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We know that the pension system hitherto, state and private, has discriminated against women. It was not necessarily always by intent, but its provisions did not fully take account of the differing work patterns and particularly the caring responsibilities which fall disproportionately to women. The measures in the Bill, taken together with the reforms provided for in last year’s Pensions Act and the reform of SERPS, are transforming the pension prospects of women. They lay the basis for equality and justice and take us beyond the Beveridge settlement, which, however far-sighted, envisaged a society focused on men. This Bill will provide millions of women with a chance to save or to save more.No Government in our country’s history have done more to better the pension prospects for all women.

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There is an outstanding issue concerning whether we can do yet more to redress the inequalities of the past by introducing opportunities for additional buy-in of class 3 national insurance contributions. We have not hitherto found a way to deliver a targeted solution consistent with the criteria of fairness, affordability and simplicity, but we are continuing to consider these issues.

This is a truly historic Bill, which will complete the reform package. On top of a wider and more generous state pension, the Bill will give millions of people access to private pension saving for the first time. We will see 9 million more people saving and £10 billion a year more saved in pensions. This is a transformation of the private pensions landscape and a blueprint for embedding a new savings culture in Great Britain. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)

3.25 pm

Lord Skelmersdale: My Lords, the House is grateful to the Minister for his introduction of this very important Bill—so important that, unlike the 2004 Bill, it will go into a Committee of the whole House. I welcome that decision, and the overall tenor of the Bill.

The Minister mentioned consensus; we do not resile from what our honourable friends said in another place. However, it is no good for the Government to assume that everything in the garden is beautiful. There is a collective view among parties—and, as the Minister just said, among stakeholders—that it is right to introduce personal accounts, and as soon as is practicable. He mentioned 2012, just three and a bit years after Royal Assent—a tight timetable if ever I saw one. I wonder whether it is achievable. Consensus works both ways. Dogmatism on the details will not maintain this consensus. It is the details that worry me and my noble friends. Your Lordships are in for a lot more explanation from the Minister before we can agree on the way forward for personal pensions.

I hope that the House will forgive me if I look back. When this Government took over running the country in 1997, they inherited a pensions industry that was the envy of the world, with 6.2 million employees enrolled in private sector workplace pensions, 5 million of them in defined benefit schemes. Savings were high, with a total saving of £54.39 billion and a savings ratio of 9.5 per cent. Today the position is very different and the EU recently reported that Great Britain was fourth from bottom of the pensioner poverty league. Only pensioners in Spain, Latvia and Cyprus are more likely to fall into poverty. In 2007, total savings were only £26.413 billion and the savings ratio was 2.9 per cent. The number of active members of pension schemes has fallen from 5.1 million to 3.3 million. Only 900,000 workers are in defined benefit schemes in the private sector. These schemes have closed not only to new members, but to existing employees as well. Workers have had to suffer a reduced income in retirement after being forced into DC schemes. State employees, though, have on the whole retained their DB schemes, resulting in much greater retirement income. No wonder jealousy abounds.

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There are two reasons for this downgrading of private sector pensions. The main one is affordability—affected, obviously, by increased longevity. Firms have found that they have to put more into their pension schemes to maintain the status quo. Secondly, there is the effect on pension schemes of the Government’s decision to remove advance corporation tax in one fell swoop. This brought an extra £5 billion a year into the Treasury—£55 billion to date. I admit that not all of this was attributable to the investment income of pension schemes. However, the Government have never admitted that there was any effect on schemes, although the Pensions Policy Institute—it is very well thought of—believed the figure was between £2.5 billion and £3.5 billion a year. What prospective pensioner has gained from this? Have pensioners really benefited to the tune of £2.5 billion a year from, for example, the National Health Service?

The Government recognised, even in those early days, that one group of employees was not saving for a pension, so they invented stakeholder pensions, which we were told would be applied for by 4 million to 7 million employees. By May 2006, according to the Government’s White Paper, only 2.7 million of them had been sold. I do not believe that that is to be seen as a prognosis for this Bill, most of which covers personal accounts along the lines of the scheme envisaged by the noble Lord, Lord Turner of Ecchinswell, and his Pensions Commission. The Minister has revised the figures to the top end of the original figures; the first impact assessment that I saw referred to between 6 million and 9 million employees but the Minister mentioned 9 million employees alone in his speech.

However many employees are involved, the Government believe that they will have pensions savings for the first time because of auto-enrolment, by which workers have to make a positive decision to opt out, but not on day one. An added twist is that employees will pay into the scheme from their first pay date after day one and get their money back if they opt out. Knowing this Government, I assume that that will be without interest. Ministers in another place have stated that the decision to opt out must be taken within a month. This may be time enough if you are paid weekly, as you will be able to see the effect of the withdrawal of 4 per cent of your pay cheque on your household income, but what about those who are paid monthly? Will it not take more than one pay period to establish whether they are doing the right thing by remaining in a personal account? We will discuss that in Committee. I am glad to hear, though, that the Minister intends to amend the Bill to allow any firm to auto-enrol its employees into its existing workplace pension.

We will look, too, at the very curious drafting of the Bill, which, although it is all about personal accounts—or 90 per cent of it is, at least—does not even mention them until Clause 58, some half way through. The Minister could save himself an awful lot of trouble by telling me why that is so when he winds up, as well as why it is necessary to have quite so many regulation-making powers, which are as yet pretty opaque. I counted 11 of them in the first 28 clauses, which must be a record. I read the comments of your Lordships’ Delegated Powers and Regulatory Reform Committee

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with much interest, and I am interested to hear that the Minister is going to accept all its recommendations. Certainly, the Government’s response to that report did not give me that impression, so this is looking on the brighter side.

As for the scheme itself, the Government are rightly seeking to contract it out to the private sector, to be overseen by a board of trustees. On their own figures, 60 per cent of moderate to low earners, earning from £5,000 to £35,000 a year, are not saving for their retirement, so a low-level pension scheme is certainly needed. However, especially at the top end of the range—let us say from £20,000 to £35,000—personal accounts will be competing with existing schemes. There must therefore be a level playing field. It is of particular note that for personal accounts wages are counted as gross, whereas for any workplace pension that I have heard of they are counted as net. We will investigate that in Committee.

There is, too, a particular worry that firms will be tempted to downgrade their existing schemes to or near the basic minimum of 4 per cent from employees and 3 per cent from themselves. I am glad that government amendments are promised to stop employers inducing their employees to opt out. There are also concerns about the qualifying schemes, which, if you are a member of them, may absolve you from enrolling in personal accounts. Can a private pension scheme with no employer input, for example, be a qualifying scheme?

Many of the earners that we are talking about are likely to take career breaks, either voluntarily or involuntarily, in which case their contributions will cease. We will seek to change the Government’s mind on whether top-ups are to be allowed when people are back in work. After all, that is exactly what is allowed with state pensions.

On the subject of state pensions, I believe that in the dying days of last year’s Pensions Bill the Government behaved shabbily in persuading the noble Baroness, Lady Hollis, to withdraw her amendment on women being able to make up more contribution years than is allowable on the basis that they would review the position, giving the distinct impression that something could be done. The Minister was then forced to come to the House to say that the Government had reviewed the position and decided to make no change. I have no doubt that the issue will be raised again in our debates, and that the thorny issue of compulsory annuities at 75 will figure in our discussions.

There is also the tie-in between state pensions and personal accounts because of the date of increasing the former by earnings gross, which the Pensions Commission said was intrinsically entwined with personal accounts. Had my party won the last election, it would have already happened, but the Government have been very coy about the start date. Should not the change be made at the same time as personal accounts start in 2012?

I readily understand why it will take at least that long to prepare the ground, to arrange the contracting out, and for the pensions industry to prepare the individual funds from which to choose, which include a Sharia fund but I note no ethical fund. Nor indeed, apart from a default fund, has there been any announcement of other sorts of funds.

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There is a balance to be struck here and we need to work it out in Committee, somewhere between caution at the beginning and things that employees will want to do with their contributions. However, the more funds there are, the more confusing the scheme will be for the employees it is aimed at. We believe that the KISS principle should apply. Is it, for instance, right that it is only after personal accounts are up and running for five years that a decision will be made about whether an employee’s extra funds can be put into the scheme or, indeed, small amounts of money taken out? That is almost 10 years away. That will not give confidence to many people, especially migrant workers, who are on the whole only in the United Kingdom for a short time before returning to their country of origin. Is Brussels turning a blind eye to this as it applies to EU citizens, or do they not know about it?

We also have concerns about the cost of personal accounts and when the scheme will be self-financing. To what extent will the start-up costs fail to be paid back by the trustees when it is up and running? As to the overall cost of the scheme, I hope that the Pensions Commission’s suggestion of 0.3 per cent a year can be adhered to. However, that cannot possibly cover advice to employees, which the noble Lord mentioned briefly, so who will provide this? We will certainly be looking at that in Committee.

My noble friend Lady Noakes in particular will be looking critically at the new trustee body and the length of time that the Personal Accounts Delivery Authority will survive after the former is set up.

Your Lordships will remember only too well the plight of the 125,000 pensioners whose firm had become broke, and the fact that the Government were forced by the ombudsman and the High Court to bring in the distinctly mean financial assistance scheme in 2004 by means of a clause in the Pensions Bill of that year, and only then at the last minute after the threat of a major rebellion by Back-Benchers. That clause was purely and simply an order-making power, a Henry VIII power. All the operative legislation on the FAS has so far been by affirmative instrument. These have included the much better terms and conditions that the Government were forced into yet again and which my noble friend Lord Taylor and the Minister debated the week before the Recess. It is always nice to welcome a reformed sinner, and I congratulate Ministers in the DWP on achieving them. No doubt a tremendous battle ensued with the dead hand of the Treasury, but they got there in the end to the great relief of a large number of people who believed their pensions to be safe and discovered that they were not.

I only mention this because I note that part of the Government’s most recent changes involved changes to the definitions of “qualifying member” and “qualifying pension scheme”, and those cannot be made by order, even an affirmative one, which is why we find them in this Bill.

It has become a part of the pensions arena that occasionally pension funds get bought by insurance companies and others, and that could be said to be a case of business models running ahead of the regulatory framework. Ministers have said that they

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intend to give the regulator draconian powers over this perfectly legitimate activity, which can be to the benefit of both existing and future pensioners, affording them more security. I do not know how far these plans are advanced or whether they are even intended for this Bill or some future one, perhaps next year’s welfare Bill. To allow pension schemes to be sold extraterritorially where there is no robust control by the regulator needs thinking about extremely carefully. I am also concerned that such powers are to be so draconian as to prevent perfectly reasonable sales and so throw the baby out with the bath water.

In some ways, one can liken this Bill to a train journey. We know the starting point—the Pensions Commission’s report. We know where we want to get to: the pension scheme for low-to-middle earners that does not exist at the moment. These are likely to work in small and medium-sized enterprises and there are concerns about the costs of personal accounts to them. Although we welcome the proposals to phase in personal accounts, this remains a worry. Continuing with my metaphor, the vague regulation powers are like scheduled stops in the middle of the night where you cannot read the station signs. Indeed, some of the stops are as yet unscheduled. We have to investigate a lot more before we arrive at our destination—which I am sure after several weeks we will.

3.40 pm

Lord Oakeshott of Seagrove Bay: My Lords, I declare an interest as a pension fund investment manager since 1976 and as an old lag on this Front Bench, too. I am leading on my third Pensions Bill since 2004. Once this Bill is law let us hope that for a year or two we can focus on implementation rather than legislation.

I start with consensus, as far as it goes. That is the Government’s buzzword for the Bill. We all want to reverse the spiral of decline in private pension provision over recent years. It must be a cause for real national concern, not a party political point, that good quality final salary pension schemes of the type I have been proud to manage for most of my working life are now limited to the public sector and the odd oil company and bank. In 1995, 5 million people were members of open defined benefit pension schemes. As the noble Lord, Lord Skelmersdale, said, today that figure is 900,000—a fall of five-sixths. We all want to see as many people as possible saving again for a pension as long as they keep the fruits of their saving when they retire and do not see it eaten away by the maggot of means-testing.

We must also fear for the future when family budgets are so savagely squeezed today. Two-fifths of households have negative monthly cash flows and nearly half of all credit card holders do not clear their debt each month. When hard-pressed families cannot find the cash for their gas bill or mortgage payment, they are sadly not going to spend a penny on a new pension. Debt destroys pensions saving today and it will cast its shadow over the whole “does it pay to save?” debate up to 2012 and beyond. Mike O’Brien, Minister for Pensions Reform, highlighted the problem just this week in the Financial Adviser. Referring to the

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8 million or 9 million people expected to be auto-enrolled into personal accounts, he acknowledged that those with large debts, particularly with huge student loans, would not be best-served by personal accounts. He said:

Well yes, but only up to a point. The 8 million or 9 million people on low and middle incomes being auto-enrolled into personal accounts—especially women who miss out so badly today—will ultimately have to make their own decisions. Yet they will need access to good quality, simple and generic advice on one of the biggest financial decisions of their lives in what will be for many uncharted financial waters. Saying it is up to them to inform themselves on the best financial choices if they have large debts sends the wrong message. Millions of people drowning in debt desperately need help. With the collapsing housing market, a mortgage famine and savage credit squeeze, the debt crisis will not be solved any time soon.

We have a cross-party consensus on the aims of pensions policy and the brave project of personal accounts at the heart of the Bill. In the cut and thrust of scrutiny and amendment as we improve the Bill, we on these Benches will always remember that a national pensions saving scheme, as we called it, was our idea. We will oppose any attempts to hobble it, pad it out or make the rules for personal accounts too restrictive. Like the People's Pension Coalition of Which?, Help the Aged, Age Concern, the TUC and the Commission for Equality and Human Rights, we want to make personal accounts as simple, accessible and cost-effective as possible—a real people's pension scheme.

Paul Myners and Tim Jones, the chairman and the chief executive of PADA, were very persuasive in the useful evidence session in Committee in the Commons when they urged Parliament to avoid the temptation to add bells and whistles to personal accounts. Everyone in the pensions world always condemns complexity, but then each of us seems to have our own pet scheme or qualification to add to whatever is proposed. My Bill team and I have had many fascinating meetings and read many useful submissions on the Bill from business, charities, academics and campaigning organisations. We will discuss their ideas at length in Committee and, I am sure, benefit from them. But the first question on my mind on any amendment on personal accounts will be: does this make the scheme simpler to operate and understand? Does it keep the costs down so that people of modest means saving for the first time for a pension get the biggest bang they possibly can for their buck?

The threat of “levelling down” posed by personal accounts is much exaggerated. It has been going on for years, well before personal accounts came in, and will continue quite independently. For perfectly understandable reasons, our highly sophisticated and profitable financial services industry has not been able to reach the 8 million or 9 million people who are the target market for personal accounts, as the abject

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failure of stakeholder pensions proved. Do not stop millions of people being “levelled up” from no private pension saving at all.

Personal accounts do not represent a serious commercial threat to existing pension providers. It just is not their market, however fond our memories might be—for those of us old enough to remember—of the man from the Pru in his bicycle clips pedalling from door to door. That just is not something they can do today. Some of our businesses and insurance companies should be careful not to be seen to be adopting a dog in the manger approach. Financial services firms also will benefit both from investment management fees on the tens or even hundreds of billions being invested in personal accounts and from massive additional annuity business when personal account holders retire.

So far so good; we are part of the consensus with the Government on making personal accounts work. But we will not be able to support much of the detail of the Bill in this place unless the Government face up far more honestly to the scale of the means-testing and generic advice problems and take action. The key problem on means-testing is still that our basic state pension is far too low—down, as the noble Lord, Lord Skelmersdale, pointed out, in the European relegation zone. Let me use another analogy. Britain’s rotten state pension is now worth less as a share of wages than when Clem Attlee was Prime Minister in 1950. We will move amendments in Committee to link pensions to earnings again, and we will be hoping—and hoping the Conservatives will come with us—to do that by 2010 at the latest, as the Turner commission proposed. We hope the Conservatives will back the link again, as they did in their last general election manifesto. Three million pensioners cannot wait until Labour’s last date of 2015, because they will be dead.

Far too many people—30 per cent to 40 per cent on the Department for Work and Pensions’ own estimates released yesterday—will see chunks of their savings eroded by losing means-tested benefits. That can lay the Government open to a charge of mass pensions mis-selling unless the groups at most risk are guaranteed access to high-quality face-to-face generic pensions and debt advice. We are most concerned, as are the Pensions Policy Institute and the People's Pension Coalition, about the highest risk group: people over 50 who are likely to be on housing benefit when they retire.

As the noble Lord, Lord Skelmersdale, made clear, the Conservatives care about means-testing too; of course they do. But unlike the Liberal Democrats they are not prepared to make a commitment to raise the basic state pension over two Parliaments so that pensioners then receive as of right the means-tested benefits they now have to apply for. As we know from the Department for Work and Pensions’ annual report, which has only just come out, it is clearly failing to get pension credit out even to its fairly modest targets, falling 800,000 short. That is just not working and not getting through. A simple citizens’ pension is the right and straightforward way to make sure people keep every pound they save. Meanwhile, let us at least try and carry the House with us on the principle that the earnings link will be restored as soon as possible, whichever party is in power.

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