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This is a very important piece of legislation that we must get right. There is a case in the even longer term for the Government to think about creating an independent body to formulate strategy for long-term savings. It should be broadly drawn, because it is important to try to develop and enforce a consensus in this important policy area. It is too important to get wrong. I hope that today's debate will help to shed some light on the Government's thinking. That was the purpose of tabling the Motion in the first place. I look forward to contributions from colleagues and others. I beg to move.
Lord Fowler: My Lords, I congratulate my noble friend on his speech. We have spent most of our time in the other place and here debating against each other, but it is extremely good that on this, and I suspect many other issues, we are very much on the same side. He made an excellent speech. I also congratulate the Minister on his appointment. He comes with a wealth of knowledge and we wish him the very best of fortune in his new post.
I start in a way which may seem a little away from the detail of automatic enrolment, but I hope that the House will soon see the relevance. Next week is the 40th anniversary of my coming to Westminster in June 1970. I spent 31 years in the House of Commons and nine in this House. I have to say that 1970 was another age. There was no Portcullis House with private offices and research assistants. I shared an all-party office. On one side I had Kenneth Clarke with his smelly cigars and dark brown Hush Puppies-or was it the other way around? Facing me was John Prescott-soon to be of this parish-who visibly scowled as I dictated down the telephone press releases defending the Government of Ted Heath. At the end of the room was our very much non-coalition partner, Cyril Smith, who happily did not come too often to the office. The noble Lord, Lord Pendry, and I tried to find space as best we could. To add to my problems, the first Queen's Speech of the new Government abolished my then constituency of Nottingham South. It was not altogether a happy beginning at Westminster.
What is the purpose of this example, apart from alerting news editors throughout the country of this significant anniversary next week? My purpose is to make a fundamental point about the history of pensions policy in the 40 years that I have been at Westminster. In this period, we have had one government scheme after another. In my first Parliament, we dealt with the pension plan of Dick Crossman and then that of Keith Joseph. When in opposition I became my party's spokesman on pensions and social security-to universal surprise, including my own-we had to deal with the Barbara Castle-Brian O'Malley plan and, in particular, the unlovely-named state earnings-related pensions scheme, SERPS. I learnt during that first debate how it is in Westminster that when the subject of pensions goes up on the screen, Chambers-here and in the
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I admit that when I got into office, Parliament had to deal with the Fowler plan on personal pensions and the end of discrimination against early leavers. Then we had the plans of Peter Lilley in the Conservative Government, while under the party opposite the ideas of Frank Field were considered-briefly. His ideas were so unthinkable that he was immediately sacked. Later, when plans were subcontracted to the noble Lord, Lord Turner, we made more substantial progress.
In the past 40 years, we had the basic pension which was earnings-related; then it was price-indexed; now it will be earnings-related again. Also, there has been one variation after another of the state second pension. We have had SERPS; we have had modified SERPS; we have had son of SERPS; and now we have an ailing cousin of SERPS called S2P. At the same time, we have seen the decline, and almost fall, of final salary occupational pension schemes in this country, for which, frankly, the party opposite must bear some responsibility. I am trying to put that in the most moderate way by saying "some responsibility". The noble Lord on the Front Bench shakes his head but I think that the party opposite must bear some responsibility for it, although I certainly accept that it does not have total responsibility. However, we should now be trying to get as much agreement between the parties as we possibly can on the way forward.
Pensions are a long-term investment and require long-term policy-making. In the current economic circumstances, it may not be possible to introduce every part of such an agreement at the same time, but I do not think that that should dissuade us, even at this point, from seeking as much agreement as we can. Indeed, I think it can be argued that in the past we have been too impatient in trying to introduce pension plans-not least in implementing the original Beveridge proposals. Therefore, my first point in this debate is that we should seek to agree on the goal of a pensions policy, getting as much agreement between the parties as we conceivably can and, above all, seeking to avert a pensions crisis whereby many of those in retirement will be living in hardship. That, I believe, is a cause that all parties can embrace.
I suggest that the basis for such an agreement-in a sense, it is what I proposed 25 years ago-is a twin-pillar system. The first pillar is undoubtedly state provision. The second pillar is personal provision, very much including workplace pension schemes of the kind that my noble friend has described. I say in parenthesis that such a twin-pillar system has been in place in Switzerland for many years, and it has worked to the great satisfaction of the public there. However, the important point is that both sides are essential. Without good state provision, you will not sufficiently encourage personal saving. The basis must be as generous a platform state pension as can conceivably be afforded. The structure that we have at present is not particularly generous but it is, without doubt, extremely complex and administratively extremely expensive. It is, above all, ill understood by the public. I remember that when we carried out our own pension review in the 1980s, most people who were members of the state earnings-related pension scheme did not know what the scheme
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Therefore, I think that the basic state pension should now be put together with the state second pension with the aim of lifting the pension level above pension credit. There would then be a decent platform pension. I accept that it may not be possible to do all that at the same time but affordability can come, for example, from adjusting the pension age. Again, it was a quarter of a century ago that I advocated flexible retirement up to the age of 70. As for paying the pension, I propose-it has already been proposed and I think it is very sensible-that you start with the over-75s and then move down the age scale. However, my basic point is that even in the present circumstances we can make some moves towards the goal of better pensions in this country.
I then come to the second pillar-personal provision. Here workplace pension schemes are fundamental and I certainly support everything that my noble friend has said about that, particularly what he said about automatic enrolment. As he said, the policy must be right in the long term. Automatic enrolment is an important step forward. I listened with concern, as I am sure the House did, to the figures of the survey that he quoted. That is not good news for future policy. He made important points about the detail of the automatic assessment. I shall not repeat all those points but they are important.
The essential point is that we know enough about how people put off making a contribution to realise that something of this kind is needed in the public interest. It is also entirely fair that personal pensions should be a combination of personal contribution, employer contribution and tax relief. Again I remember when we were going round this course in the 1980s with the state earnings-related pension scheme. At one stage we were proposing that it should go and considering what we should put in its place. I proposed exactly the kind of workplace pensions now in legislation. I think that we proposed a rather bigger contribution from employers than that being proposed today. The Treasury predictably opposed us on grounds of the tax relief bill and the decisive intervention in that debate came from the Prime Minister, Margaret Thatcher, who supported absolutely our proposal, including employer contribution.
It should be emphasised and underlined that a pension contribution is a very good investment for any company that is intent on trying to keep good staff and employees. We are also trying to make saving as attractive as we possibly can. In that respect I welcome very much the decision of the Government to do away with the absurd restriction that you must take an annuity at the age of 75. We have been fighting about that in the previous Parliament and before. There was never any particular justification for that policy and it is encouraging to see the Government moving so quickly. I am sure that my noble friend needs no instruction here, but I observe that not all pensions policy is made in his department. I am sure that the ex-Pensions Ministers from the previous Government who seem to be around the House today did not have
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However, that is what the Treasury decreed. Let us make no mistake; it is not something exclusive to Labour Governments. I say from personal experience that such interference is not unique. I could write a chapter of a book on how my own review was damaged. In fact, from memory, I think that I have written a chapter of a book on that. Let us hope that the sensible decisions on annuity mark a new era in the intervention of the Treasury.
I always said when carrying out my own review that we were making policy in a cold climate. If it was cold then, it is positively arctic today. Even so, I believe that we can make progress. The Chancellor has already shown that on annuities. As for the parties, we can certainly debate the speed of improvement and the other important improvements that can be made for, say, married women and the details of automatic enrolment. It would be of enormous benefit if the parties, after 40 years of debate, could agree the principles and the structure of what we want to achieve. That would be an enormous step forward and it would also be in the spirit of today when we are all seeking as much common ground as we conceivably can in all areas of policy-making. We are seeking to prevent hardship in old age and pensions policy is a crucial part of that.
Lord Lea of Crondall: Can I be clear that the noble Lord is strongly supporting the automatic enrolment principle? There is all this talk about people not being aware of it, not supporting it, and so on. We have had the big review-the Turner review-and we have a policy to make sure that for the first time everybody has some buy-in through the company for which they work. It includes both employers and employees, and we have heard neither the noble Lord, Lord Kirkwood, whose speech I very much admired, nor the noble Lord, Lord Fowler, saying that we have to sell this harder despite some of the propaganda against it by the private insurance industry.
Lord Fowler: It is marvellous that when one tries to reach agreement the noble Lord immediately looks for disagreement. There is no disagreement with him on that point; there is no disagreement from my noble friend and none from me. We want automatic enrolment. I said that about five times but the noble Lord may not have been listening at the time. Of course we need to promote and sell it, but let us not have a bashing match and go back to the old business at which the noble Lord is rather adept of having a go at the industry or whoever his latest target happens to be. Of course I agree with automatic enrolment and of course it needs to be sold. That is also the view of my noble friend.
Baroness Hollis of Heigham: My Lords, I, too, thank the noble Lord, Lord Kirkwood, for introducing this debate today. There is very little that I would disagree with within what the noble Lord, Lord Fowler, said. The crisis in occupational pensions, which certainly
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It was not until about 2005-06 and the report of the noble Lord, Lord Turner, that actuaries started building that in, after five years in which many companies had been taking contribution holidays. The resulting panic of renewed employer contributions at much higher levels accentuated by FRS 1719 and the collapse of the markets since then means that when I last checked, only four of the FTSE top 100 companies still had their DB schemes open to new members. We all know that in DC schemes, the employer's contribution is 6 per cent, rather than 16 per cent in DB schemes, so the employee gets a smaller pot, together with investment risk, disinvestment risk, inflation and longevity risks, all falling on the shoulders of people who find pensions intimidating. We end up in the DC private sector with only 40 per cent of people covered, compared to 85 per cent in the DB public sector. It is coverage and adequacy as much as pension type that divides private and public sector pensions, which is why I so welcome auto-enrolment, either into an existing pension or into a shell stakeholder-which may be the most important element of all this, where we know that if employers do not contribute, employees will not, and which will therefore have an employers' content for the first time-and NEST.
Will auto-enrolment work? Yes. When Scottish and Newcastle went from opting in to opting out, it went within a matter of months from 45 per cent contributions to 90 per cent contributions. The only people opting out were student workers. So there is huge potential. As always, I am especially concerned with the implication of auto-enrolment for the low paid, especially women. Should low-paid people be auto-enrolled? Without trying to go over the arguments that some of us raised in debate on the Queen's Speech, only if it is safe to save and only if it is attractive to save. We must make it safe and attractive. Here, I entirely support the noble Lord, Lord Fowler. Increasingly, there is all-party consensus and full industry support for a new state pension which lifts people off means-tested pension credit.
As Steve Webb, who is now the Minister for Pensions, and I argue in a pamphlet, which can be found at www.soapboxcommunications.co.uk/anewstate pension.pdf, we could fund that pension by putting into one pot BSP, the state second pension capped at 2020 to give the extra headspace, and pension credit. At a stroke, there is a pension floating people off pension credit and thus making it safe to save and pay to save. Without such a platform, too many people will be at risk of mis-selling, and if we do not do it, issues such as annuitisation at 75 will be at risk. If we scrap annuitisation at 75, which I support, then, but only then, if it is underpinned by a safe new state pension, savers would no longer have to annuitise a slice of their pot to keep them off pension credit
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In order to make it attractive to save, we have to allow low-paid people, who often have no other savings, access to a slice of their pension fund, perhaps represented by the 25 per cent tax-free lump sum, otherwise women, in particular, will not save if they have to lock the money away for 40 years when they may face all sorts of financial tumult in their working lives from divorce, disability or the need for running away money. We need to find appropriate low-cost vehicles in which to save. I have great hopes for auto-enrolment and also for employers' contributions into existing shell stakeholder pensions. For example, we know that where employers do not contribute to a shell stakeholder pension, only 13 per cent of employees contribute, but where employers contribute, something like 80 to 90 per cent of employees contribute. As a result of NEST, people who are lower paid or are working in businesses with fewer than five members of staff-the cut-off point for stakeholder pensions-will have the opportunity to come into auto-enrolment.
I shall raise some detailed issues about NEST, and I hope the Minister will bear with me. I hope they will be considered in the 2017 review. NEST is targeted at the low paid, who are disproportionately women, who are probably earning between £10,000 and £20,000 a year. Given that they are low paid, to start with the NEST pots will be pretty small. I accept that you cannot ask kitchen-table employers to contribute more than 3 per cent at this stage, although I would hope that in time that would rise to at least 5 per cent.
I shall put four propositions to the Minister that would make NEST work and make it safe and attractive, which are the two criteria that dominate the debate. When NEST has rolled out, employers will contribute only 3 per cent, which will be 8 per cent in total, on earnings above the LEL. That means that someone on half average earnings-£10,000 to £11,000-will get a pot built on contributions of only just over half of that-£6,000-unlike other occupational pensions, which take the whole of the earnings range into account. I believe that where an employee wishes to contribute on all her earnings, including those below the LEL, as happens in other OPs, she should be allowed and encouraged to do so, and where she does, so must the employer. To do the full range for somebody on £11,000 a year would cost the employer an additional £4.50 a week, but the employee's pot would more than double. Paying in only above the LEL for, say, 20 years on £11,000 a year would give her a pot of around £19,000 or an extra pension of around £19 a week, on which she promptly loses 40p in the pound on pension credit, so she ends up only approximately £11 a week better off. Put in the new state pension, and she would keep that £19-as opposed to £11-in full. Allow-indeed, encourage-her to pay on all her earnings, at a cost to her of an extra £5 a week, and her pot doubles to some £35,000 and she gets £35 a week, which brings her off pension credit. She keeps every penny and has a real, decent opportunity of comfort. So she could get £11 a week, £19 a week or £35 a week. By doubling her contribution, she receives three times her pension, and
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Secondly, I want NEST to offer access to that 25 per cent lump sum to encourage saving. After all, if a financial emergency hits you, it is much cheaper to borrow from yourself than from loan sharks charging 500 per cent APR down the road.
Thirdly, I want NEST to raise its ceiling in due course from £3,000 a year. I know that providers of other pensions were worried at the time that money that goes to them will be diverted, but, frankly, once NEST has settled down, we should permit it. Why is it okay to have a £10,000 cap on ISAs but only a £3,000 cap on pensions-on NEST? That is nonsensical.
Fourthly, NEST and other auto-enrol schemes really must help us with the problem of orphan pots. A hairdresser may have had a couple of periods of self-employment and built up a small pot of £2,000. She has £18,000 in her NEST pot on retirement, which is modest, but she cannot access that £2,000 because it is floating out there in the ether. She cannot trivially commute it into cash, because her NEST pot is above the trivial commutation limit. She cannot annuitise it because it is too small for providers to do so. She cannot import it into her NEST holding to raise it to £20,000 because of the preliminary rules that we have established and which should be reviewed. I know that there is good will in the DWP to attach it, so I hope the Minister can tell us how far it has gone with this when he replies. It would be unfair if someone in that hairdresser's position had saved £20,000 but cannot touch 10 per cent of it because of completely arbitrary-and, if I may say so, man-made-rules.
Finally, I will go slightly wider than the topic, if I dare, and say a word about public sector pensions. I accept that government will wish to review how sustainable they are in the current climate. I am a new governor of the PPI-a long-established governor of the PPI, the noble Baroness, Lady Greengross, is sitting behind me-which is researching possible options for this. One option, which I really want to float today, is for DB for earnings that attract a standard rate, and then a flip to DC on earnings at a higher rate or at another figure of, say, £35,000 a year or £30,000, so that the broadest shoulders bear the risk and those who are most in need of protection have the security of a DB slice. It is a hybrid scheme, and your Lordships are quite sensitive about hybrid schemes at the moment. I regret that I have not been able to cost the savings, but it would be fair, protect the low paid and be simple. Everyone would know what it means, and it would share risks, allow public sector employers to have a better stab at protecting and predicting future liabilities. It would also discourage the habit of late-life promotion for white men to enhance their pensions.
I very much welcome today's debate. I hope that the Minister will clearly show his support for NEST today, flag up that we will have a review in 2017, confirm that some of the issues that have been raised today and that could transform the financial outcomes for women in particular will be considered, and that he, like the noble Lord, Lord Fowler, and I, will join in the general consensus that the only way to get the low paid into
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Baroness Greengross: My Lords, I declare an interest as president of the Pensions Policy Institute and head of the UK International Longevity Centre. I, too, congratulate the noble Lord, Lord Kirkwood, on securing a very timely debate. He has raised some important issues and asked some significant questions. I also congratulate the other speakers today, who have been quite exceptional. I know that those who follow me will be the same, so my comments will be brief.
I am supportive of auto-enrolment but above all of the important consensus that has emerged about long-term pensions issues. Personal accounts may not be suitable for all employees due to their interaction with means-tested benefits. This particularly applies to workers over 55 years of age, who will always have insufficient time before retirement to accumulate a significant fund under the scheme. However, they may have just enough pension to reduce any benefit entitlement, including passported benefits, such as council tax relief, pound for pound. As I have said previously, this does not mean that people should not be auto-enrolled, but it implies that people will need, as the noble Lords, Lord Kirkwood and Lord Fowler, said, clear information and generic advice to help them to make informed decisions about whether they should stay in or opt out of personal accounts
The noble Lord, Lord Fowler, pointed to the extraordinarily awful levels of ignorance among the general public. The issues are who pays for the information and who will provide the information and advice, particularly down the line at the decumulation stage when employment has ceased. An important test of the personal accounts policy will be whether it is possible to design information and generic advice in a simple and easy-to-understand way to help people to decide whether they should opt out of personal accounts.
There are policy options that the Government could consider to improve the incentives to save for some groups, particularly those who are heavily at risk. I hope that the Minister will be able to indicate some of the thinking along these lines. Increasing the trivial commutation limit or introducing a limited pension income disregard could improve the returns from personal accounts for some individuals at a cost of increasing government expenditure on means-tested benefits.
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