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The answer to this seems to have come from the party opposite—although it has lost it since—and that is the lifetime savings account, LSAs. Other countries with funded OPSs have versions of LSAs—in the US the 401(k)s, the KiwiSavers in New Zealand, and others in Singapore, Chile and so on. The recent Pension Policy Institute paper, Would Allowing Early Access to Pensions Savings Increase Retirement Incomes?, discusses these, together with my own proposal to use the tax-free lump sum. Think for a moment about our current arrangements. At the moment, you may draw your 25 per cent tax-free lump sum at 50, soon to rise to 55, independent of drawing your pension. Only 14 per cent of people use that lump sum to add to their pension. It goes to repay debts or the mortgage, or to buy a new car, a new conservatory or a cruise. Why not remove the time bar? What really is the point of ideologically and rigidly reserving the lump sum for a pension when it is not used as a pension? Why is it okay to spend it on a car at 55 but not to use it to save your home at 45?
Why not permit anyone reaching a de minimis in their pot of, say, £10,000 or £20,000, to ensure the savings habit, up to a cap of, say, £80,000 or £100,000, to avoid fancy tax planning, to draw down that 25 per cent as they need it? On £40,000 they could take out £10,000, and only if they rebuilt to, say, £60,000 could they then take 25 per cent of that increment—that is, a further £5,000. At a stroke, this would transform DC pensions into what they need to become—LSAs, simple, single funds combining savings and pensions, with 75 per cent ring-fenced for the pension and 25 per cent available as savings and, as it is tax-free, no tax adjustments would be necessary.
I fear my noble friend may tell me four things: first, that tax privileges are for pensions only; secondly, that it is unfair to DB schemes; thirdly, that it diminishes the value of final pensions; and, fourthly, that it is costly, complicated and too much trouble. If that is the way his argument is going to go, let me address those issues.
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Tax privileges only for pensions? Not when we have ISAs and A-days allowing the affluent to turn tax-privileged savings into tax-privileged pensions but not allowing the poorer off, who cannot afford ISAs, to turn some part of their pensions back into desperately needed savings as their lives possibly crash around them.
Unfair to DB schemes? Given that DC schemes halve the contributions from employers while laying all the risk on employees, rebalancing would be decent. Diminishes the value of a final pension? Only if that money would have been spent on a pension, and it would not be. It takes value out of a pot’s build-up? Legal and General’s recent research shows that 42 per cent of those with a pension would save more, and that 42 per cent of those without a pension would start one, if they could access part of it. More would save and they would save more. Technically, it is no more difficult than tracking GMPs or deferred payments now.
Such a scheme would reduce opt-out rates after 2012, including from personal accounts; encourage more people to contribute and to contribute more; assist with home buying, job retraining and avoid repossessions; displace expensive commercial loans, freeing up income thereby for further saving and producing a virtuous spiral; and appeal to women facing financial crises, young people who refuse to lock savings away for 40 years and the low paid, who cannot afford high enough contributions if they remain inaccessible. They would then have what we all need: security in retirement sustained by savings for today’s world. My noble friend probably knows more about pensions than anyone in this Chamber. I beg him to think out of the box. What do low-earning people face? Financial turbulence greater now than in retirement. What do they need? Access to savings. What savings do they have? They are in their pension fund. What will it cost the state? Virtually nothing. Would it encourage them to save more? Almost certainly. Helping to keep people afloat in their working years really is the best, and probably the only, way to ensure that they have a pension in retirement.
7 pm
Lord Patten: My Lords, I shall continue, albeit I suspect not seamlessly, the exact theme of the noble Baroness, Lady Hollis of Heigham, as though it had been choreographed by the Whips’ Office, which decides who should follow whom. My words are to deal with those who are on the other side of the picture—savers—from those on whom she quite properly concentrated; that is, some who are in difficulty and the position of women in particular. I do so declaring my financial and business interests as listed in the Register and noting the forthcoming Banking Bill, due for Second Reading soon in your Lordships’ House.
I shall discuss only savers and the plight of some of them in relation to our present economic affairs. In doing so, I should inform the House that I have never had, nor do I intend to have, any active role professionally in fund management provision, from the pitch of which the noble Lord, Lord Myners, had the great good sense to walk away some years back in rosier times. I particularly welcome his presence in the
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The deserving saver, rather like the deserving poor in Victorian England, faces a terrible prospect as we move from what the profession of economists—for once ungloomy, momentarily cheering up—taught us to think of as the great moderation or the age of Goldilocks economics. Beware, my Lords, of cheerful economists. It seemed then that people could save their bowl of porridge and eat it as well. Spending did not have to be sacrificed to build up savings as the seemingly unending spiral of house and other asset prices underpinning it created a cosy sense that most people were saving enough.
Today, the picture is suddenly very different. Savers, in particular older pensioners, face a nuclear winter of declining returns as interest rates race to the bottom. That is a fact of life for older pensioners in this country. As one of pensionable age murmured in my hearing the other day, “Look, my taxes are now being used to bail out the high-street banks at a cost that my children and grandchildren will have to pay off”—a situation going on as those interest rates race to the bottom. “Now I also face the prospect, like the Japanese did a few years back, of maybe having to pay a fee to the same banks for simply parking my cash in their safes as well”.
For anyone who has been a hard working saver, determined to stay solvent rather than following the “spend now and pay much later than you thought was necessary” policy that, alas, has been new Labour’s drumbeat since 1997, the price of personal prudence has been terrible. However, with the United Kingdom generally in such a terrible mess, we have to try, where and when we can, to pull together to get us out of it in a bipartisan way if at all possible.
In that spirit, I have three short-term suggestions for the Minister for what could reasonably be done by the Government, as they struggle to deal with a liquidity crisis that could easily turn into a solvency bombshell for our banks if property defaults take hold this year and next in the way in which some fear they might—that is coming down the track.
The first is to recognise the urgency of the need, while present market conditions continue, to suspend the rule that those with pension funds must buy an annuity by the age of 75, for just as the funds of an individual or couple who have pursued the most risk-averse investment strategies available have lost a huge amount of their value—30 per cent, 40 per cent, 50 per cent or more—so will their pension prospects take a commensurate hit under the present annuity regime. That is a cruel demographic penalty imposed on those who happen to have been born in the early 1930s. It is hardly fair, and fairness is one of those matters which the right honourable gentleman the Prime Minister said he wished to make central to his legislative programme this year.
Secondly, I hope that the Government, supported by all opposition parties including my own, will regularly reassure those who are carrying on saving for their pensions that the tax treatment of those pensions will not change; in other words, that they will carry on
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Thirdly, when money put into gilts, cash or money-market funds yields such pitiful returns at the same time as good companies need that cash, we need to encourage people to think about investing more in shares and corporate bonds, having assessed the risk not just of doing it but of not doing it. My noble friend Lord Tugendhat, who is momentarily not in his place in front of me, said more than I need to say about the pressing need to raise the cap on ISAs. It has been stuck at £7,200 for too long; £10,000 would be a good starting place, just to give that signal to people that we collectively in the political community wish them collectively in the savings community to continue saving.
I think that there would be bipartisan support for those three modest measures, but it is a bipartisan approach that should be encouraged by political realism—the fact that there are more savers than borrowers in this country. It is the savers who tend to belong to those age groups from which the voting classes come and turn out on polling day to vote. Anyone who ignores savers in the run-up to the next general election will reap their own electoral whirlwind.
7.09 pm
Baroness Sharp of Guildford: My Lords, the department whose affairs I shadow—namely, the Department for Innovation, Universities and Skills—has been rightly grouped among the departments to be considered today, because the issues with which it is concerned are central to the competitiveness of the British economy. Indeed, in setting up the new department in July 2007, the Prime Minister said:
“The new Department will be responsible for driving forward delivery of the Government’s ... vision to make Britain one of the best places in the world for science, research and innovation, and to deliver the ambition of a world-class skills base”.
I shall talk today about those two issues: science and technology, and the skills agenda. Both are marked by requiring upfront investment, especially investment in human capital, before the benefit from that investment can be reaped.
As with all investments, the temptation in a downturn is to economise and to cut. What is not essential today can be put off until tomorrow. My plea to the Government and to business is to recognise how important these investments are to our future competitiveness. Britain now has to live by its brains, not its brawn, a point made by the noble Lords, Lord Rooker and Lord Bhattacharyya. If we fail to make these investments, our ability to hold our own as we emerge from this recession will be much damaged. The noble Lord, Lord Marlesford, was correct in saying that capitalism can be, and has been, saved by the enterprise and technology of this country, but it cannot be saved if we make no investment in it.
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In relation to science, the strategic framework for science policy was set by this Government in July 2004 in their 10-year framework for investment with a target of reaching a public and private investment in R&D of 2.5 per cent of GDP by 2014. We are now nearly halfway through that period, but, sadly, we are no nearer reaching that target in relation to gross expenditure on research and development. We hover around the 2 per cent mark. To my mind, the Government have done their part. They have fulfilled their promise. Funding of the science base through the research councils has, to date, been given priority, and even in the last Comprehensive Spending Review maintained a real growth rate of 2.5 per cent. Here I pay tribute to the noble Lord, Lord Sainsbury, who for much of this period was the Minister for Science and drove much of this programme. I very much hope we shall see this rate of funding maintained through the period of the next CSR, 2011 to 2014.
I have three specific questions for the Minister. First, the weak link is private sector R&D, which has not responded to a regime of generous tax credits and remains stubbornly at around 1 per cent, even for the prosperous years of 2005 to 2006. The great danger is that in this deep recession we shall see substantial cuts in funding. What steps are the Government taking to prevent this? Secondly, while the Government have increased their funding for the science base, they have cut back fairly savagely on R&D spending by government departments themselves. In addition, R&D budgets for departments have been raided on a number of occasions. The BERR budget was raided for £68 million to fund retraining and redeployment at Rover. The Defra R&D budget, vital to our climate change challenges, was raided to pay for the disastrous mistakes made in the new agricultural support programme. Can we have an assurance that this will not happen again? If the Government do not give priority to R&D, how can we expect private industry to do so?
Thirdly, I draw attention to a brief debate that we had on 25 November on the new immigration regulations that came into force on 27 November. If the Government really wish to make Britain one of the best places in the world for science, research and innovation, they need to undo at least some aspects of these regulations. It is absolutely absurd that universities now have to find a third-party sponsor for all visiting researchers and are expected to undertake lengthy bureaucratic checks. Our long and proud tradition of welcoming scholars to this country, to share their research with our own scholars, has many benefits and this is now in jeopardy. I hope, again, that the Minister can assure us that we shall rapidly see the end of these absurd rules.
I turn briefly to apprenticeships. The noble Lord, Lord Mandelson, said that the children, learning and skills Bill, which will come before this House later in the Session, provides that every young person who so wishes should be able to make use of an entitlement to an apprenticeship, and puts the onus on local authorities to find places for those who wish to take up this entitlement. An excellent report on apprenticeships from your Lordships’ Select Committee on Economic Affairs a couple of years ago stated:
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“Apprenticeship should be established as the main route to skills below graduate level. It should be the standard method for a combination of work and learning to contribute to the Government’s goal that all young people aged 17 and 18 should participate in some form of education and training”.
My response to that was very much “hear, hear”. Yet while the Government are establishing this entitlement to an apprenticeship, they are far from establishing it as the standard method of combining work and learning. Rather, they have muddied the field by launching, at the same time, the new 14 to 19 diplomas. These 14 different sector lines in areas such as health and social care, engineering, construction, communication and media studies, as explained by the person now in charge of them at the DCSF,
but are nevertheless aimed at those who,
They will learn about the world of work but gain very little practical experience. The minimum requirement is 10 days’ work experience.
Meanwhile, the extremely popular and successful Young Apprenticeship programme remains only a pilot and there are, as yet, no clear lines of progression from the diplomas to the post-16 apprenticeships. It makes for a difficult choice for 13 year-olds and their parents. Do they stick to the tried and tested, but often dull, GCSEs? Do they go for these new diplomas, which talk about the world of work but give little actual experience? Or do they opt for a young apprenticeship, which will guarantee them a route into an apprenticeship?
If we are to emerge from this current recession with the capacity to compete within the global framework, the skills of the workforce and their ability to innovate and benefit from developments in science and technology will be crucial. This has been understood by this Government for a long time and they have introduced—and continue to introduce—many changes aimed at ensuring that we reap these benefits. I am not alone in thinking that perhaps they have introduced too many changes and failed to allow those that they have made to take firm root. These diplomas are another example. This recession will, in many senses, be an acid test of whether this is so.
7.16 pm
Lord Sawyer: My Lords, this is a short speech about customers. It is about how we might be able to give people the opportunity to speak for themselves and not always be spoken for by experts and people who sometimes seem to know better. I declare an interest as a non-executive director of Britannia Building Society, although I obviously do not speak on its behalf, or on behalf of any other organisation. I was pleased that the Chancellor recognised in his pre-Budget speech that mutuals provide a valuable alternative to banks across a range of financial services, and that the Government are committed to growth and efficiency in this sector. Sadly, the growth and efficiency could be jeopardised by the application of the financial services’ consumer credit scheme, which places unfair and disproportionate burdens on mutuals in requiring them to provide punitive levels of compensation for banks which have adopted imprudent—and often reckless—
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I will comment briefly on two further issues, both relating to banks and their retail customers. Despite the best efforts of the FSA, I do not believe that banks treat their customers fairly. There is a substantial body of evidence to support that contention, from a long history of poor product provision to an equally long history of overcharging and of failing to pass on cuts in interest rates to customers. This is not a simple matter, but nor is it recent. Most interestingly, I draw the House’s attention to a 2007 survey by the Building Societies’ Association, comparing customer confidence in mutuals and other providers. This shows a much higher level of satisfaction with mutuals than with all other financial providers. This deficit in customer confidence, coupled with the failure of the business models adopted by most banks, has led, quite rightly and unavoidably, to a degree of state intervention on behalf of customers. I welcome this, and the way in which my noble friends on the Front Bench and in another place have handled this extremely difficult situation on behalf of customers.
It must also lead to a completely new way of thinking about how banks are governed and managed and about their relationship with customers—and I really do mean a new way of thinking about it. We need to think about a situation in which customers are seen as people not only to be treated fairly but to be respected, listened to and empowered to have a real and direct say in how their banks are governed. I am talking not about fairness but engagement—about customer empowerment on a scale and in a depth that banks have not yet considered. I am looking for our Government to listen to that argument and be champions of customers in that respect. That will mean much more than marketing, branding or focus groups; it will mean the real adoption and adherence to values and systems that give customer direct access to and engagement with directors and managers of their banks.
I know that can be done because, in many parts of the mutuals sector, those values and that respect are standard practices. When customers are owners, they are given a very different model of customer engagement. For example, in the Britannia Building Society, there is a council of members with 24 customers who meet for a whole day at least four times a year and engage with the chief executive and his team on any matter that concerns them. The agenda is determined by the customers. There is nothing off limits—so much so that the council of members entered into a dialogue last year with the remuneration committee of the board of directors to discuss face to face for several hours the executive remuneration package. In fact, it approved the package, including the introduction of a long-term incentive plan. That was an outstanding and worthwhile level of engagement, which was applauded and welcomed by leaders of business—and it was also a massively important degree of engagement for the customers. That is the sort of practice that we should
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The second thing that I want to touch on briefly is corporate governance, which has been mentioned in the debate already. We need more diversity on the boards of banks. Directors of banks are mostly financial experts, bankers and accountants. All those people are extremely important—why would I say otherwise?—but there is an argument for including people who do not come from that sector and who would bring a different point of view, common sense and clear judgment learnt in other places.
I am pleased to see my noble friend the Minister in his place, because I can tell a tale of when he, as Secretary of State for Industry, made the bold and imaginative decision to appoint a non-executive director to the Royal Mail board who was to have a special interest in representing employees. That was not exactly looked on with great favour by all the traditional members of the board, but that appointment, which is now held by my noble friend Lady Prosser, has turned out to be an outstanding decision. The contribution of those members to the board is universally acclaimed by all the business leaders, from Allan Leighton downwards. The noble Baroness brings diversity and a way of thinking that is different from that of all the traditional board members. I ask my noble friend the Minister to consider that great success and whether there may be opportunities in the banking world for people to look at and digest that experience and how it might relate to them.
Finally, given the enormous challenges and responsibilities faced by the FSA in relation to its role as a regulator, I wonder whether there might be some sense—and others would know better than me about this—in looking at the separation of its role as a financial educator and customer champion, which is very important, and its role as a regulator. Regulation and customer protection are two very different things and probably require a set of very different skills. As this is going to be a growth sector and there will be a lot more of this in future, would some degree of separation not be worth considering?
7.24 pm
The Earl of Caithness: My Lords, if, as the gracious Speech states, the overriding priority is to ensure the stability of the British economy, reform of the banking system is essential. Regrettably, the Banking Bill that we will soon discuss in this House is the wrong one to sort out the problems that we face.
We in the West are accustomed to going to the bank when we need money, and until recently money has been relatively easy to obtain from banks. Of course, we are all aware that if we fail to make our payments on time, banks can foreclose. Some, who believed they had a good relationship with their bank, have recently had a rude awakening. Banks and bankers have little tolerance for people who find themselves in arrears, even though it might be through no fault of their own. Banks often don a cloak of aggressive righteousness and take immediate and detrimental action against
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