I welcome the provisions in both of the Bills that are before us today, particularly with regard to flexibility on the drawing down of savings, but, as has already been mentioned by the speaker on the Opposition Front Bench, there are certain concerns which this House should have when reviewing the Bill in Committee so as to ensure that this new flexibility, which I welcome, does not put a pensioner in a position of inadvertent poverty. The point made by the noble Lord, Lord Davies of Oldham, is absolutely right. Your Lordships—and those who are responsible for the implementation of this legislation—should always remember that there is a tremendous difference between guidance and advice. Advice is something that you pay for, as the noble Lord, Lord Davies, pointed out, and is between the pensioner and either an individual or a respected firm. Guidance is something that the Bill deals with, and is much to be welcomed.
When one starts contributing to a pension scheme, if one is employed by a large company, and it is a defined benefit rather than a defined contribution scheme—that is, over the lifetime the individual earns
an entitlement from the pension fund that is underwritten by the employer, which is a big difference from the contribution schemes where an individual is saving for later life—it is important to look at who is providing advice. The Bill provides for guidance as opposed to advice—free guidance to individuals, who may wish to ask themselves, “I have built up this substantial pot of money but I still have 15, 20 or 30 years after retirement. What is the most sensible proportion that I should leave in my pension pot and how much should I draw down, either in individual lump sums or all at once?”. That is where advice is absolutely crucial.
I hope that when the Ministers take these Bills through Committee, they will be able to answer some of the detailed questions about who pays for those who will give advice. My understanding is that it will be from public funds, which the Treasury will require to be raised from those who are providing guidance, and that the individual bears no financial burden by saying, “I want to draw down some money. Here are my assets. Here is how long I and my dependants expect to live”. That advice is absolutely crucial. The citizens advice bureaux are perhaps not the right entities to provide that advice. We need a new cadre of trained and respected bodies and individuals to provide that free advice. Pensioners and prospective pensioners should be strongly recommended to take that advice.
I will conclude by making a comment, if I may, on defined benefit schemes. Like a number of noble Lords, I have served as a trustee and now the chairman of a large defined benefit pension fund. That fund bears the risk of a diminution in the assets and—this is my final point—the movement of interest rates. When a pension fund calculates its deficit or its surplus, typically every three years, one of the factors used is the gilt rate. The gilt rates are at historically low levels at the moment, which means that when the actuary discounts the liability of the lifetime of the remaining members of the pension fund, which might be 15 or 20 years after they have retired or even longer, a very low rate of discount is applied and therefore the liabilities in the accounts of the pension fund rise. Over the past two or three years, they have risen dramatically. Although I welcome low gilt rates and low interest rates, when we come to the valuations very shortly—on 31 December of this year—we will find that the deficits of some of our largest pension funds have again risen. I have no solution to that, but we need to reflect on whether there needs to be some kind of change in the principles that are applied.
I very much welcome the Bill and I look forward to Committee.
5.29 pm
Baroness Drake (Lab): My Lords, I declare my interest as a trustee of Santander and Telefónica pension schemes and a board member of the Pensions Advisory Service and the Pension Quality Mark.
I am extremely concerned about the extent of the new pension freedoms and the speed of their introduction. I think that the Chancellor is rushing his fences. I have two real concerns: the behavioural impact of those freedoms and poor decision-making by the saver. I am now confused as to where the consensus on pensions
policy now is. The rush to put the freedoms in place from April 2015 is dominating the debate, overshadowing consideration of their efficiency for the long term. I favour some more freedom, an increase in the trivial commutation level and reducing the proportion of the pension pot that has to be compulsorily annuitised, but the extent of the freedoms unleashed in these Bills will create new problems. There is now a complete separation of tax-advantaged pension saving from any requirement to secure an income stream in retirement. The effect of that decision will be profound.
The Treasury cited Australia and the US as examples where consumers have similar freedoms, but they both have problems. In Australia, few people buy an annuity. The leading accounting body, CPA Australia, found:
“Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s been lived now instead of being put aside to provide income in retirement”.
As my noble friend Lord Hutton comments, the Murray review into Australia’s financial system found that a quarter of people with a pension pot at age 55 had depleted it by age 70. The complexity is tipping people into cash, and the review now recommends a default back into annuities.
In the US, 51% of the workforce has some form of pension plan, mainly in 401(k) schemes. Thirty-five per cent of those who left jobs in 2013 cashed out their 401(k)s outright. The US Treasury this year said that it will offer a tax break for savers who buy annuities and allow pension schemes to offer long-term deferred annuities as a default. Both those nations are rowing in the opposite direction of the Bills. The Office for Budget Responsibility states that the tax consequences of the reforms are “highly uncertain” because no one knows how many people will spend substantial parts of their pot from next April.
Choice is now extended, but for many millions the biggest challenge remains building an adequate pension pot. The average annuity in 2013 was bought with a fund of just over £35,000; the median was £20,000. How will the reforms help the next generation of savers? The Pensions Minister and the DWP are to be complimented on the rollout of auto-enrolment, but on the default contribution rate of 8% a median earner’s pension pot will still be very modest.
The employer pension contribution had been expected to increase over time, but the new freedoms make that more difficult. The Government have sent out a clear message to the individual—“It’s your pot of cash. You saved it. You spend it as you like”—neglecting the contribution from tax relief and, in most cases, the employer. The now public focus on early access to cash from age 55 contradicts the more important messages of working and saving longer and drawing your pension later. Employers are integral to the success of workplace pensions, and a major influence on the level of contributions, but what is the Government’s message to the employer? “Pension pots are for people to do with as they like; they are no longer reserved for retirement income”. The premise on which employers were compelled into making a pension contribution under auto-enrolment no longer holds. How will that affect employer attitudes? They may be less disposed to increase their contribution and more politically
resistant to an increase in the statutory 3%. Will a finance director want to pay more to a worker’s fund so they have freedom to purchase a Lamborghini?
Historically, employer and employee pension contributions were so tax advantaged because they supported a retirement income. I agree with the Pensions Minister that tax relief should be reformed to give a more efficient distribution, but if pension savings policy is now, “Spend it all as you like”, then the fundamental principles of the tax relief will inevitably be revisited. I would not want to see the incentive to save for the long term seriously reduced for the next generation of young savers because successive Chancellors claw back too heavily on tax relief, but I fear that is now where we may be heading. The Institute for Fiscal Studies has already questioned whether the contributions to a DC pension saving should continue to be so tax privileged if annuitisation is voluntary.
The new freedoms bring new risks and complexities and uncertainty as to how the risk of consumer detriment will be mitigated. The Government are dependent on the market to ensure the success of the new freedoms. The Pensions Minister, Steve Webb, has said he will watch the pensions industry “like a hawk”—not a statement of confidence. Antipathy to annuities has been driven by falling annuity rates and the behaviour of providers, who will continue to supply the retirement products—so it is new freedoms, same market.
The new FCA study, which examined how market conditions may evolve from April 2015, found that competition in the retirement income market is not working well for consumers and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The chair of the FCA in a recent speech made two key comments. He said the increase in regulatory rules has failed to prevent misconduct and does not,
“seem to prevent further problems arising”.
At some point, inevitably, the Government will have to place in statute a clear fiduciary duty on providers and asset managers to put consumers first. Meanwhile, some good providers will want to respond positively to the new freedoms, but how will the market be placed in April 2015? The Legal & General Assurance Society chief executive John Pollock said:
“The fact is we were given hardly any time and then expected to deliver a satisfactory solution”.
Many employers will find engaging with the new freedoms a step too far because they are too complex, too costly and they fear associating with the products and poor decision-making. We may see a greater switch from trust to contract, an accelerated move to default ex-employees out of company schemes and a greater reluctance to fund employee access to guidance and brokering services—employers do not want any liability come-back. Employers are not obliged to provide access to the new freedoms through their schemes and many will not. People will have to embrace the complexity and cost of transferring their savings to get that access. I suggest a further tip into cash.
As to savers, policy now relies on one set of behavioural assumptions when people are saving and another when accessing pensions. It is assumed that workers are prone
to procrastination and behavioural biases, which prevent them from making active decisions to save, so they are auto-enrolled and defaulted into an investment fund. However, at the age of 55 they become engaged savers, making active complex choices and informed decisions about their income and risks in retirement. However, as the PPI confirms in its report,
Transitions to Retirement
, making informed decisions about accessing DC savings was the hardest of all pensions, retirement and other financial decisions.
The Government need to help people to manage these risks. We will have the guidance guarantee, which is welcome, and it needs to be a success. However, some consumer and industry players want the FCA to introduce a second line of defence, requiring providers actively to ask customers whether they have considered the most important risks. We have little clarity on the charges and quality standards on retirement products in future, and the annuity market still urgently has to be tackled.
The Pensions Minister, Steve Webb, and the DWP have been focused—desirably so, and I compliment them—on new approaches to risk sharing, defined ambition and collective DC being their proposition, so it is most surprising that these two Bills are now being run together because one directly undermines the other. The potential for collective DC has changed as a result of the new freedoms. Intergenerational risk sharing between members with the provision of retirement income becomes very difficult if people can crystallise the value of their fund and take their cash from age 55.
As others have said, collective DC schemes are designed to smooth out income. The individual does not have a well defined pot over which they have individual ownership. That the collective DC schemes are not really compatible with the freedoms in the Taxation of Pensions Bill is not just a technical point but a cultural one, too. The freedoms row back to taking cash and seizing the individual while collective DC and defined ambition culturally, emotionally and sentimentally move in favour of sharing risk. It is not a coherent framework.
The Pension Schemes Bill has a significant number of delegated powers, so there is much still to be understood. In order to be sustainable, collective DC needs scale, an assured flow of new members, excellent governance and full transparency. On governance, the Bill is largely silent, yet collective DC and defined ambition can be run by trustees or private providers. The Government have added a clause to enable regulations to impose a duty on managers of non-trust schemes to act in members’ best interests, but it is unclear whether this would place an unequivocal fiduciary duty on private providers. Neither the NAPF nor the ABI detect a current appetite for such schemes, as they confirmed to the Public Bill Committee, so defined ambition, collective DC and any collective risk-sharing future in pension schemes need to be driven if they are to take off. However, we have no visibility as to how the Government will do that. Rather, I fear that the work of the Pensions Minister and the DWP has been undermined by the freedoms that come with the taxation Bill.
5.43 pm
Lord Holmes of Richmond (Con): My Lords, it must surely be Christmas soon, with not one but two pension Bills in the same afternoon. What treats to pop under the tree.
I give my respect and honour to my noble friend Lord Jenkin for his 50 years in Parliament. My sadness is that I got to know him only about a year ago, but I appreciated the wisdom that he shared with me when I joined your Lordships’ House and his witty comments, sometimes sotto voce when he was sitting next to me, at which I found it very difficult to suppress at least a snigger.
Where are we with pensions? It has been a tumultuous 20 years. We have heard the words “security”, “freedom”, “flexibility” and even “simplification”, until we all finally concluded that pension simplification is probably one of our greatest oxymorons. Defined benefit schemes, once the gold standard, with the ability to deliver two-thirds of someone’s income in retirement, were a solid proposition but have been undermined and eroded over the years by a whole series of factors, not least the tax raise by the previous Government, which put the final nail in their coffin. However, these current changes offer a lot; there is flexibility, but that must be balanced with the ability to have assured choices. I will not dwell too much on the Taxation of Pensions Bill, which is a money Bill and not our responsibility, but I ask the Minister what assessments HM Treasury has made as to the likely impact on tax take—not least as regards NICs—of these changes proposed in the Bill.
Much has, rightly, been said about the guidance guarantee. I will not add to those comments, but it is at the core of so much of this. If guidance is to be given, it must be guidance that can be relied upon. For many individuals, pensions are not only dull, boring and uninteresting, but that person will potentially hit a point where a decision could dramatically and irreversibly give them a retirement which they did not deserve, expect or need to have if they do not get that decision right.
The idea that a pensions board clearly sets out all of somebody’s benefits in one place—they have a dashboard picture—makes such sense. As regards wake-up notices, because of the profound nature of these changes I ask the Minister to consider whether such notices need to occur at five or maybe even 10 years before retirement, to get people thinking about what potential exists and how they may choose to act. We will almost certainly have guidance on it, but that is no bad thing. Much has been said on the guidance guarantee from a member’s perspective, but for a moment let us consider this from a trustee’s point of view, when somebody may want to transfer defined benefits into a defined contribution provision. Currently it is required that trustees consider the “appropriateness of the advice” that that member would have taken. I ask the Minister to consider sharpening this as we go through the legislative process. As it stands, it could be interpreted that there is a responsibility on trustees to look into that advice to consider its appropriateness. What is meant by that and what should be clear is that trustees need to convince themselves of the appropriateness of the independent financial advice and that it has come from
an FCA-authorised provider rather than a responsibility on trustees which would be almost impossible for them to exercise to go into the details of that advice, and which would also go far too deep into the private matters of that particular member.
To turn to what is best seen as the £30,000 rule—the trivial commutation—again, potentially £30,000 of benefits can be moved without the need for advice. However, as the Bill stands, how can that happen if a member does not have nor should need the knowledge to understand how to assess the value of their benefits? It will not be measured on the cash equivalent transfer value measure but on the lifetime allowance measure. Not only does a member not need to know this, but even if they do know it, it will be impossible for them to gain all that information if they had existing crystallised provisions in a whole series of schemes. I ask the Minister to consider whether in these circumstances a way around this would be to enable that measure to be made on the CETV measure, which would cut through a whole heap of headaches and certainly allow everybody who currently understands that measure to go forward.
As regards the new types of schemes, again, I commend putting risk in there—the new defined ambition. However, there is a new issue here with regard to cost, complication and potential confusion. There is potentially a cost for trustees who seek to have to go through a process to come to the conclusion that their defined contribution scheme is a defined contribution scheme, as they always suspected. There is potential confusion for members to have their scheme potentially fall into a different name, despite the fact that the benefits structure is exactly the same.
There are a number of smaller provisions on which I will go into more detail when we get into Committee. However, what I would like to draw out is that, despite people’s lacklustre and disinterested approach to pensions, they impact our lives way before we come to draw the pension. For example, recent pensions case law demon-strates that, potentially, a part of a pensions trust can fall within a bankruptcy order. How will these new changes affect that? Similarly, how will the legislation impact on pension-sharing on divorce ear-marking orders, already issued and those yet to come? Pensions matter from the moment when a person begins with an employer, when they change employer and when, perhaps, they become bankrupt or get divorced. So many life elements impact on pensions provision.
I support the intent but, as always with pensions, the devil is very much in the detail. It is complex and it makes your head hurt, but it matters—and time is incredibly short.
5.51 pm
Lord McKenzie of Luton (Lab): My Lords, I start by congratulating the noble Lord, Lord Jenkin, on his splendid speech this afternoon, and I give him my personal best wishes for his retirement. It has been a privilege to work with the noble Lord on a number of pieces of legislation. I have always found him incredibly knowledgeable and there is an old-fashioned kindness about his approach, as well as enormous stamina. There have been times when he has still been going at 10 o’clock at night, or 10.15 or 10.30 and beyond,
when other noble Lords were flagging and wishing that somebody would call the House to order and to be adjourned.
We have two Bills before us this afternoon but, sadly, no opportunity to undertake a line-by-line consideration of one of them—the Taxation of Pensions Bill. It may contain only four clauses, but there are some 75 pages of schedules to add to the nearly 3,000 pages of tax legislation that the coalition has visited on us to date. If there were a Committee stage, we would have the chance to examine the very important issues that my noble friend Lord Hutton raised earlier.
The Government herald these two Bills as introducing a radical reform, giving greater choice for individuals and business. Indeed they do, but whether it will mean better outcomes in terms of retirement income for individual savers is another matter. As my noble friend Lord Davies of Oldham has said, we support the principle of increased flexibility for people in retirement and reform of the pensions market so that people get a better deal, but the changes undoubtedly bring forward a more complex landscape with different choices for consumers and the prospect of new, more diverse pension products. Given the huge significance of the decisions which individuals make at or when they approach retirement, affecting their lives and that of their partners for 20, 30 or even more years, it is vital that they are supported to make the choices that are right for them.
The Government’s rhetoric has been about the benefits for retirees, and they have been a little coy about the benefits expected to accrue to government. The Taxation of Pensions Bill, after taking account of changes to taxation of death benefits and the reduction in the annual allowance, will generate increased taxation for the Government of £3.86 billion in the period to April 2020. Can the Minister confirm that figure? Increased income tax receipts are expected through to 2030, with modest reductions thereafter.
With taxation receipts for government falling short of expectations, it is doubtless welcome news to the Chancellor that pensioners will be contributing more. However, we do not know much about who is going to bear the extra tax, and in what circumstances. How much of the extra tax will be derived from individuals putting themselves into higher rate tax bands? We know that for any sum taken from uncrystallised funds, 25% will be tax free and the balance taxed at marginal income tax rates. So those wishing to access the whole of their erstwhile tax-free amount will have to subject the whole of the balance to income tax in one go. Perhaps the Minister can give us some breakdown of all of this.
What percentage of retirees is it estimated will continue to take annuities, and what percentage will take their pension pot in one go? Notwithstanding this tax bonanza for the Government, there are lingering concerns that some, with resources and compliant employers, will see the new flexibilities as an opportunity to reduce their tax bills by the use of salary sacrifice arrangements, thereby saving national insurance and tax on the 25% tax-free withdrawal. The Government have addressed this issue in part, by reducing the annual allowance from £40,000 to £10,000 once flexible
drawdown is under way, but there still appears to be the prospect of tax leakage in pre-flexible drawdown periods. Are the Government accepting of that?
As we have heard, the Pension Schemes Bill allows for the establishment of collective defined contribution schemes—an arrangement that we support, and indeed have called for. Similarly, we support the concept of shared-risk schemes. It is high time that pension provision was broadened to offer more than just defined benefit or defined contribution schemes. Increasingly, the binary landscape has left new savings going into DC schemes as the longevity, investment and inflation risks, coupled with accounting rules, became too difficult for many employers to sustain. Efforts to chip away at some of the perceived more burdensome obligations of DB schemes have not stemmed the tide of closures in the private sector.
As the NAPF 40th annual survey identifies, active membership of DB schemes has reduced by two-thirds since 1975, to just 1.1 million today. Active membership of DC schemes outnumbers that of private sector DB schemes for the first time ever, and the success of auto-enrolment is expected to reinforce this shift.
At the same time this is taking place, decumulation of DC schemes is happening in an environment of sustained low interest rates, with quantitative easing helping to create an environment of miserable annuity rates. All this has been accompanied by a substantially dysfunctional market. So the defined ambition elements of the Bill which provide the framework for risk sharing between employers, employees and third parties are to be welcomed—as is the prospect of collective benefits involving risk pooling between members, with the opportunity of greater stability of outcomes.
I understand that it is hoped that the necessary secondary legislation will be ready for April 2016, to coincide with the abolition of contracting out. Does that mean that we will not see drafts of the key regulations during the passage of the Bill?
Undoubtedly the aspect of the Bill which has attracted most comment involves the new flexibilities around decumulation of DC schemes. The speed with which these changes were announced and are being introduced is, as other noble Lords have said, worrying. The lesson from previous major reforms, such as the single state pension, auto-enrolment and most changes to the state pension age, is surely the benefit of laying the groundwork, through extensive consultation and stakeholder engagement, and building a consensus where possible.
The guidance service—the deliverer of the guidance guarantee—is especially important, because the availability, scope and effectiveness of the service will be key if the new flexibilities are to work as intended. As a very recent PPI report shows, we will have to recognise the changing circumstances that face individuals as they approach retirement—such as rises in state pension age and the normal pension age in private sector schemes, removal of the default retirement age, increases in longevity, and current economic challenges. These factors are changing the way in which people approach retirement and pension transition. It is no longer necessarily just a case of leaving work and taking a
pension—although accessing DC pensions is, as we have heard, currently considered the most challenging aspect.
Just at the time that inertia is being put to good effect to encourage accumulation by auto-enrolment, the Bill seeks to galvanise engagement and enthusiasm when it comes to decumulation, as my noble friend Lady Drake said. This engagement is expected initially of a generation who have generally not saved enough for retirement, whose longevity is increasing, but where men in particular underestimate life expectancy, and who tend to overestimate their income returns.
So far as the current market is concerned, let alone one selling more diverse products, as two recent reports by the FCA make clear, providers are not generally treating customers fairly. One of its reviews showed that 60% of retirees with DC pension savings were not switching providers when they bought an annuity despite the fact that around 80% of those consumers would obtain a higher income on the open market. I think that my noble friend Lord Hutton made that point. As for those with medical conditions and lifestyle factors, the FCA estimated that 91% could get a better deal on the open market. The review identified that only 5% of annuities sold by providers to their existing pension customers were enhanced, compared with 50% of annuities sold in the open market.
So how can we have confidence that the guidance guarantee will facilitate better outcomes, especially over time when the vacated space of compulsory annuities will engender a wide range of products? There are a number of concerns. The first is whether people will seek to access the service in the first place, and some piloting by Legal & General was not encouraging. We know from the “near final” rules published by the FCA on 27 November that they will introduce a requirement —the first line of defence—for DC providers to ask consumers whether they have used the guidance service or received financial advice, and to encourage them to do so if not. That is all well and good, but a growing number of voices are calling for a second line of defence—we heard some of these this afternoon, particularly that of the noble Baroness, Lady Greengross —which requires providers actively to prompt consumers, to ask whether they have considered matters such as tax, their partners’ needs, benefit implications, medical or lifestyle needs, including social care ramifications, the impact of inflation and the risks of running out of money. The FCA reviews certainly give emphasis to the need for such a second line, and we will doubtless explore this further in Committee. But perhaps the Minister can say whether it is intended that there will be only one free session at which guidance is provided. How will this work over a lifetime in circumstances where an individual does not opt for an annuity and new products are coming on stream over his or her lifetime?
There is much else that can be explored in Committee —matters that are in the Bill and, indeed, some that are not. Certainly, we will wish to pursue the issue of removal of restrictions on NEST. I take this opportunity to say that my attention has been drawn to the operation of the PPF and how it affects certain categories of employees. In particular this issue has been raised by
pilots of BMI and Monarch. BMI entered the PPF in 2012 and Monarch is in the assessment period. However, the operation of the PPF cap is raising the prospect of such pilots receiving pensions dramatically below their original scheme expectations. Can I meet the Minister to explore that issue rather than raise it endlessly in Committee?
These Bills have the potential to change the pensions landscape and we have a duty to engage with them constructively but rigorously.
6.03 pm
Lord Kerr of Kinlochard (CB): My Lords, it is a pleasure and a privilege to participate in the tributes to the noble Lord, Lord Jenkin of Roding. I should like to add one footnote. As a former public servant when he was a great man in the Cabinet, I should like to say how much his courtesy towards the public service was appreciated. He was a great team leader. He was not one of those who thought that the public service was a lesser breed without the law. It was a privilege to work with him at that time.
I also agree with every word of what the noble Lord, Lord Freeman, said so elegantly, particularly the tribute he paid to the kindness of the noble Lord, Lord Jenkin, in welcoming new Members to this House. I learnt a great deal from him when I first arrived here, in particular about energy policy. I will greatly miss his consistent stress on the need for further back-up investment in generation. Governments of both hues have perhaps not paid sufficient attention to that. If the lights go out and we find ourselves in the dark as we brush our teeth, we will remember the noble Lord with very great affection.
6.05 pm
Lord Bradley (Lab): My Lords, I begin by adding my own tribute to the distinguished career of the noble Lord, Lord Jenkin of Roding. As we have heard, he has given huge service to Parliament in both Houses over 50 years and held many of the great offices of state—even if he did not get on to the front row of the photograph. His contribution today is further testimony to his massive wit, wisdom and insight into both Houses of Parliament. I wish him a very happy and healthy retirement.
We have heard a wide-ranging and high-quality debate. I thank the Minister for his detailed introduction of the Pension Schemes Bill which we will explore in great detail in Committee and at other stages in this House. I thank all noble Lords for their excellent contributions to the debate. A theme that has run through it is that, although we are taking the two Bills together, they do not necessarily fit together quite as well or as coherently as the Minister argued when introducing them, just as the four pensions Bills introduced during this Parliament belie the proposition of the Minister for Pensions, Steve Webb, that, overall, this is a coherent set of reforms.
My noble friends Lady Drake, Lord Hutton of Furness and Lord McKenzie of Luton made clear in their excellent speeches that how the new freedoms and flexibilities in assessing pensions, introduced through the Taxation of Pensions Bill, and the provisions to
allow the creation of collective defined contribution and shared-risk schemes, sitting between defined benefit and defined contribution schemes, will impact on each other has not been fully worked out. I am sure that, as we go into Committee, the Minister will provide further details about the new pension freedoms and how they will impact on the types of shared-risk schemes that may be created following the changes in the Pension Schemes Bill. We want to explore the potential tension between guidance, help and encouragement to build up a pension pot, particularly following auto-enrolment, and flexibility and choice in turning this into an adequate retirement income.
As my noble friend Lord Davies made clear, we support freedom and flexibility in accessing pensions but want to ensure that three tests are met: savers should get the right guidance—I stress that we are talking about guidance, which is different from advice; the system should be fair to low and middle-income savers; and the reforms must not lead to additional burdens on the state. These principles will steer the questions we ask when we look closely at the guidance guarantee in the Pension Schemes Bill. For example, will the guidance be of sufficiently high quality and impartiality to help people with perhaps the most complex financial decision that they will ever have to make? Will take-up be sufficient to ensure that people are not left unequipped to deal with this decision? Will those who receive an annuity or are defaulted into one still be able to access a good-value product?
The Government clearly understand how important it is that the guidance guarantee—or whatever it is eventually called—meets the substantial challenge of equipping people to navigate what can be a very difficult market. This reflects another tension between the different strands of the Government’s pensions reforms. Auto-enrolment is based on the idea that consumers do not always make the best decisions in a complex market and, instead, may end up doing nothing. The pensions freedoms are predicated on those same consumers becoming highly engaged with the decision in front of them when they reach retirement. The guidance guarantee is the bridge over which they attempt to cross that fault line between different reforms, and it will need to be up to the job. We will address this issue in Committee when we look at that aspect in the detail that the noble Lord, Lord German, set out.
Those difficulties are possibly made more pronounced by the pace at which we need these reforms to be implemented and the pace at which the Government are pressing through this legislation in this House, as the noble Baroness, Lady Greengross, clearly pointed out in her excellent contribution. In the case of citizens advice bureaux, for example, it comes on top of an already challenging set of circumstances for people who rely on that service. I hope that the Minister will be able to reassure the House that all the organisations that will be responsible for giving guidance, including the Pensions Advisory Service, will be adequately resourced to do what they are being asked to do. That is especially important given the disparate estimates that have been made of the take-up of that guidance, as came out clearly in Committee in the other place. As we heard from my noble friend Lord McKenzie, Legal & General has said that following its own pilot a
mere 225 out of 9,000 contacted took up the offer of guidance. Therefore, take-up could be very low. TPAS has estimated that it will be 25% but I accept that others have made higher estimates. However, take-up will be crucial if the guidance is to be meaningful for the people who rely on it.
Questions remain unanswered about how the new flexibility that has been announced will affect the way that pension savings are treated. If they can be accessed at 55, can a creditor demand that money be drawn down to cover debts? Currently, the fact that pension savings are put aside for purchasing an annuity prevent them being accessed and treated as free money. There are concerns that the pace at which these changes are being rolled out means that the Government have not ironed out all the details of such important matters for individuals reaching that age.
The other principal change to the legislation ahead of us is the outlining of new definitions of the different kinds of pension schemes, moving beyond the general money purchase and non-money purchase definitions in the legislation to make it possible to create shared-risk schemes. We support the changes and in fact earlier this year we called for these changes to create CDCs. Their benefits have been laid out by other noble Lords. They have the potential to offer a more stable retirement income than individual DC schemes. Modelling for the DWP showed that a collective pension would have outperformed an individual one by an average of 33%, according to historic data, and, just as importantly, would have performed more consistently. We need to look carefully at those outcomes. However, there is obviously the potential in collective shared schemes to achieve that stability and longevity in retirement income.
There can also be benefits from not having to divest from relatively riskier assets into safer ones with a lower return as the saver reaches retirement age, as is often the case with individual DC schemes. They can also have lower administrative costs. As a result, IPPR work from last year showed that it was the most popular option for government reform, backed by a broad spectrum of the population. Clearly there are benefits to be had from collective schemes.
The Bill is light on detail. As the Minister intimated, it does not contain the detail of the kind of defined ambition and DC schemes the Government envisage will be arrived at. Nor is there much suggestion of how many collective schemes the Government envisage will be set up in the short to medium term. I hope that the Minister will provide some more detail on the DWP estimate for the number of employers likely to take up the option of a defined ambition scheme. I hope that we will have details of that not only today but as the Bill passes through its stages in the House.
There are a number of missed opportunities in the Bill. There are steps that the Government could take to improve the market that would fit well with these reforms, such as changing the legislation so that pension schemes are required to have a board of independent trustees with a fiduciary duty owed to scheme members over and above that owed to shareholders. That was clearly identified by my noble friend Lady Drake. The OFT has shown that the contract-based market is not getting value for money for savers. As we have heard,
international evidence shows that if the Government were to move in that direction it is likely to lead to better governance and transparency. We look forward in Committee to laying out the evidence on how trust-based governance can improve dysfunctional markets.
With this there is also the chance to build up scale in a way that would drive efficiencies and build up those economies of scale, which we again know from inter -national evidence can improve administration. It would mean that fewer trustees could cover more of the market and lead to the lower transaction costs through intermediation as recommended by the economist, John Kay. Two hundred thousand schemes are too many, so it would be helpful if the Minister could outline what is being done to encourage scale.
There is also a missed opportunity to build on the good work that NEST has already done by lifting the restrictions placed on it in the light of the European Commission’s confirmation that doing so would not breach state aid rules, as the Government previously argued it would. For NEST to remain influential in the marketplace, it needs to be able to grow to reach more employers and attract more savers. We will be exploring that possibility in Committee.
It is also crucial that, in the excitement of the new flexibilities being rolled out this April, we do not forget about reforming the other parts of the market that have not worked well for consumers but which provide the types of product for which there may still be demand. The Financial Conduct Authority’s interim report on the retirement income market published last week showed that the market is still not working well, and we know that of the 40% of people who get an annuity with their existing provider, 80% were not aware of the option to shop around. Others were not practically aware of how to go about this, or did not think it worth shopping around in the first place. In fact, it can make a substantial difference to people’s retirement income. The National Association of Pension Funds estimates that not shopping around can cost up to 20% of retirement income. It would therefore be of great benefit to the consumer to require an independent broker’s recommendation before it is possible to sell an annuity to someone who has saved with the scheme they are purchasing the annuity from.
We also urge the Government to take action to prevent people who are taking advantage of the new flexibilities being subject to similar examples of consumer detriment, albeit perhaps through a different product. It is concerning that the Government’s plans to address rip-off pensions do not include income drawdown, despite the fact that 320,000 people are likely to be looking to access these products after April. If charges equivalent to many of today’s drawdown products were to apply then, someone investing a pension pot of £30,000 could see 27% of their savings taken away in charges. Given that the median annuity in 2013 was purchased with a pot of £20,000, these charges could be significant.
As we have heard from other noble Lords, this Bill is more a framework than a completed piece of legislation, enabling rather than fully formed. It will be difficult to
scrutinise without further details from the Minister about the likely content of regulations and the timetable for when these regulations will be laid. It is essential for this House to have sight of those regulations so that we can look across the piece of the primary legislation and the regulations to be absolutely sure that we are scrutinising effectively the impact of the Bill on future incomes in retirement. However, the number of amendments that the Government introduced as it progressed through the other place, and the number that we are likely to see as it progresses through this House, means that it is vital that these proposals are adequately tested here. We may therefore look at whether clauses should stand part of the Bill when we come to Committee stage to enable us to debate the crucial issues that have been identified by many noble Lords this afternoon.
We want a pension market that protects consumers and provides them with what they need in retirement. That is precisely what we will attempt to achieve as the Bill passes through this House.
6.21 pm
Lord Newby (LD): My Lords, it is a great pleasure to be able to respond on behalf of the Government to our debate this afternoon. As ever, your Lordships’ House has demonstrated a very considerable degree of expertise in the subject. I am sure that I will not be able to cover all the points made, but we will have the opportunity of doing that at some length in Committee.
Like other noble Lords, I begin by joining in the tributes paid to the noble Lord, Lord Jenkin. I first saw the noble Lord when I, as an official at Customs and Excise, was drafted to sit in the Box during one day of a Budget debate when he was Secretary of State for Health and Social Security. I was very excited about this, until I was asked a question that I could not answer—fortunately, not by the noble Lord. The fact that in 1980 he was at the peak of his powers in that position and has remained a very influential Member in Parliament in its various forms since then is a real testament to his achievement. His interventions here, as noble Lords have said, have always carried great weight and have informed and guided our deliberations. We wish him a long and very happy retirement.
Lord Newby: I also pay tribute, very briefly, to my right honourable friend Steve Webb, who, as Minister for Pensions, has taken the lead in driving these and many other pension reforms forward. Many said that a coalition Government would not be able to make long-term reforms of a fundamental nature. Well, when it comes to pensions, whatever you think about them, you cannot claim that the Government have shied away from looking at all the issues. Indeed, they are effecting major changes.
At first sight, you would have thought that there could be no issue about the fact that giving people more freedom to spend their money is a good thing; that is what these Bills do, and therefore there will be unalloyed pleasure at the prospect of doing it. However, as noble Lords have pointed out, there are two challenges
with this. First, many individuals either lack the financial literacy to make much sense of their finances, which we know about, or are slothful when it comes to thinking about pensions—which I think the current system encourages in some cases, not least because of the way in which they are treated by their pension providers.
As we know, many pension providers have been untrustworthy in the past, and have misled people rather than encouraged them. In the majority of cases, even now, they provide information to their individual policyholders in a manner that the policyholders cannot understand. Pension providers know jolly well that they cannot understand it and they have almost wilfully refused to make information available in a manner that people can understand. One of the great attractions of what we are doing on the guidance front is that it will require a template to be completed by pension providers about what on earth it is that individual policies amount to.
We have a market that is not working as markets are supposed to work. The purchasers do not have the information that they need and the suppliers very often are not providing products in a way that is fair to the consumer. That is why the whole issue of guidance is at the heart of these Bills and the debate today. I start with that because every noble Lord who has spoken has talked about guidance. As we have explained, from April next year everyone who benefits from the new flexibilities will get free and impartial guidance. The Treasury will take overarching responsibility for the service that will be delivered, but it will actually be delivered by the Pensions Advisory Service and Citizens Advice. I assure noble Lords that they will be adequately resourced and will be able to, and by their very nature will, give impartial advice.
To ensure that the service is in place in what is admittedly a tight timetable, an implementation team has been established within the Treasury to work with those providers. The Government have given the FCA responsibility for setting standards for guidance and monitoring compliance. This will, we believe, deal with the question asked by the noble Lord, Lord German, about whether the service will be of a high enough quality—we are confident that it will be. Further progress on how we intend to introduce and implement the guidance guarantee will be issued by the Government before Christmas.
Noble Lords asked whether there should be a second line of defence, so I should perhaps just explain what is already planned and what the FCA has already said. The FCA has made it clear that firms should not do anything to dissuade customers from getting guidance, but it accepts, and the Government accept, that not all individuals will seek to take up the offer of guidance. It is their choice to do so. In its new rules document, the FCA confirmed that pension providers must signpost individuals to the guidance service in wake-up packs. We have said that they should be issued four to six months ahead of an individual’s nominated retirement date. But I take the point made by a number of noble Lords that it might be advisable to think about giving earlier signposts to policyholders that they need to think about their pensions.
The FCA has reaffirmed the expectation that firms encourage consumers to shop around on the open market and that they should receive sufficient information about the consequences of their choices before signing up to a purchase. It is introducing a new requirement that, when communicating with customers about accessing their funds, firms are required to ask whether they have taken guidance or relevant financial advice. If not, they should encourage them to do so. As noted above, it has introduced a new requirement to recommend that consumers seek guidance or advice rather than simply signposting it.
Firms will be required to give a description of the tax implications of the option selected by the consumer and it has been made clear that firms can question the consumer’s decision when they feel that it is inconsistent with their circumstances without fear of overstepping the boundary into regulated advice. The FCA is considering whether it is appropriate to place further requirements on providers and, as noble Lords have mentioned, it is reviewing the rules in the first half of next year. The whole issue of what might constitute a second line of defence will be in its mind at that point.
Finally on the guidance, the noble Lord, Lord McKenzie, asked whether it would be one shot at getting the advice. I will say two things on that. First, the fact that the pension provider will have to provide details on the individual’s pension in a standard form will help to ensure that, when the person goes, they have the information that they need. One of my concerns is that people turn up without the key bit of information —I can imagine myself doing that. We hope that we are getting round that. At the very least, people who have had their advice will be able to go back to the website and access it to check further information that they then think they need.
I turn to individual noble Lords’ comments. The noble Lords, Lord Beecham and Lord Davies of Oldham, and others asked about the impact on the Exchequer. A number of noble Lords slightly implied that we were doing all this only to get a small amount of additional income. I can assure noble Lords that the public finances are not in such a bad way that we have completely to reorder the way we do pensions to get a short-term benefit. The Budget costings showed that the net additional income to the Exchequer from the scheme will be £320 million next year, rising to £1.22 billion in 2018, but then falling off after that because people will bring things forward. As I say, our motivation for doing that has nothing to do with something that is, though significant, a relatively modest figure in the overall context of the public finances.
The noble Lord, Lord Davies, set out the Opposition’s tests, which included guidance, which I have dealt with, fairness and cost. On fairness, we are ensuring that the generous tax reliefs available on pension savings are not used solely for tax planning, given the flexibility that the rules offer. Overall, we think that the rules promote fairness. On cost, and in particular the question of the impact of the changes on welfare and social care spending, that obviously will depend on how people choose to use their savings. However, the Government do not expect this impact to be significant in the context of the steps taken to improve the sustainability
of pensions spending, such as the changes to the state pension age and reforms to public service pensions. I remind noble Lords that the estimated net impact of the Government’s key pension policies is a saving of about £17 billion in 2030 on today’s terms.
The noble Lord, Lord Davies, asked about the review. It has two elements. On reviewing the cost to the Exchequer, the Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts made at future fiscal events. On the guidance, it obviously will be extremely important that we understand its outcomes. The Treasury will establish robust KPIs to measure consumer outcomes.
My noble friend Lord German asked about the publication of the FCA standards and when that would be. The FCA has stated that they will be produced before the new scheme comes in, which is hardly surprising. We hope that it will do that significantly earlier than that, we hope at Royal Assent. On his concern about regulators working together, I say that the DWP and HMRC work closely with the Pensions Regulator and the FCA to ensure that there are no gaps in regulation in this area. We have no reason to believe that there are any. He also asked about housing wealth. The guidance will make sure that consumers consider questions about their situation as a whole and will direct them to further sources of information as appropriate. However, one of the problems of housing wealth for many people is that they do not have any intention of accessing it as part of their pensions. Some people do, but very many do not. Given the practical problems of downsizing, which we discussed recently in your Lordships’ House, many people who in an ideal world might want to do that in fact do not.
The noble Baroness, Lady Greengross, asked about a possible extension of the levy beyond the number of firms currently planned. Until now, the Government have decided that those firms which are most likely to benefit from better informed and engaged consumers should help to fund the service, hence the levy on the current range of firms. Occupational pension schemes do not currently offer accumulation products, as membership of such schemes is linked to employment and they do not sell products into the market in the same way as financial services firms. It is possible, however, that schemes may wish to change this approach over time, and we will keep the levy under review.
The noble Baroness also asked about welfare and the impact of these changes on social care, as well as how the Government are treating the new pension arrangements. We are treating the options as similarly as possible for the current welfare means test purposes by applying a notional income of 100% rather than 150% of the income that an annuity would have provided. We want to make sure that the decisions people make about drawing down their pensions will not significantly affect how they are assessed for welfare and social care support.
A number of noble Lords, including the noble Lord, Lord Hutton, questioned the evidence that the pension flexibility as proposed will encourage or discourage saving. Of course, we will not know that definitively until we have the scheme up and running. However, the National Association of Pension Funds found in its spring workforce survey that 28% of workers say that they are now more likely to save into a pension. Young people are the most likely to say that, and lower-income respondents also said that they were more attracted to pension saving. While a number of noble Lords have been rather gloomy about how people will respond to these changes in terms of savings, one of the reasons people do not want to save for a pension at the moment is that they often think that an annuity is such appallingly bad value. That is definitely the case for young people, and indeed more generally.
Baroness Drake: Will the noble Lord accept that in terms of people not actively saving, the behavioural evidence shows that it has nothing to do with annuities, but with their own inertia about dealing with complex decisions? Any complex financial decision has the same effect.
Lord Newby: My Lords, I think that the strong take-up of auto-enrolment suggests that people are actually a bit more long-sighted than they are sometimes given credit for. Young people in their 20s and early 30s who are thinking about their pension savings are looking at what kind of value for money they can get from doing that as opposed to putting their money into alternative forms of saving. So I am not sure that I altogether agree with the noble Baroness.
The noble Lord, Lord Hutton, said that the Government should strongly encourage partial annuitisation. We have always been clear that an annuity will remain the right choice for many at some point in their retirement because it can provide the security that they are looking for. He also asked about inheritance tax. I can say that the intention of the legislation is that the scheme administrator will retain some discretion over how death benefits are paid, ensuring that these benefits can remain outside the scope of inheritance tax.
Lord Hutton of Furness: I am enormously encouraged by the Minister’s response, but can he explain to me how they will do that?
Lord Newby: My Lords, I do not know, I am afraid, but I will write to the noble Lord as I am almost out of time. The House has rules that, as a Whip—although I know I am going to break them already—I can break only to a certain extent. I will write to the noble Lord in that respect. I might also write to him about the situation in Australia.
The noble Lord, Lord Freeman, asked whether the new flexibilities would put people at risk of poverty in the future. The basic principle here is that people must be trusted to make their own choices about how to use their savings to fund their retirement. We believe that the introduction of the new, simpler state pension in April 2016 will help minimise the impact on means-tested
benefits as the full level of the new state pension will be above the level of the basic means test in personal credit, and we expect over 80% of those reaching state pension age in the mid-2030s to be receiving the full new state pension.
The noble Baroness, Lady Drake, took up the theme of the noble Lord, Lord Hutton, about the dangers of a revolution. She saw the dangers as being significantly more considerable, I think, than most noble Lords who spoke. Of course, some of the potential problems that she foresees are impossible to predict absolutely, but I did not recognise the gloomy landscape that she portrayed in a number of respects. She asked why we were still paying tax relief when people will spend all their money. Tax relief is designed to support and encourage people to save for their retirement.
Baroness Drake: I did not ask why we are still paying tax relief if people are going to spend all their money. I asked whether, if people did not have to have annuities, it was possible that, over time, successive Chancellors revisiting the consequences for the next generation might not have this generation’s generosity on tax relief.
Lord Newby: My Lords, I was just about to say that this Government certainly are not going to revisit it. It is impossible to know what future Governments will do about tax policy. One of the key points about tax relief is to encourage people to save and I think any future Government will want them to carry on doing that.
A number of noble Lords, including the noble Baroness, Lady Drake, talked about the possibility of people taking their pensions early at 55. There is that freedom but my personal view is that, particularly as people are working to a later age rather than retiring earlier, the number of people who will wish or think it sensible to take their pension at 55 will not be very great. For some people, particularly those with health conditions, taking an early pension is absolutely the logical thing to do.
The noble Lord, Lord Holmes of Richmond, asked whether trustees and scheme managers will be required to evaluate the appropriateness of the advice that individuals are given when moving from DB to DC. As we have set out in our consultation, we intend that trustees and managers will be required to check that advice has been received from an FCA-authorised person but they will not be required to evaluate the content of the advice or to check its quality. The detail of the process by which scheme managers will be required to check that the advice has been taken will be set out in regulations, which we will work closely with the industry to develop. Iapologise for rushing through.
The noble Lord, Lord McKenzie, asked whether I would be happy to arrange a meeting with BALPA, and I would indeed.
The noble Lord, Lord Bradley, gave a strong explanation of the benefit of collective schemes. He touched on one of the key benefits of the changes. We do not know at this stage how many people will take them up; we cannot give detailed estimates of how many people will do any number of things at this point. We see strong practical reasons to believe that collective schemes will benefit many people and that the industry will move to develop them.
To sum up, as my noble friend Lord Bourne laid out at the beginning of our debate, these are radical changes that build on this Government’s previous reforms to the UK private pensions market. At the heart of the reforms is the Government’s intent to give people greater choice. That entails both greater choice for businesses regarding the type of pensions that they offer and greater choice for individuals in how they access their pension savings. These radical changes need to be made to reinvigorate the private pensions market and to ensure that it remains relevant for future generations of savers. I commend the Bills to the House.
Pension Schemes Bill
Order of Consideration Motion
6.46 pm
That the Bill be committed to a Committee of the Whole House, and that it be an instruction to the Committee that they consider the Bill in the following order.
Clauses 1 to 40, Schedule 1, Clauses 41 to 46, Schedule 2, Clause 47, Schedule 3, Clauses 48 to 65, Schedule 4, Clauses 66 to 76, Schedule 5, Clauses 77 to 85.
Taxation of Pensions Bill
Second Reading (and remaining stages)
6.47 pm
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.