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Lord Hunt of Wirral: My Lords, first, I declare my interest as senior partner of Beachcroft Wansbroughs and chairman of Beachcroft Wansbroughs Consulting. I thank the noble Lord, Lord Lea of Crondall, for his kind words about the speeches made by a number of my noble friends. However, I must take issue with him on his description of independent financial advisers because the Association of Independent Financial Advisers, led by its very able director-general, Paul Smee, has done much to raise, and has sought to raise even higher, the standards followed by independent financial advisers. Of course, in a world that is as complicated as it is now, that has become very difficult, as has been pointed out in the debate.
My plea is to espouse the cause of simplicity, particularly as regards occupational pensions. We are all concerned to protect the vulnerable in society. However wealthy an individual may be, it is a moment of vulnerability to commit to a pension arrangement that will require an organisation to be in existence several decades hence in order to pay that pension out,
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especially in the world described by the noble Lord, Lord Lea of Crondall; the "buy now/pay later" environment. For the less well off that is of particularly critical importance to their welfare in later years. Yet the reality of modern mixed economies is that businesses operating in dynamic markets do not last for decades.
However, the solution does not lie in accumulating various forms of protection to deal with each new difficulty as it arises. That is the long road to complexity which, in itself, brings problems of its own. It frustrates pension take-up and can result in the very detriment that the rules are trying to cure.
In that context, the Inland Revenue's substantial proposals for simplification of the taxation of pensions contained in the Finance Bill currently before another place are to be welcomed. I should point out that it will be an opportunity missed if this Pensions Bill does not secure a similar balance between effectiveness and the benefits of simplicity.
So far, it is not easy to see that the mass of pensions rules for occupational schemes is being improved. We will not have the new pensions regulator until next April and we have yet to see the codes of practice on how to run a pension scheme. It must be a goal to ensure that those will be simpler and easier to understand than the rules of the current regulator, OPRA.
Limited price indexation (LPI) is another area where needless complexity is evident, as several speakers have already pointed out. In creating the pension protection fund, the Government propose to create a new cost for all employers. It is a superficially attractive proposal by the Government to propose an offset to that by reducing to 2.5 per cent the LPI ceiling for benefits that were built up after April 2005. But consider the administrative burden that that will create and the increase in the complexity which consumers will have to master.
In future, retiring defined benefit scheme members may find that they have built up three tranches of pension all gaining LPI, but at different rates. Those benefits built up before 1997 will increase at whatever rate the trustees choose. Those built up after 1997 will increase by price inflation subject to a cap of 5 per cent. Those built up after 2005 will increase by price inflation subject to a cap of 2.5 per cent.
But this is relatively straightforward when compared with the LPI for money purchase arrangements. The Pensions Act 1995 also requires that members of defined contribution occupational schemes must use funds built up after 1997 to buy a pension, again subject to LPI at 5 per cent, and these too would be subject to the proposed 2.5 per cent cap from next April. However, this means that the scheme member would have to buy two different types of pension with his fund, one from amounts built up during the period 1997 to 2005, attracting index linking up to a ceiling of 5 per cent, and one from amounts built up after 2005, attracting index linking subject to a ceiling of 2.5 per cent.
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Sadly, the complexity does not end there. If the scheme member is contracted out, protected rights have set rules on increases to pensions. In consequence, this person is likely to have multiple tranches of pension, each one subject to different rules.
I understand from the Minister that the Government are aware of the complexity of their proposals, and we have heard that amendments are to be introduced in this House to deal with it. I suggest, however, that rather than complicate LPI for money purchase schemes they should do away with LPI completely. This would be a helpful development, but a brave and courageous one. I could see the Minister flinch as I said the word "courageous". It would match the boldness of the Inland Revenue.
Clearly, there will be some who would find the terminology worrying and confusing. For example, removing something called "protected rights" has the appearance of an important protection being taken away, but viewed from the consumer perspective, it would actually look rather different. An indexed annuity simply comes into payment at a lower base. Removing LPI from all types of money purchase pensions would mean that members would have the freedom to choose the most appropriate annuity for them in particular, whether it is level or indexed.
This freedom will reduce significantly the number of separate pension tranches. It will make it much easier for members to understand their benefits at the outset, during their working lifetime and when they come to choose to take their benefits. By demystifying pensions saving at every opportunity, the Government will encourage people to save for their own retirement. So I think it is high time that the Government really adopted a practical approach to dealing with the pensions crisis, and simplification is a central plank of being practical.
I look forward to seeing the Government's proposals on LPI and I commend to them the clear objective that simpler policy options will nearly always be better for consumers than complicated ones.
As we have heard in the debate, there are many other concerns about the Bill. John Harris, chief executive of the Society of Turnaround Professionals, has expressed concern that the new provisions will impose large, uncertain and unprecedented liabilities on directors and shareholders who have done no wrong. Many share in the general concern that the pension protection fund must be implemented in such a way that it does not deter valuable turnaround business by imposing unsustainable personal liabilities on turnaround executives.
These concerns are also shared by R3, which represents licensed insolvency practitioners who take formal insolvency appointments over insolvent companies. It, too, is very concerned that the Bill as drafted could expose administrators to a contribution liability as a result of a strategy to achieve a successful administration. It is ironic that only 18 months ago this Government passed the Enterprise Act, which introduced new measures designed to encourage and
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promote the rescue of troubled companies with viable businesses. There is now a real risk that this Bill will undermine those measures by strongly discouraging such rescues.
As the noble Lord, Lord Oakeshott of Seagrove Bay, pointed out earlier, this would undermine the policies of the Chancellor himself. So while there is obviously a need for robust anti-avoidance measures to ensure that the PPF helps only those for whom it is intended, this must be carefully balanced to ensure that desirable business rescues are not blocked.
I understand that last week the Occupational Pension Schemes Joint Working Group put this point forcefully to the Minister's senior officials. I do hope that the Minister will have had a full report and will move quickly, as of course many of the anti-avoidance measures in the Bill were added at a very late stage and the noble Baroness and her colleagues will not have had time properly to consider these problems. I hope that she will have an answer for us in this debate.
Baroness Barker: My Lords, this has been a fascinating debate. As the noble Baroness, Lady Dean of Thornton-le-Fylde, put it so eloquently, there was a time when people's eyes glazed over when the subject of pensions arose, but now it is a subject of deep interest. Moreover, we have had a demonstration of why this House is so necessary when considering matters of this kind, such has been the range of expertise among the speakers today. The noble Baroness, Lady Dean, went on to take issue with some of our comments about the length and complexity of the Bill. Perhaps more than anyone else the noble Lord, Lord Higgins, having worked through the pension credits legislation, will be the first to agree with me that the length of a Bill is absolutely no measure of its complexity. That legislation was very short, but managed to give the Financial Services Act a run for its money.
Our problem with this Bill is not so much its length, rather it is the key areas in which it should be explicit, but remains silent. I shall concentrate my comments on a number of those areas. I do so because there is only one fundamental question that noble Lords have to answer: what does this Bill add up to in practice? At the moment, it is extremely hard to tell. Will it be, in the words of Malcolm Wicks in another place,
Or is it just a patchwork of reforms and regulations that will amend some of the deficiencies of the 1995 Act and which may mean that some people have a marginally better income in retirement than they might otherwise have done?
In the presence of the noble Lord, Lord Lea of Crondall, I shall make one prediction with absolute confidence. For the next year and a half, your Lordships' House will devote an inordinate amount of time to studying the regulations and orders which will emanate from this Bill, and I believe that we will be right to spend as much time as we possibly can on going through them.
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The noble Lord, Lord Fowler, as he has done a number of times in your Lordships' House, set the political context for this Bill. He is absolutely right to say that the political importance of pensions has grown dramatically over the past few years. It is interesting to note that shortly noble Lords are to be joined by Mr Philip Gould. Every pollster knows that since 1995 the issue of pensions has shot up the list of concerns of electors in a quite remarkable way. The noble Lord, Lord Fowler, and others have pointed out quite rightly that there is growing knowledge about pensions on the part of the public, but there is too an even more swiftly growing concern about the lack of knowledge people have about pensions.
To that end, I want to follow on directly from many of the points just made by the noble Lord, Lord Hunt of Wirral, about the necessity for simplification and clarity. There is agreement across the House that situations like Allied Steel and Wire are unacceptable, that we have to do what we can in this House to reverse the current situation. Some companies deem it acceptable to walk away from the obligations they have to their pensioners over 30 and 40 years, leaving those people with nothing. However, there is disagreement about the extent to which this Bill will in reality protect those pensioners, as well as the extent to which it will enable the other 19 million private and occupational pension holders referred to by my noble friend Lord Oakeshott over the coming 50 or 60 years.
Other speakers in the debate have questioned many aspects of the pension protection fund, which is unsurprising given the amount of confusion during the extremely lengthy debates on it in another place. As the noble Lord, Lord Higgins, rightly pointed out, even the Minister himself was unclear: is it an insurance scheme, a pension fund or something which at times he simply could not describe? It is important that the basis of the scheme is clarified before we go any further in our deliberations, not only to enable the pensions industry to take some satisfaction from it but in order that there is an absolute certainty which can work its way down to individual pensioners.
Our reading of the Bill is that the PPF is a pooled-fund insurance scheme; that it will be started with the remaining assets and liabilities of those pension schemes that have fared worst of all; that it is expected to continue with unspecified investment powers and, ultimately, without the backing of the Government—although I believe that my noble friend Lord Oakeshott was right to question the extent to which that would happen in reality.
That is not a good start in life for any fund, quite frankly. For this one, in particular, there is a need to ensure that it is set up from the beginning on a sustainable basis. We on these Benches will bring forward amendments to ensure that matters such as the analysis of risk—not only for pension funds but also for employers—are included. We shall seek to limit the transitional period in order that that moral hazard is minimised.
Much of the comment from the pensions industry has focused on the cost of the PPF. It is extremely important to determine the cost because the viability
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of the fund is crucial. But it is also necessary to establish beyond any doubt exactly what will be the benefits to individuals. There have been differing views about the cost to business of the proposal that those who have retired will receive 100 per cent and that those who have not yet reached retirement age will receive 90 per cent. However, there is a more fundamental question than that: 90 per cent of what? It is still not clear.
Can the Minister confirm that, contrary to what some people have understood, the PPF will not replicate entirely the provisions of the scheme to which a person belonged—for example, that it will pay survivor pensions only to spouses, and do so to a maximum of 50 per cent, even if under the scheme from which the person came unmarried or same sex partners received survivor benefits? If I am correct, does not the Minister agree that the scheme will soon face challenges on the grounds of equal treatment?
I am extremely concerned that there should be clarity from the outset about what the scheme will do. The impression given when it was announced in the House was that some people would have their Rolls-Royce defined benefit pensions replaced. I rather suspect a number of people will find that they get something a little more like a clapped-out Ford Cortina.
We on these Benches have consistently said that reform of the state pension is essential. We have referred to the need to raise the level of the basic state pension and to ensure that older pensioners receive greater support. Simplification of the state pension will provide a crucial underpinning of the Bill. It is only with simplification of the state pension that employers and pensioners can begin to have a hope of understanding what their income in retirement might be.
We have a number of misgivings about some aspects of the Bill that deal with this issue—and here I part company slightly with both the noble Baroness, Lady Dean of Thornton-le-Fylde, and the noble Lord, Lord Fowler—because we believe that the proposals on the deferral of the state pension have been rather overestimated. The introduction of a lump sum in return for deferment was heralded by Ministers in another place as,
Moreover, it is stated that this would be "a choice of reward" for people in that deferral would enable them to receive a higher percentage weekly pension. But the reality is that poor people cannot afford to defer their state pension; they need it to live on.
It is not clear from the Bill what the effect of deferral will be on a person's entitlement to pension credit. It is not clear from the Government's statement whether or not it will apply to all pensioners. The Government state that they want to make sure that the lump sum is ignored where "most" people claim pension credit, housing benefit and council tax benefit. They have not said that there will be an overall disregard. That crucial matter of detail needs to be addressed.
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Deferral is a gamble. One gambles that one will be alive to receive the pension at the end of the period of deferral. I do not agree with those who say that the whole area of pensions is really a form of expert gambling; nor do I believe that any of your Lordships would wish to kid people that there is some kind of magical certainty. We want to ensure that people make informed choices. It is therefore important that we should make clear exactly what will happen to people if they do defer and what will happen if they die—particularly if they are not married—in the interim.
As to combined pension forecasting, we, too, have a number of reservations. The Government are already way, way behind in their estimates for provision of combined pension forecasts. Nearly six years ago the Government predicted that more than 700 employers and pension providers would take part in such a service. To date, only two pension providers and 64 employers have participated in the scheme.
One of the most crucial aspects is that there should be a reliable means of giving people the best estimate of what their income will be. The Minister helpfully circulated a hard copy of the proposed web-based retirement planner. I realise that the programme is not yet finished and that it is not yet live, but even at this stage there is a glaring omission—the pension credit is not mentioned anywhere at all. Given that, over time, 50 to 80 per cent of all pensioners will be in receipt of pension credit, that is a huge omission.
It is on details such as this about the interface between state and private pensions that an overall policy of increasing the age at which the basic state pension is paid, and supporting employers in maintaining older people in employment, will rest or fall. It is the nitty gritty, but it is important.
As we are debating this issue today, I should like to ask the Minister this question. In a recent survey, one in four people expressed the hope that they would retire to Spain. Can the Minister say whether the calculations will be done in euros or in sterling?
There are other elements of the Bill to which we give a cautious welcome. We are very pleased with some of the proposals on providing information and advice to employees. However, we think that the Government's rigidity in relation to member-nominated trustees is too limiting. We think that the proposal to have only one means that in any scheme a choice between having a member-nominated trustee who is a member of staff and who is not retired, or having someone who is retired, will have to be made. It would be rather difficult for a person in either of those two categories to adequately represent the interests of the others.
Many noble Lords have referred to the financial assistance scheme. I should like to ask the Minister two questions. First, how did the Government arrive at the figure of £400 million?Is it a political calculation that £20 million per annum over 20 years is all that the Treasury is willing to stand? Or is it a DWP actuarially-based calculation that the average compensation payment of £340 is adequate to make up the losses of those people who have lost defined benefit
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pensions? Furthermore, did the calculation take into account that while some of the beneficiaries of the assistance scheme have already retired and are facing a very bleak retirement, some of them are only in their twenties? I think that will make a huge difference to the way in which the assistance scheme will work.
I agree with others that the question of annuities will not go away. It has been ducked in the Bill. We need to go back and look at it again—and we need to do so now, well before the forthcoming debate on compulsion, which, if I am right, will come after the general election.
We are all agreed on the scale of the pensions crisis. We are all agreed about the need to encourage employers and employees to have faith in the pensions system and to increase their contributions. We are all agreed that one of the major factors which is a bar to employers and to individuals is the lack of knowledge and certainty, as well as the lack of ability to figure out what the financial position for individuals will be in the future.
We would be unrealistic if we thought that we could magically provide people with accurate predictions of the financial position either in macro terms or at the individual level. But there is one thing, above all, that we must do. We must preserve as far as possible the reputation of Parliament and the Government as the honest broker—perhaps the only honest broker left in the pensions field.
The worst thing would be to overspin or oversell the measures in the Bill. I think we are all agreed that they make a valid contribution to a difficult problem. With detailed study and consideration on a non-partisan basis, the measures could be made a great deal better by the time the Bill leaves your Lordships' House.
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