provide for a substantial part of those who are under-saving. That is an important point.
With all that background, the Green Paper simply does not match up. The gap between the problems, which are clearly set out, and the solutions is huge. I believe that various inter-departmental working groups have put forward schemes, but the dead hand of the Treasury has come down solidly on many of
them. One can see that a whole series of proposals have been made. Clearly, some parts of government have wanted to go a good deal further to produce a solution to the problem. The Treasury has allowed a quarter solution. But it does not measure up.The Green Paper has a number of good measures, many announced earlier, including flexibility and raising age thresholds, although I agree with my noble friend that we must be more robust on age thresholds. There is a lot of tinkering, some good points on education, but endless reviews that fail to deal with the substantive point. Andrew Smith said in a Statement on 11th July in another place that one of the two acid tests for the Green Paper must be what would increase the level of savings for retirement. On that acid test, the Green Paper totally fails.
In this context, I turn to defined contribution and defined benefit schemes. There is much to be said for the shift to defined contribution schemes, although obviously, for those who have them, defined benefit schemes are better. They fit life styles better and give an element of security to the owner of the pension if a company goes into liquidation. The problem is that in the switch from defined benefit to defined contributions employers are not contributing enough. That is the real issue, and it is the issue which the Green Paper does not address. Therefore, as regards the problem of encouraging people to save for the long term rather than for immediate gratification, further incentives are needed, especially for employers. I agree with the noble Baroness, Lady Barker, that the ABI proposal for a pension contribution tax credit is one way. For a cost of £1 billion—much less than the £5 billion lost as a result of the Chancellor's earlier measure—£3 billion-worth of additional savings would be produced.
The Inland Revenue document on simplification of the tax system goes much further and is more robust than the Green Paper in producing solutions. The principles in the document are right and provide a good platform on which to work. I hope that they will be taken forward. However, some details require further adjustment. Unfortunately, I do not have time to deal with them.
Pensions must be sold. They are not bought, like most savings schemes. The private sector must be encouraged to go out and sell them. Frankly, I have always worried that the 1 per cent pricing cap will be insufficient to cover the costs of many companies which sell them. Equally, the Government must contribute to the cultural climate. I quote from a recent Daily Telegraph leader:
- "Government, regulators and industry need to create a more positive environment for the investing public".
I wanted to make many other comments, but my time is up. The critical issue is that on the acid test of whether the Green Paper will increase the level of savings for retirement it fails. The Government will have to think again.
4.31 p.m.
Lord Lea of Crondall: My Lords, I congratulate the Government on publishing the Green Paper and the noble Lord, Lord Fowler, on introducing the debate. I agree with him that we want to find a consensus which will last 20 years, not two. In that goal, there is an analogy with the 10-year plan for transport, which people now say should be extended to 20 years. It is highly desirable, because transport investment must be passed by each Parliament and it is not possible for infrastructure to be conceived in two years. We all know that motorways such as the M25 take 20-plus years to build.
Why do I emphasise that analogy? I do so because we must be careful. There was an all-party consensus on transport in both Houses, but the policy was in danger of being derailed by what happened at Hatfield. We must therefore distinguish between the short-term and long-term trends which face us and the Green Paper is good at doing that.
We know that the proposals will cause outrage somewhere or other. I refer to demographics in other factors—not so much to the Stock Exchange as to the longer term trends. Whatever we do about taxation will cause outrage with one group or another; for example, as regards retirement age and compulsion. Intergenerational equity also arises. One has only to watch Rory Bremner's programme to gain a good social insight into all of that and many other key questions.
Like the noble Lord, Lord Fowler, I want to begin with incentives. The biggest of all the long-term strategic changes, accelerated by the fall in the stock market, has been the underlying problem of the economic ratio between lifetime earnings in exchange for work and a proportion of those lifetime earnings in exchange for non-work. We all understand earnings for work, but we are talking about earnings for non-work.
In crude terms—it is not too far out of the ball park—we are looking at a ratio in our lifetime of 2:1; that is, twice the number of years in work as in non-work. Within the foreseeable future, we could rapidly be moving towards a ratio not a million miles away from 1:1. You do not need to be Einstein to realise that if the ratio were 1:1, you would have to pay "tax" at the rate of 50 per cent—forget defence for the moment—merely to pay for the same amount of time when you are not working. Clearly, that is unworkable and we must address the problem. I echo what was said by the noble Lord, Lord Alexander of Weedon, about getting everyone around the table in order to achieve a common analysis and a solution to the problems. Otherwise, we shall have only distrust and mutual recrimination.
The noble Lord, Lord Fowler, described what he and his wife experienced in trying to postpone their state pension. It is interesting, but how is the ordinary punter supposed to know about the capitalised value of a state pension? In the late 1970s, I was a member of a Royal Commission on the distribution of income and wealth. I know a little about economics, but I was astonished by the capitalised value of the state pension. It totally transformed the position of the so-called distribution of wealth. How are people supposed to make such decisions and how are they supposed to know whatever figure will not sell them short? There must be trust in the Government, trust in the employers and trust in so-called independent advisers—but I am afraid to say that I increasingly do not trust them because of the kickbacks. A great deal of academic literature is published about the trust society and the trust economy, and most important in all this is the issue of trust.
I want to make a point about working longer. When Beveridge introduced his scheme, it was normal to make explicit the distinction between the two classes of society. The manual workers would die within three years of retirement. Beveridge's proposals were therefore economic because many would be dead by the age of 68. Today, we can expect to live for 15 years after retirement at the age of 65, which changes the picture. However, given that we cannot take it with us, a difference will remain between people whose life expectancy is at the lower end of the scale and people whose life expectancy is at the higher end. How are people supposed to know when means testing will kick in for them and whether in the present jigsaw puzzle it will be in their interests? Should they say, "Forget it, I'll take whatever is on offer in the state system"?
I turn to the other end of the income scale and to a point on which I do not see eye to eye with the noble Lord, Lord MacGregor, in so far as I followed his drift. The noble Lord believed that the document on taxation produced before Christmas was important. That much I agree with—it was a well-written document. I believe that a pricing cap of 1.4 per cent is good. In a debate two or three months ago, I suggested that we did things the other way around; that is, scrapped the tax incentive and gave everyone the same tax expenditure. Currently, 50 per cent of the tax expenditures go to the top 5 per cent of the people, which is an unsustainable position.
It is more difficult to combine the ratio of final salary schemes with part-time work. If we are moving towards not having a cut-off retirement age but a gradual retirement age, we shall have to consider that issue.
As the noble Lord, Lord Alexander, said, we must avoid people thinking that their social contracts with their employers have been torn up. I want to build on the suggestions in the Green Paper in regard to institutions that we can trust. The Consumers' Association and the National Association of Citizens Advice Bureaux could do more to establish independent bodies that people can trust. Independent financial advice must be independent, without the kickbacks that have destroyed people's confidence.
Many people are saying, "We may as well club together and buy a racehorse". That is not a good position from which to go forward. The pension commission has a good agenda to look at over the next three years, and I very much welcome that.4.41 p.m.
Lord Blackwell: My Lords, I, too, welcome the opportunity provided by my noble friend Lord Fowler to debate this issue of substantive public policy. Before contributing some ideas, I shall follow the noble Lord, Lord Lea, in revisiting earlier sections of the Green Paper which refer to the scale of the challenge. We need to get it in context. However, the Green Paper does not lay out the nature of the challenge as clearly and as starkly as we need to see it.
There is a tendency for any generation to view the world around it as normality and to project that normality forward as the natural state of the world. We have a tendency to do that in regard to pensions and savings, and we do so at our peril. The truth is that we—if I may use my noble friends and myself as an example of a single generation—are part of a golden generation that has a unique opportunity in the history of mankind.
Two things have come together over our lifetimes. First, as has been mentioned, there has been an extension in life expectancy. For the first time, people expect to have a comfortable life after the age of 65. At the beginning of the century very few people lived for very long beyond retirement age.
Retirement has become affordable for many of us because of the second thing that has happened in our lifetime—the massive expansion in the working population, partly because of population growth and partly because of increased participation. That growth in the workforce has led to economic growth and to rising incomes from which people can afford to save. It has also driven rises in financial assets and housing values. This has led to the belief that it is affordable for many of us to have a pension expectancy in retirement which will lead to a comfortable lifestyle. It is a unique perspective in history. But it is one which, I suspect, will not be easily repeated by the generations that follow. We need to understand that fact and face up to it. There are a number of reasons. Most importantly, the growth in the population and the growth in the workforce that we have experienced will not continue. In fact, the working population is set to decline. That, as the noble Lord, Lord Lea, pointed out, will change the dependency ratio. Whereas there are now three people in the workforce for every person in retirement, by 2050, as the Green Paper points out, there will be half that number—that is, 1.5 workers for every person in retirement. That means a greater share of GDP will be going to non-workers.
The other consequence of lower growth in the workforce is a lower growth rate in GDP. A report published recently by the European Union estimates that declining population growth rates across the EU mean that GNP growth rates will average about 1 per cent over the next 50 years as opposed to 2 per cent to
2.5 per cent historically. In some countries, Germany and Italy, there may be a zero or negative growth rate in GDP.Fortunately, the UK will do slightly better—the Government's Green Paper suggests somewhere between 1 per cent to 2 per cent—but it will still be significantly lower than past growth rates. Less rapidly rising incomes, less income available to save and less rapidly rising asset prices, both shares and property, will impose a double burden on the working population. Not only will they have to support more old people but they will have less income and less rapidly growing assets from which to save significant amounts for their own retirement. There will be a dramatic change, which we have to recognise in order to consider policies that will be up to the scale of the challenge.
What can we do about it? The answer clearly is not more public funding. That would merely reflect the problem. The current unfunded deficit for government state pensions has been estimated at more than £1,000 billion today, which puts the £100 million unfunded liability of private pension schemes into context. That assumes only inflation adjustments, which is completely unrealistic to give people a reasonable standard of living after another 50 years. If one were to keep state pensions in line with GDP, one would double the funding costs over the next 50 years on a smaller working population.
So we cannot rely only on the state sector. As the Green Paper concludes, we must have more savings, and we need a radical shift in the savings rate in order to achieve that. Like other noble Lords, I welcome the extra flexibility that is promised for pension systems, but that does not go far enough.
I suggest, first, that all parties should consider again the possibility of a much wider tax-exempt savings vehicle, where one can put in savings which, after a period of two or three years, are exempt thereafter from tax as long as one holds them. These savings could be used not only in retirement but before retirement in emergencies or in situations where people need to call on their funds. The scheme should be much more flexible, much simpler, much easier than the current narrowly defined pension schemes. In particular, as other noble Lords have said, they should be exempt from the annuity rules.
Secondly, I suggest that we should recognise the substantial amount of wealth that has been accumulated outside of financial assets in property and in housing. I endorse the suggestion of the noble Baroness, Lady Greengross, that we should do more work on enabling people to realise such wealth through properly structured and supported equity release schemes. We should also recognise its importance by abolishing inheritance tax and allowing this important source of wealth and savings to be handed down from one generation to the next. This will give more people the opportunity to get a foot on the ladder. As we know, property ownership is now widespread in the population.
Thirdly, the Government should consider matching contributions to their savings schemes, particularly for the lower paid, a point referred to by my noble friend Lord Fowler. We know that it is extremely difficult for those on low incomes to afford a sufficient amount of savings to make a substantive difference to their retirement, particularly with schemes such as the minimum income guarantee around and the complexities that add to the costs of products they have to sell. If the Government were to commit one pound to every pound put aside by individuals and their employers, they could end up potentially with a multiple of four—one pound from the individual, one pound from the employer and two pounds from the Government. This would mean that the small savings of an individual would add up to a substantial amount and would change the savings culture where it needs to be changed.
Fourthly, I repeat a proposal I have made before. The Government should now face up to crystallising the reality of the liabilities they have for state pension schemes—the £1,000 billion. It is a real liability. I propose that the Government crystallise it and make it specific to individuals so that they can see, without going through the time delay referred to by my noble friend Lord Fowler, how much they have in their own pension pot. This could be backed by government bonds. The knowledge that they have such an amount accumulating would encourage people to top it up rather than believing they were starting from scratch.
Finally, despite all the possible ways of encouraging savings, we need to face up to extending the retirement age. It is unrealistic for people to expect that, given the demographic and economic facts I set out earlier, they can accumulate enough over their working life to pay for the kind of retirement period we now have, particularly when people are retiring earlier. We should recognise that and allow people to work longer, extending the state working age, if only to encourage people to save more to fund the period until they have the state pension.
4.50 p.m.
Lord Freeman: My Lords, I, too, congratulate my noble friend Lord Fowler on an excellent speech and on winning this debate. I declare an interest as the chairman of a large industrial pension scheme—a final salary scheme. I shall concentrate my brief remarks on the private sector, the role and responsibilities of the employer and of those in employment, as opposed to self-employment, where the problems are more acute. As my noble friend Lord Fowler rightly suggested, the solutions for those in self-employment probably lie in a much more generous second state pension funded by contributions.
The noble Lord, Lord Haskel, is a distinguished, enjoyable and interesting debater. One always listens to him with great interest, but your Lordships cannot allow the noble Lord to get away with the statement that this problem, described so accurately by my noble friend Lord Fowler, is all due to the mismanagement of companies and trustees. I hope the noble Lord, Lord Haskel, is not including me among those who are
responsible for these problems, which are due to many causes. My noble friends Lord Alexander and Lord MacGregor cited a number of reasons for our predicament. I am not slinging any mud, and neither, I think, have many of those who have contributed to the debate.What is happening among employers? Some very large companies, including Rolls-Royce, have been mentioned. What is happening out there in industry? Companies with final salary schemes are, by and large, moving towards closing them to new entrants and offering defined contribution schemes instead. That will not reduce the cost to employers of continuing final salary schemes for many years to come. Some may have to reduce certain pension benefits in the future—not accrued benefits—and many are asking employees to increase their contributions. But I stress that employers' costs will rise. In common with many other companies, my own fund, which offers a final salary scheme, has had to make changes. The estimate of the actuaries, Mercers, is that employers' costs will rise by up to 30 per cent over the next five years, for a variety of reasons. In some of its press releases, the TUC seems unfairly to have implied—and I am not blaming the noble Lord, Lord Lea—that employers were trying to save money. That is just not the case.
I shall put three very brief questions to the Minister. If she is able to answer even one in her reply, I should be very grateful. Before doing so, I should like to put some flesh on the bones of what my noble friend Lord Fowler described as the problem in terms of the present rate of savings. The Green Paper, incidentally, indicates that probably about 50 per cent of all those in the workforce are not saving enough. PricewaterhouseCoopers, a firm for which I work, has estimated that the average total pension—state and private—is set to fall in Britain by 25 per cent by 2050. That means that if one is to maintain very roughly the one-third pension in relation to past earnings, employees and employers must put up their contribution rate by 50 per cent. That is a significant sum.
My three points are in response to the Green Paper, which invited responses. I agree with what my noble friend Lord Alexander said in calling for a wide-ranging review. It is trailed in the Green Paper by the employer working group. The Minister will obviously tell us more about how that is being set up. But actuaries, consultants, employers and trade unions all need to think hard about how we are to increase the contribution rate.
The noble Lord, Lord Oakeshott, has yet to speak, but I think his party has trailed the first point that I want to make in the press over the past two months. All employees, in both the public and private sector, should have an annual statement from their employer of their total pension entitlement—state pension, employer pension scheme, additional voluntary contributions—earned to date and prospectively earned at the date of retirement. I share the concern of the National Association of Pension Funds that this will be very costly to introduce, given that the Government want a million employees covered by this
annualised pension benefits statement but, by gosh, when it is produced, it will shake up a lot of employees and a lot of employers. I suggest that the state should pay half the administrative cost of such a procedure by way of tax credit or tax relief.Secondly, my noble friend Lord MacGregor and the noble Baroness, Lady Greengross, both referred to the suggestion of the Association of British Insurers of a pension contribution tax credit. The principle, with which I agree, is to skew our tax system, which currently provides blanket corporation tax and income tax relief for pension contributions from employers and employees respectively, and introduce an incentive similar to the American 401K scheme, which I belonged to when I was employed in America. An employer's pension scheme must qualify for certain thresholds relating to the level of employer contribution, the number of people covered in the workforce, the treatment of low-paid workers and the treatment of women. If employers reach those thresholds, the state will contribute additional tax relief. My noble friend Lord MacGregor indicated the estimates—they are only estimates—of the likely benefit, and I very much agree with him.
My third and final point, touched on obliquely by the noble Lord, Lord Haskel, concerns the need to improve the quality of experience and training of employee trustees, many of whom are trade union representatives or are drawn from the working or retired workforce. I think that that should apply to the investment advisers as well. I agree with Paul Myners and Derek Higgs, who both recently produced reports, that independent trustees should be appointed, perhaps the independent non-executive directors of the parent company. Such people would not have a vested interest from the standpoint of employees or employers and could offer a fresh light on a very complicated subject. If any of your Lordships were to sit as a trustee, I wonder how many would understand the complicated legislation.
I look forward to the pensions Bill which will undoubtedly come in the next Session. I am sure we all await it with great anticipation.
4.58 p.m.
Lord Elder: My Lords, in participating in this debate, I should begin by reminding the House that I am a member of the Economic Affairs Committee of your Lordship's House which is embarking on a major inquiry into the economics of an ageing population. I have little doubt that there will be a repeat of the experience we had in our recent inquiry into globalisation—an equally vast subject—and that we shall be inundated with evidence. I do not in any way wish to prejudge that inquiry, but the Green Paper is one of the key initial pieces of evidence. I welcome both the Green Paper and this debate on it. I, too, congratulate the noble Lord, Lord Fowler, on initiating the debate.
The starting point for any discussion of pensions has to be the mixture of changing demographics and changing expectations, which mean that more people
are living longer, with the belief that they should be able to spend the longer period of their life in retirement in better comfort than ever before. Life expectancy has risen and is continuing to rise. The remorseless arithmetic of improvements in medicine, diet and lifestyle—at least for the well-off nations of the world—means that life expectancy at 65 has risen by 16 years for men and 19 years for women.There appears to be no end to that process, which is of course to be greatly welcomed. I suspect that it may be set to rise at an even faster rate than that allowed for by the official estimates. We always make estimates based rightly on current knowledge. But it would be rash to assume that all the great medical advances have been in the past, and none is for the future; and, as the noble Baroness, Lady Greengross, said, this comes against a backdrop of declining birth rates.
The Green Paper needs to be seen as part of a process, not in isolation. It was quite right that the Government turned their attention first to the questions of pensioner poverty and the affordability of the state scheme. I know there are many who are keen to do more, but there has been a really significant increase in the income of the poorest pensioners, within the context of a scheme which, in marked contrast to many in the rest of the European Union, is affordable in the medium and long term.
As we know, the Green Paper talks about four areas: informed choice; saving at the workplace; building trust in the financial services, and extending working life. It is on the first and last of those that I intend to concentrate my brief remarks. Inevitably I come to this debate without the expertise of many of the contributors from whom we have heard. However, I have had the singular misfortune to have had in my career four major periods of employment, each with its own pension scheme, interspersed with a few periods of self-employment, when I have had to make my own pension arrangements. In the first of those periods I was working in the Palace of Westminster, and I was able to benefit from a scheme in which the authorities made a contribution in my name—as it happens, with Equitable Life. If I am unclear as to what I might expect from my periods of employment should I reach an age when I am dependent on those policies, it is largely because I am afraid to ask.
No one underestimates the importance of pensions, nor the fact that for a whole range of reasons far too many people have failed to face up to the problem, preferring to put off to the indeterminate future decisions that in reality need to have been made when first going into work. But for too long there has not been the framework to help individuals to make sensible decisions, and it has been too easy to ignore the warning signs.
So, I for one entirely welcome the first set of proposals in the Green Paper, those on informed choice for the individual. The simplification of the tax regime and the improvement in individual information on pensions will give people more of the information
they need to make the right choices and, indeed, will put a quite proper onus on them to ensure that adequate provision has been made.I also greatly welcome the introduction of a single lifetime tax-free limit on pensions, designed to help saving at the time and in the way best suited to the person's needs. As job patterns become yet more flexible, so too must patterns for saving for retirement.
The other area on which I should like to comment briefly is that relating to the extension of working life. There are real issues here. Many of the explanations for encouraging people to retire early have little foundation in hard evidence. But the loss of productive capacity by losing too many people who have a full contribution to make to the economy and who wish to do so is more often than not just crude age discrimination.
The Government's intention to implement legislation covering employment and vocational training in these areas is to be especially welcomed. I also welcome the extension of the New Deal programme to the over-50s. I doubt whether anything can do more to improve the quality of life for people than to find them interesting and fulfilling work. That is every bit as true for the over-50s as for the young.
I know that there is controversy about the extent to which targeting is now in the system as far as concerns old-age pensions. But the real short-term issue is how we increase the take-up of benefits by those entitled to them. I have no doubt that were the Opposition to change their position from one of confusing pensioners by saying that the scheme is bad and should be abolished to one of encouragement to pensioners to take all that is their due, that would be a real contribution.
In commenting on the Green Paper it would be wrong not to make reference to the present circumstances as regards pensions—and to what is regularly described as a "pensions crisis". What has happened has been that a fundamental weakness in the system has been exposed all too clearly by the collapse of the stock market. I do not believe—in their fairer moments the Opposition do not believe—that that is down to government policy. David Willetts said as much at the end of last year when he very fairly drew attention to factors such as those we have been discussing: increasing longevity and changes in the labour market.
Nor would I want to blame fund managers entirely, although my noble friend Lord Haskel made a number of interesting points. I believe that in the new low-inflation environment in which we live, the need to look again at the question of bonds rather than equities should at least be revisited. The argument in favour of equities seems to be that that is what has always been done. I for one was impressed by the case made by the former head of corporate finance at Boots, John Ralfe, explaining its move to bonds. The devotion of the industry to equities at the very least needs to be reassessed. Too often managers have claimed expertise based on a record of delivery which reflects little more than that they were operating in a
strong, long-running bull market. The evidence does not seem to support the view that the risks of equity holding have really been properly assessed, as millions now know to their cost.Perhaps the most interesting aspect of the Boots' experience is that the change saved Boots 97 per cent of what it had paid in fees, and costs for management reduced from £10 million per year to £300,000. At the very least there is a case to be answered. I think fund managers would do well to try to do so.
No doubt there will be continuing debate, and much further evidence will be considered, but I wholeheartedly welcome the Green Paper as setting the right framework in which future decisions can be made.
5.6 p.m.
Baroness Byford: My Lords, three years ago a person with a pension fund of, say, £100,000 could expect an annuity of about £9,100 per year. In the intervening time that fund has fallen in value to about £68,900 and the annuity it will purchase has also fallen to only £4,837 per year. That cannot be right. It is not sustainable. Why should people be forced to take up an annuity when they are 75, given the figures that I have mentioned?
Back in 1997, at a stroke the Government withdrew the advance corporation tax relief to which several noble Lords have today referred. I believe that that one action started the pension crisis rolling. We are not saying that it is all the fault of the Government, but that one action really did start it rolling.
In raiding pension schemes the Government took billions: £5 billion, to be exact, in the first year and every following year. That affected not only individuals but companies and public authorities. Can the Minister tell the House whether a risk analysis was undertaken before that decision was made?
I have made a rough calculation—I am very much the amateur among professionals here today—which indicates that even at today's low rates of interest it probably would be better to spend the equivalent of the annuity out of capital and leave some of the funds to one's descendants than to put them into a pension fund.
I was intrigued to learn that in 2001 actual pension savings totalled £43.7 billion, compared with the Government's expectation of £86.4 billion, again referred to earlier. What a record! Either the Government have greatly underestimated the damage that has been done to the pensions industry, or perhaps the department has simply got its sums wrong.
I would have hoped to have seen some real incentive in the Green Paper to encourage saving. However, like others I was a little disappointed in that regard. The part by which I was encouraged and about which I want to ask the Minister, is paragraph 24 of the summary, which states:
- "We will introduce a single regime with a lifetime limit on the amount of tax-privileged pension saving".
Not only are the Government almost certainly losing out on their private pension piggy bank; the state pension is now so complex it must be costing ever more. Each year the number of pensioner households rises. Following the introduction of pension credits, over 55 per cent of households will be drawn into means testing. Can the Minister tell the House the estimated cost of the state pension and the provisions that have been made for 2003–04 with the addition of the pension credit scheme? Can the Minister assure the House—perhaps I get suspicious in my old age—that those administration costs have nothing to do with the reason why the whole question of the state pension was not included in the Green Paper?
Many organisations think an opportunity has been missed to simplify the state pension system, which they consider to be too complex and too reliant on means testing. Other noble Lords have asked the Minister to give the Government's target of the retirement savings coming from the private and public sectors. The last time I heard, the answer was 40 per cent public and 60 per cent private, but I gather that there may be a wobble on that as well.
Like the other noble Baronesses who have spoken, I am seriously concerned about the effects of the pension squeeze on older women in particular. Recent figures from the Equal Opportunities Commission have highlighted the salary gap between men and women in similar jobs. On top of that, women take a break when they have children. Their husband's pension scheme will usually have a survivor rate, for which many are grateful, but I understand that current pressures are resulting in a cessation of final salary schemes for new entrants and a lowering of survivor rates for existing members. I am anxious about that.
As other noble Lords have said, women are often lower paid. They work fewer years than their male colleagues, but they live longer. I had hoped to see more in the Green Paper that is relevant to them.
The pension pressures affect public service employers every bit as harshly as they affect individuals and private companies. From next year, the local education authority in my home county of Leicestershire will have to find an extra £6.9 million to cover teacher pensions. That has huge implications. That extra burden is a large portion of the swingeing increases in council tax that we shall see all over the country.
As other noble Lords have said, there is insufficient pension cover provision in our country at the moment. Some 50 per cent are not saving enough and many do not plan to save at all. I find that particularly worrying among our younger generation. I think they look at some of the results over the past few years and decide that it is not worth saving. The Green Paper should have addressed those concerns. We heard earlier about longevity and people being able to enjoy better health.
We should also remember another great change that has taken place in the workforce. Those in my generation might originally have expected to work for one or two companies alone, but today's generation
will work for many companies. I would have liked more flexibility and encouragement in the Green Paper for pensions to be transferred more easily.Finally, I am greatly worried about the rampant indebtedness in this country at the moment—not just nationally, but among individuals, too. How do the Government address that, knowing well that people are spending today rather than saving for tomorrow, when we should be considering saving to cope for the years of retirement that we hope to enjoy?
I thank my noble friend Lord Fowler for giving us this opportunity to express our concerns and hopes about the Green Paper. I realise that mine is a personal viewpoint. I have fears, but I also have hopes. I hope that the Government will move their rhetoric into action. We have a lot of consultation at the moment, but we need action at the end of the tunnel.
5.14 p.m.
Lord Vinson: My Lords, we are indebted to the noble Lord, Lord Fowler, for the debate. His knowledge on the subject is second to none. I declare an interest as an old age pensioner. I am also proud to be a member of Frank Field's pensions group, which has put forward a number of useful ideas.
By way of background, I would first like to share some thoughts that should guide our approach to pensions. It is a well accepted principle that an individual can take out an insurance policy to insure himself, but a nation cannot insure itself. The risk has to fall on someone. The same applies to pensions. An individual can have an inter-generational charge through his pension savings on other individuals, but overall the nation pays.
So there is very little difference in national cost between funded and unfunded schemes at the same level. They all come out of the gross national product in the year paid. Additionally, funded schemes carry the advance costs of capital accumulation and rather higher running costs, but have investment advantages. I also recognise that there is no difference between pension and other sorts of saving other than the tax treatment. A tax privilege given to one person is a tax cost on another. One person's tax break is another person's tax hike. The cost of all pensions comes out of the same rice bowl. If people live longer, they simply have to work longer in the paddyfields. It was well said of Robinson Crusoe that he could not retire because if he did he would have starved to death.
I welcome the Government's move, albeit at a snail's pace, to encourage later retirement and to reward it with a more generous state pension. It is high time, too. Unlike the noble Lord, Lord Fowler, I did not bother to check the penalties for delaying one's pension from 65 to 70. I was horrified to find, when I started to draw it at that age, that I would have to work another 14 years, until I was 84, until I got back the money that I had forgone. This is hardly a way to encourage people to work longer after 65.
As time is short, I shall deal specifically with one area. There is a tendency in the pensions world to address problems of entry. Sadly, much less attention is given to the problems of exit. Encouraging people to save is one thing, but how they draw down those savings is equally important. Current annuitisation arrangements do not encourage saving and do not work with the grain of human nature by allowing people to pass on to their heirs some element of their unexhausted savings. I particularly praise the work of Tom Ross and his Pensions Policy Institute. Its suggestions have the ring of common sense and I hope a number of them will be implemented.
Many people today have little more than the old age pension to retire on. A high percentage of citizens feel that they cannot afford to save. Those who have saved and are currently scraping along on their old age pension and tiny personal savings could find themselves living next door to a spendthrift neighbour who has never saved a penny and is on minimum income guarantee, with all the rental and free dental benefits that flow from it. That neighbour is better off than them, because they have fallen into the savings trap by trying to make some small provision for their old age.
So why save? To encourage people to do so at the moment is to give them false advice against their own long-term interests. I accept that the Government have recognised this moral hazard and are starting to do something about it by changing pension subsidy from the minimum income guarantee to pension credit, but there is still a nightmare of complexity. So I should like to make a new suggestion, as more needs to be done.
Implicit in my remarks is that the basic state old age pension should be sufficient for a person to live on with dignity and without the need for means testing. However, as demographic pressures get worse, I am sure it will never be enough. If people, particularly those on below the national average wage, are to be encouraged to save additionally and voluntarily, it must be done in a manner that is simple, safe and understandable, carries no up-front commission, is low cost and, in retirement, genuinely rewards previous thrift.
My suggestion is that we revitalise the well trusted National Savings movement and introduce a new National Savings pension bond. The idea needs refinement, but basically people could use the bond throughout their working lives to save up to a maximum of £25,000, indexed, which is a huge sum to a great many working people and roughly double what they currently save. Such savings through the National Savings movement could be invested in index-linked bonds or a new fund specifically designed to finance our crumbling infrastructure.
This country has a tide of savings seeking a safe haven and an infrastructure that is crying out to be rebuilt. In the name of common sense, it must be possible to bring these two together to create a more prosperous economy that will help to pay more generous pensions through a mechanism other than a tortuous PFI.
I come to the key element of my suggestion. People saving through the bond on retirement would automatically get an annuity at a pre-guaranteed indexed rate, based on their contributions and age at retirement. I estimate that, on a full fund of £25,000, this would give an annuity of roughly £30 to £35 a week at 65. That is about 30 per cent additional to the old age pension. Such a guaranteed annuity would remove the lottery associated with pension exit policies and give the same security that is available to those in the Civil Service and elsewhere.
In itself, however, such a scheme would not be enough if such savings were penalised and means tested for social security. The annuity paid from the special pension fund should be disregarded for social security purposes. That would do away with the present pension trap and genuinely reward citizens in their old age for the income that they have forgone by saving through their working lives. Such a scheme would be a real incentive to save and would keep some element of ownership in pension provision.
The National Savings movement is trusted, and computer technology makes life-time savings accumulation easily recorded and cheaply administered. Government could stand behind the annuity payment rate. Invested into infrastructure, it would be doubly worth while. In many respects, it would be a voluntary funded National Insurance scheme, providing a safe haven reward and bringing real security to those on low incomes in retirement.
Unless we make savings understandable and worth while on exit, there is no answer to the question, "Why save?" The timing is never right to make pension change, but perhaps some of these concepts could be grafted on to an existing scheme to make them more attractive and to help them to achieve what we must all aim to achieve—higher levels of secure savings for people who work longer to enjoy a better old age.
5.21 p.m.
Baroness Turner of Camden: My Lords, I, too, thank the noble Lord, Lord Fowler, for introducing this timely debate on the Green Paper. I note that it is intended that there should be further consultation over a whole range of issues, which is surely to be welcomed, as is the Green Paper itself.
I still hold the view, which I believe is also held by the NAPF, that the simplest way in which to ensure at least a basic income in retirement is by substantially increasing the basic state pension. I am aware of the Government's objections to this course, as they are restated in the Green Paper. The policy of targeting, which really involves means testing, introduces a whole range of complicated benefits, such as the MIG, the pensions credit, the second state pension and so on. Means-tested benefits are expensive to administer and involve lower take-up. Had the National Insurance Fund been used for the purpose which many people still believe it was intended, there would now be no difficulty about funding increased non-means-tested benefits. Instead, it has been used only partially for that, and has been diverted by successive governments to other purposes.
We now face problems with occupational pensions. I have always believed that the provision of occupational pensions was one of the success stories of the last century. The introduction of the original pension plan in the mid-1970s by my late and very much missed noble friend Lady Castle, with SERPS and contracting-out arrangements, occasioned a growth in final salary schemes. As a result, a generation of retirees has been able to retire at an acceptable living standard. However, many large firms have recently decided to close their final salary schemes to new entrants and to replace them with defined contribution schemes, to which the employer often pays a great deal less and the employee bears the risk himself. Moreover, there is no certainty about the eventual outcome, which will depend upon the uncertainties of the stock market. Unions are threatening industrial action to protect members' pension rights.
The Government have sought to deal with the situation in which too few people are saving for retirement or covered by occupational schemes by the introduction of stakeholder pensions. The employer's sole responsibility is to provide access to stakeholder providers—no employer contribution is required. Moreover, the amount that must be paid into such schemes to provide for a pension of a reasonable standard can seem very high to young people at a time when they may have other expenses, such as repayment of student loans, mortgage repayments, cost of childcare and so on.
The Government are concerned that people are simply not saving enough. I agree that it is a problem, but people are likely to save only if they can be reasonably sure of security. Those who have saved via savings accounts have seen interest rates decline, so that the income that they once expected from their money has diminished. If they have invested in the various types of investment accounts, the value of their original investment may have drastically declined. The times are not propitious for saving.
So what has to be done? A great deal more could be done to encourage the growth of occupational pensions. Unfortunately, successive governments have not been as supportive as they should have been. Admittedly, there have been some tax incentives, but the previous Conservative administration, anxious to improve the take-up of personal pensions, actually encouraged people in occupational pensions to withdraw from them and take out personal pensions. As we know, that had disastrous results.
The present Government, through their activities over ACT, actually undertook a raid on pension scheme assets, the results of which we are still seeing. Employers also contributed to the present pensions crisis by awarding themselves contribution holidays at a time when the stock market was producing substantial returns. Now, of course, employees are having to pay the price. A number of us protested at the time, but were assured that actuaries had attested to the security of the pension promises, so employers
largely got away with it. They should not continue to do so and should be prepared to pay into schemes to ensure that pension promises are protected.There have also been one or two instances in which the insolvency of companies has affected the pension scheme, with the result that unfortunate employees face severally diminished pension expectations, sometimes losing out altogether. Therefore, the issue of the security of pension provision is of considerable importance.
The Government's Green Paper attempts to address these problems. They are aware that many professionals in the pensions industry have been complaining about over-regulation—with some justification, since pension administration seems to have become very complicated. But the Government rightly point out that it is a question of getting the balance right. Some regulation is absolutely necessary for the protection of pension scheme members.
Much of the Green Paper is concerned with security, and a new pension regulator is proposed. That seems a good idea, but I would be interested to know about the interaction with those already involved with pension security. We have OPRA, a pensions ombudsman—and, of course, there is OPAS, of which I am a board member, which gives a free service to individuals with relatively minor pension problems. How would the new regulator fit in with existing arrangements?
As a form of protection for employees with defined benefit schemes that are under-funded when an employer becomes insolvent, a centralised clearinghouse arrangement is suggested. The TUC has suggested the establishment of a pensions protection fund, which could be coupled with insolvency insurance to cover any shortfall in employer contributions at the time of wind-up. These are all propositions worthy of consideration, but actuaries tell me that a fund would be viable only if it were underwritten by the Government.
The Pickering Report made a number of suggestions clearly designed to save defined benefit schemes, including the suggestion that it should be part of the contract of employment that employees should belong to the company's scheme. I am inclined to support this, but a lot depends on the security of the scheme. The same is true of the suggestion occasionally made that there should be compulsory contributions. Again, employees must be assured that their investment is reasonably safe, otherwise that will not be popular.
Pickering suggested that survivors' benefits be discontinued and indexation abandoned, with a view to making such schemes more acceptable to employers. I hope that these recommendations are not accepted, as the first would be damaging to many women, who often have not had the opportunity to build up pension entitlement themselves, and the second, since people now live longer, would be disadvantageous to the older pensioner. I do not even like the suggestion that it should apply only to
pensions of £30,000 or more. Once the principle is accepted, the figure can be varied. It is not a good idea and should not be pursued.Finally, there is a section dealing with the special problems of women. The problem of poverty in old age is largely that of women. This is because many women have an interrupted work pattern. For many, improved state provision is the only answer. The original SERPS attempted to deal with the problem by basing entitlement on the best 20 years' earnings, but that provision was quickly dropped. The problem of interrupted work patterns still remains, and the Green Paper does not really address it. Awareness of pensions issues among women may be low, as the Green Paper said, but that is not why so many women are poor in old age. They simply do not have the money to invest in pension provision, no matter how aware they may become.
The Green Paper provides a useful basis for further discussion and one hopes that, as a result of the wide consultations envisaged, solutions to the problems envisaged will arise.
5.30 p.m.
Lord Northbrook: My Lords, we are all grateful to the noble Lord, Lord Fowler, for initiating this debate. First, I declare an interest as an investment fund manager. From a City perspective, I can see the effect on pension funds of the raid on their assets which has cost them £5 billion annually. While by no means claiming that to be the only cause of the current pensions crisis, it clearly has not helped. The change in accounting standards with the adoption of FRS 17 is also not the cause, but it very much highlights it. Abolition of the carry-forward provision for the self-employed in relation to retirement annuity premium relief has rubbed salt into the wound.
The Government's pensions Green Paper, following the Pickering and Sandler reviews, made important general points—not least of which is that up to 3 million workers are "seriously undersaving" for their retirement, and that an independent commission will now investigate whether workers should be forced to make additional private pension arrangements.
The plan to rationalise the eight different pension tax regimes is welcome. I note the proposed lifetime ceiling of £1.4 million and endorse the views of the noble Lord, Lord Oakeshott, that the Lord Chancellor's pension package of £2 million should be subject to a tax clawback. I agree also with the comments of the pension analyst from the financial advisers Hargreaves Lansdown, who said that the ceiling,
- "should make understanding a pension easier".
One of the most radical proposals in the Green Paper will, from 2010, allow employees who delay drawing their pension to take a higher compensatory amount, of 10 per cent per year as opposed to the current 7.5 per cent. New public sector workers from 2006 face the prospect of having their retirement age
increased from 60 to 65. However, as stated by Ros Altman, governor of the London School of Economics,
- "Whilst the Green Paper has addressed the need to allow employees to work longer, it has done little to encourage them to save more".
Separate plans to encourage savings through simpler charging structures do not seem likely to succeed. The take-up of low-cost stakeholder pensions, launched last April in an attempt to encourage poorer-paid workers to save, has been disappointing.
The Green Paper has also promised long consultation, but little action, for employees whose final salary pension schemes were being closed or wound up. There is, I believe, an argument that the Government should change the rule that treats current employees of firms that are winding up their pension schemes less favourably than those who have already retired.
The Pensions Policy Institute, commenting on the Green Paper, said that the paper had failed to address the problems of state pensions that shrink as the years go by. It said that the new means-tested benefits go up every year in line with earnings, but the state pension climbs more slowly in line with prices. That means that the state pension will have shrunk so much by the time today's workers retire that most people will have to claim the means-tested part.
The PPI continues its examination by stating that most of a current pensioner's income comes from the state. Yet Ministers assumed that individuals would do more towards saving for retirement when in reality many people are not doing so. In fact, said the PPI, saving into private pensions has "stalled" with people starting later and saving more irregularly. The Government must, in its view, reform the state pension if they are to avoid tomorrow's pensioners being worse off than this generation's. Shadow Work and Pensions Secretary David Willetts said:
- "The Government has been wrong to exclude reform of state benefits from the many consultations. It is not too late for the Government to change its mind".
The accountancy firm PricewaterhouseCoopers, in a press release of April 2002, calculates that the incremental cost of the new pensions credit could increase from about 0.2 per cent of GDP, in 2004–05, to more than 1 per cent of GDP by 2050, assuming an indexation of the guaranteed credits. Even with the price indexation of the basic state pension, these calculations suggest that total government spending on state pensions and related benefits will increase by about 1 per cent of GDP over the next 40 to 50 years, equivalent to around £10 billion at 2002 GDP values. Furthermore, about 70 per cent of all pensioners would be likely to be eligible for the means-tested pensioner's credit by 2050. In total, the number eligible could double, from about 5.5 million in 2004, to about 11 million pensioners by 2040 taking into account the ageing of the population.
PricewaterhouseCoopers believes that there are alternative ways of spending that significant additional amount which would make the state pension system much simpler and reduce significantly the reliance on means testing. I understand that, at present, on the Government's own estimates, only 65 per cent to 75 per cent of eligible pensioners claim the MIG. Two alternative long-term strategies have been suggested by PWC to address those drawbacks of the pension credit. First, the Government could gradually phase out the pension credit after 2010 and recycle the money into a stronger second state pension, raising almost all pensioners above the means-tested income support level by 2050. Or, secondly, the Government could increase the basic state pension to the level of the MIG and index that to earnings, paying for it by avoiding the additional cost of the pension credit by 2010, and gradually increasing the state retirement age from 65 to 67 between 2020 and 2030.
So, in conclusion, there is a pensions crisis which has not been fully tackled by the Government. To stem it, a savings climate needs to be re-established. Removing the rule of compulsory annuities, although with a minimum protection still in place, would be a great step in changing the climate back again. Rewards could be given by way of tax incentives for those who keep their ISAs for a long time. Tax credits should be restored to pension funds and the reliefs taken from the self-employed reinstated. Reform also needs to be made to the state pension, which will be made much more complex by pension credits. For that reform, one of the PricewaterhouseCoopers measures seems appropriate. I would favour the plan to phase out means-tested benefits in the long term so that the whole system becomes simpler.
5.37 p.m.
Lord Naseby: My Lords, I declare an interest. I am chairman of the Tunbridge Wells Equitable Friendly Society, now trading as the Children's Mutual; a trustee on the employees' pension fund; and a non-executive director of two other companies, both of which have occupational pension schemes.
My noble friend Lord Fowler distinguished himself in the world of pensions through his work over many years in another place. His contribution today should be noted by all sides of the House and by those outside who read our proceedings. When he said that the Green Paper was a disappointment, he understated the situation. It is a long time since I read such a long Green Paper with such a limp conclusion.
It is true, as several Members have said, that the Chancellor's £5 billion raid did not create the current problems any more than the stakeholder pension scheme—as disappointed as the Government must be with that—has helped the situation. The day before yesterday, I think, the Financial Times—like the noble Lord, Lord Haskel, who is still in his place—drew attention to the pension holidays enjoyed by some firms whose pension funds were in surplus. It has been suggested that taking a holiday at that time amounted to mismanagement. However, companies exist basically to create wealth—that is, to invest, to
produce a product, service and dividends, and to create shareholder value. If an independent actuary—I emphasise the word "independent"—states to pension trustees, of which I am one, that their fund is in surplus, it is correct that we should not necessarily seek from our employer an increase in any one year. If we are sufficiently in surplus, it is perfectly appropriate that those funds should be taken as a holiday because, in a private-sector-oriented society, they would be better spent on investment in the company, on new products, new developments or whatever is needed for that company to succeed—because, unless it does succeed, the pensions will be in trouble. We must remember that we need companies that succeed.The situation in the outside world for those of us who are having to deal with it is very serious. So far as I can see, there has been almost no reaction from Her Majesty's Government to date. Almost all defined benefit schemes will soon be closed to new entrants. Almost all new entrants will join defined contribution schemes—rather like the US scheme, but not with quite the same benefits. What is even worse is that young people still have the option of whether or not to join a scheme. I venture to suggest that we should look at what the Australians do. They make it compulsory—and so it should be.
Mention of young people brings me to the question of what incentive exists for the brightest entrepreneurs in our society if they are to be restricted to a lifetime fund of £1.4 million—made worse by the fact that Members of another place and paid Members of this House, from the Lord Chancellor downwards, are to be exempt.
In addition, none of us, as trustees, guessed that mortality rates would be adjusted in the way that they have been in recent times. We have to rely on outside recommendations. It is not for individual trustees to work out what the mortality rates will be at any point in time.
Above all, as other noble Lords have said, there has been a collapse in share prices—and we cannot be confident that there are not more falls to come. Perhaps some funds should have held greater investments in bonds. Yet an examination of the post-war period suggests that those who invested in equities have done broadly better than those who invested in bonds. It is wrong to suggest that funds are not invested in bonds and cash. A great many are.
Every time a company announces a deficit, the press pounce on the fact—which pushes down the share price and compounds the company's problems.
The deficits faced by pension schemes have to be understood. Few schemes are in difficulty as regards paying pensions currently or in the foreseeable future—that is, over the next few years. As I have said, all trustees keep some of the funds in cash or in readily available bonds.
There is less of a problem so long as we remain under MFR, with time to increase any deficit by putting up company contributions and by asking employees to
increase their contributions. It seems to me that, given a 10-year extension period, the problem could be dealt with.But looming over us all is FRS 17 and the date, 31st December 2005. The accounting rule is tougher; it is a snapshot of a fund at a point in time. It was created when the markets were stable and certainly at a time when the present volatility did not exist.
So what can and should be done? The Government should re-examine FRS 17, talk to those who proposed it and ask for it to be postponed. It was created in a different era. After all, if the FSA can suggest to the life companies that their solvency ratios can be recalculated and they can still be solvent, the same should be possible for FRS17. The Minister shakes her head. I do not accept that it is impossible.
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