Personal Pensions

HC Deb 16 July 1984 vol 64 cc25-32 3.43 pm

The Secretary of State for Social Services (Mr. Norman Fowler)

With permission, Mr. Speaker, I should like to make a statement on personal pensions.

When I set up the inquiry into provision for retirement, I said that one of its first tasks would be a study of personal pensions. This followed proposals to enable people to arrange their own individual pension plans as an alternative to joining an employer's scheme or the state earnings-related scheme. Under the proposals, people would accumulate their own fund which they could take with them when they changed jobs.

Evidence on these proposals was taken at four public sessions of the inquiry, and I also received 1,700 submissions and letters. In addition, I commissioned market research which demonstrated a substantial potential demand for personal pensions. I am today publishing a short consultative document outlining the Government's proposals and next month will be publishing a longer document which will summarise the evidence received.

The Government believe that the demand for personal pensions can and should be met. We propose that all employees should be given a right to take a personal pension. They will be free to choose the pension arrangements that suit them best. This right will extend both to those who belong to employers' pension schemes and to those now in the state earnings-related scheme. Nearly half of the work force now belong to occupational schemes which are contracted out of the state earnings-related pension scheme. The Government recognise that such schemes play a vital part in pension provision. We have therefore devised a system that will sit alongside and not threaten employers' schemes.

The proposals would allow those opting for a personal pension to contract out of the state earnings-related scheme. A minimum contribution to their personal pension would be required to ensure that they provided themselves with an adequate income in retirement. Different arrangements would operate for people who already belong to compulsory contracted-out schemes and those who do not, but the common aim is to ensure that all those who choose a personal pension are treated alike while not adversely affecting the financial viability of occupational pension schemes. I hope that this approach will meet the worries of many of those pension interests which gave evidence to the inquiry.

The essence of the Government's proposals is freedom of choice and flexibility. By giving all employees the right to a pension that they can take with them, we shall remove another obstacle to job mobility. People must have as wide a range of choice as possible of bodies with whom they may place their personal pension investments. The consultative document suggests a range of these but recognises the need for an adequate framework of consumer protection. We shall aim to keep restrictions to a minimum, but there must be safeguards against, for example, misleading promotion.

The House will recognise that the proposals are far reaching and that all concerned with the provision of pensions will want to study and comment upon their detailed implications. That is why I have published them as a consultative document. I shall welcome all views that are expressed over the next few months. These are vital issues, and before proceeding with any legislative measures we shall want to be sure that the legitimate interests of all those concerned are recognised.

I should make it clear that the general principles underlying the proposals for personal pensions are ones to which the Government are committed. We have already gone a long way towards improving the position of occupational pension scheme members. I have announced our intention to legislate to safeguard the pension rights of early leavers. I have published proposals to give them a statutory right to a transfer value and to give more information about their schemes. Personal pensions extend choice for members of schemes and will also provide a major new option for people who at present have no alternative to the state earnings-related pension scheme by allowing contracting-out on an individual basis.

The proposals that I am announcing today give people more choice in the way they save for their old age. They are aimed at giving everyone in work a new right—the right to choose a personal pension.

Mr. Michael Meacher (Oldham, West)

Is the right hon. Gentleman aware that these are potentially damaging and retrogressive proposals? Is he aware that that is perhaps not surprising as they come from such a politically loaded and unrepresentative committee which comprised five people? Unprecedentedly, it comprised two Ministers, a Right-wing economist, the chairman of the Life Offices Association and Mr. Mark Weinberg, the managing director of Hambro Life, who has a huge vested interest in the proposals to the extent that he is expected to become a millionaire as a result of them. We deplore the partisan bias in that committee which will make a killing for some people in the City and expose thousands of people to the pitfalls of a hard sell from insurance companies, which will be strongly against their long-term best interests.

Is the Secretary of State aware that "personal pensions" is simply a breezy new title for the old-fashioned money purchase schemes, which have been overwhelmingly rejected because of their major disadvantages? Personal pensions do not provide benefits that relate to earnings at or near retirement, which is what people want, and they throw risks on people who are least able to bear them. Moreover, they undermine the central principle of the pooling of risks against unforeseen events such as long-term illness or disability.

Is the Secretary of State aware that these proposals will, contrary to what he said, almost certainly undermine final salary schemes, which are overwhelmingly preferred as the best option; will destroy a structure that has taken 20 years to settle down; and will expose the pension industry to its greatest enemy — uncertainty — by throwing pensions back again into the political cauldron? The Opposition will not allow the partnership in Labour's state-earnings-related pension scheme of 1975—the best deal that the pensioner ever had—to be overturned in this way.

Apart from that decisive reason against the proposals, is the Secretary of State aware that they will not achieve the goals that the Government claim for them; they are not the best or the only means of solving the problem of early leavers; they will not reduce the power of the financial institutions, as the insurance companies will simply replace the pension funds as institutional investors; and they will not create a right to personal wealth because an individual who decides to manage his own portfolio may well prove incompetent and lose his pension security? Is he aware that there are wholly inadequate safeguards against the hard-sell sharks, as can be seen from the current market for buy-out policies—they are sometimes called section 32 schemes—whose advertisements often do not make clear what is guaranteed and what is a projection on a highly optimistic basis?

Will the Secretary of State acknowledge that, although for some people there would be gains under the proposals, for large numbers of others the benefits would be reduced in an unfair and arbitrary way? Finally and above all, is he aware that pensions require consensus, which means the agreement of the Opposition, if the long lead-time of planning is not to be frustrated by political conflict? The Secretary of State will not get consensus if he confines his decisions to a packed and prejudiced committee such as this one.

Mr. Fowler

Even by the standards of the hon. Member for Oldham, West (Mr. Meacher) that was a ridiculously hysterical response. Once again he places his faith in the maximum of restrictions and the minimum of freedom. It should be pointed out to him that no one is being compelled to take a personal pension. We are giving people a choice. Every time we try to do that, the hon. Gentleman, speaking apparently for the Opposition, opposes it.

I remind the hon. Gentleman that the proposals will benefit about 11 million people who are not covered by occupational pension schemes. There are those in schemes who, as the Gallup poll showed, would prefer to make individual arrangements. There are those who want to change jobs frequently during their careers and want to make better pension arrangements. There are women in work. The proposals break down another barrier to job mobility.

As for endangering occupational pension schemes, the Government want further to encourage occupational schemes, not reduce them. We have therefore devised proposals that meet the demand for personal pensions without endangering existing occupational schemes. On consumer protection, I am making it clear in the document that we shall publish that we shall consult on that, on a cooling-off period and on all such issues.

The hon. Gentleman should not come to his silly and instant judgment on these proposals, especially on the bogus grounds that he presented to the House this afternoon.

Sir Geoffrey Finsberg (Hampstead and Highgate)

Is my right hon. Friend aware that some pension schemes are non-contributory? Will he assure us that no opportunity will be given for employees who have non-contributory schemes to get into this scheme and make transfers of portable pensions?

Mr. Fowler

We are proposing that the right to a personal pension should apply to everyone in all sorts of schemes, but I assure my hon. Friend that we shall listen carefully to all the points made about the schemes.

Mr. Michael Meadowcroft (Leeds, West)

The principle of portability is fine, but the question is whether, on balance, it is a benefit to move towards opening a Pandora's box of street corner salesmen with the potential of exploiting the many individuals who cannot afford expert and objective advice. Does the Secretary of State agree that he must give much more attention to safeguards and must give guarantees to people, or the benefits will prove to be the freedom of the fox in the hen run.

Mr. Fowler

We shall do everything possible in the consultation period to discuss and consider sensible measures of consumer protection. The hon. Gentleman will agree that we do not want so many restrictions upon personal pensions that it makes their growth unviable; but given that, I entirely share his view that we should consider measures of consumer protection. I ask the hon. Gentleman to examine the market research that we have carried out, which shows that about 80 per cent. of those not covered by pension schemes are interested in personal pensions. The House should consider extending their rights as well as the existing rights of people who are already covered.

Mr. Peter Hordern (Horsham)

I congratulate my right hon. Friend on putting an end to the Victorian paternalistic system which allows an occupational pension to be paid in full only to those who have served a lifetime in one company. Is it not truly astonishing that the spokesman for the Opposition, the hon. Member for Oldham, West (Mr. Meacher), appears to align himself with the narrow, restrictive vested interests of the City, which are interested only in preserving full pension rights for a narrow minority of people who are covered by occupational pension schemes? When will my right hon. Friend introduce legislation to carry out this ambitious and hopeful scheme?

Mr. Fowler

I have, unfortunately, listened to the hon. Member for Oldham, West (Mr. Meacher) previously, and very little astonishes me about the views that he expresses. We propose that a personal pension — a pension that someone arranges for himself and can take with him when he changes jobs or becomes self-employed — shall become a right for employees. There should now be a consultation period on the proposals in the document. That will come at the end of November and proposals for legislation will follow it.

Mr. Brynmor John (Pontypridd)

The Secretary of State mentioned the 11 million people in the state pension scheme. How many of those does he believe will contract out of that scheme and take up personal pensions? He talked about safeguarding the occupational pension schemes. What steps will he take to safeguard the state income-related scheme? What protection will he afford to those who invest in personal pensions? Will it be a complete game of roulette, or does the right hon. Gentleman envisage a safety net?

Mr. Fowler

I envisage some consumer protection restrictions and some restrictions on the providers of personal pensions. As to any risk to the national insurance fund, when the hon. Gentleman has read the consultation document he will see that people with personal pensions will bear the investment risk themselves and the national insurance fund will not take up any of the shortfall on the guaranteed minimum pension. It is, of course, extremely difficult to forecast the demand, but the Gallup poll showed that about 80 per cent. of those not covered by pension schemes were interested in personal pensions. The poll showed that there was a substantial demand for personal pensions from those in pension schemes and especially from those not covered by occupational pension schemes.

Mr. Roger Freeman (Kettering)

Is my right hon. Friend aware that his statement is warmly welcomed by Conservative Members, based as it is upon freedom of choice and upon encouraging individuals to make provision for their own pensions as well as relying on the state scheme? In the interests of a free and wide debate, will my right hon. Friend publish the report to the Minister on the scheme by the Occupational Pensions Board?

Mr. Fowler

I am grateful to my hon. Friend for his support, and I give him the assurance that the Occupational Pensions Board's report will be published. It will be published in the document that I shall be publishing, but if the board wants to publish it prior to that, it is entirely free to do so.

Mr. John Fraser (Norwood)

As the Government preside over a record number of bankruptcies, will the right hon. Gentleman confirm that an individual pension will be exempt from any claims by a trustee in bankruptcy and that, if the funds of the subscriber with an insurance company are put in jeopardy by the insolvency of that company, they too will be protected?

Mr. Fowler

Yes, I can give such assurances. Obviousy, we shall want to give that kind of protection.

Mr. Tim Eggar (Enfield, North)

Is my right hon. Friend aware that his statement will be widely welcomed. Is not the attitude of the hon. Member for Oldham (Mr. Meacher) extraordinary, because if his fears are well grounded no one will opt for portable pensions and, therefore, by definition he has nothing to worry about? Will my right hon. Friend also confirm that employers' contributions will be transferable into portable pensions?

Mr. Fowler

In reply to my hon. Friend's second point, personal pensions will be available as of right to all employees who should be able to contract out of the state earnings-related scheme. The test of contracting out should be based on the level of the contribution, not on the guarantee of benefit, and special arrangements will be made for schemes contracted out. My hon. Friend will find that the points he has raised are covered in the consultative document. I am grateful for his support.

Mr. Charles Kennedy (Ross, Cromarty and Skye)

Will the Secretary of State further share with the House his views on how the shortfall will be met? If, as he said in his statement, he is anxious to increase job mobility, and if the shortfall is not assisted by Government support, is there not a danger that the opting out scheme will become a greater liability on employers and could result in a possible tax on jobs similar to the national insurance surcharge, which was abolished in this year's Budget?

Mr. Fowler

I do not think that it will remotely have that effect. Pension scheme costs should not go up as a result. Personal pensions will be contracted out of the state earnings-related scheme and will therefore benefit from a rebate of national insurance contributions. That rebate will go to the personal pension. Frankly, I do not believe that the dangers to which the hon. Gentleman alluded will come about.

Mr. Tim Smith (Beaconsfield)

I welcome what my right hon. Friend has said, for the simple and important reason that it will increase choice, but what guarantees will there be for existing occupational pension schemes? Is there not a danger that some small schemes in particular may, in these circumstances and depending on conditions, feel that it is not worth continuing?

Mr. Fowler

I do not think that they will feel that, and I very much hope that they do not. We want to encourage further occupational schemes, not to reduce them. In the consultation document we have sought to devise proposals which will meet the demand for personal pensions without endangering existing occupational schemes. Clearly, I shall listen to what the National Association of Pension Funds and other pension interests have to say.

Mr. Denis Skinner (Bolsover)

Is not the Government's avowed intention to ensure that those who rely on the state scheme will suffer once people begin to pull out at the top end? Cannot an analogy be drawn with what the Government, encouraged by their supporters, did to weaken the NHS by giving the so-called freedom of choice to buy into private medical insurance? Will not the net result be the same, and will not these proposals damage the state scheme? The only beneficiaries will he the insurance companies and about 50 of the Secretary of State's right hon. and hon. Friends who will line their pockets as a result of their association with those companies.

Mr. Fowler

No. That is about as silly as the comments of the hon. Member for Oldham, West (Mr. Meacher) — [HON. MEMBERS: "Not quite."] My hon. Friends correct me—not quite as silly.

The hon. Member for Bolsover (Mr. Skinner) is correct—we believe in giving the public choice. That is right, particularly when 11 million people are not covered by occupational pensions. The only logic of the hon. Gentleman's argument is a system under which both health and pensions should become a state monopoly. He is welcome to make that suggestion, but I doubt whether the public will support him.

Mr. Andrew Rowe (Mid-Kent)

Does not my right hon. Friend agree that there are a range of reasons for supposing that the traditional pattern of earnings is likely to change and that many people will be earning much more in the middle of their careers than at the end? Does not this scheme provide the kind of flexibility or response that we all need?

Mr. Fowler

It should not be assumed that everyone wants to be a member of a final salary scheme, for the reasons that my hon. Friend has stated. We are setting out one further option.

Mr. Tony Banks (Newham, North-West)

May I push the Secretary of State further on his reply to his hon. Friend the Member for Enfield, North (Mr. Eggar)? Will employers' contributions be transferred over with portable pensions?

Mr. Fowler

There will be no obligation on the employer to make a contribution, but there will be no restriction on him doing so if that is what he wants. The national insurance rebate will be transferred, but that is different.

Mr. Tim Yeo (Suffolk, South)

Does my right lion. Friend agree that the success of personal portable pensions depends heavily on the continued availability of tax reliefs on contributions to those schemes? Will he bear that in mind in any discussions that he may have with his right hon. Friend the Chancellor before next year's Budget?

Mr. Fowler

Yes.

Mr. Michael Stern (Bristol, North-West)

I congratulate my right hon. Friend on the start of what is potentially the greatest increase in the freedom of an individual to control his own life since this Government introduced the legal right to buy council houses. I invite him to contrast the attitude of the hon. Member for Oldham, West (Mr. Meacher) with the Opposition's well-known regard for individual democracy at all levels, particularly in the Labour party.

Mr. Fowler

My hon. Friend is right. The personal pension proposals add to other reforms planned by the Government and protect the rights of early leavers, the right to transfer value and provision on disclosure. Taken together, these amount to some of the most substantial reforms in occupational private pensions over the last 20 or 30 years.

Mr. Tony Marlow (Northampton, North)

As I understand it, if someone is a member of a company pension scheme, he pays the money himself and the company pays some money into the fund on his behalf. If my right hon. Friend is saying that those who opt for the private pension will not get the contribution from the company, there is no real choice and they would be better to stay with the company.

Mr. Fowler

There is no obligation on the company to make a contribution, but what makes this different from, for example, section 226 schemes, is that people will benefit from the rebate of national insurance contributions. That will be a substantial step forward. I very much hope that some companies will decide that in the interests of employment policy they will want to make a contribution to personal pensions, but that will be a voluntary decision.

Mr. Meacher

Will the right hon. Gentleman answer three questions which he has dodged throughout these exchanges? What exactly is his guarantee that personal pensions will not threaten the occupational schemes? What safeguards will there be against the hard-sell sharks? What guarantee does he offer that no one on a contracted-out personal pension will end up below the poverty line on a supplementary pension?

Mr. Fowler

On the third point, by setting the minimum contribution we shall seek to ensure that that does not happen.

As I have said before, personal pensions will be contracted out of the state earnings-related scheme. They will therefore benefit from a rebate of national insurance contributions. The effect of the proposals set out in the consultation document will mean that at one and the same stage they will meet the demand for personal pensions without endangering the existing occupational scheme. For example, the rebate proposals mean that the scheme's finances will not be upset if the younger members leave the occupational scheme. The hon. Gentleman will have received a copy of the consultative document and will find the details set out there.

As for consumer protection, I have made it clear already that we shall consult further on that. In my view, such matters as cooling-off periods and exaggerated projections of return are factors in respect of which we shall want to safeguard the public. However, I find the approach of the hon. Member for Oldham, West quite extraordinary. It is clear that he is entirely opposed to the freedom of choice of the public even when it is demonstrated that half the working population are not covered by occupational pensions. Frankly, I think that the hon. Gentleman will live to regret the words that he has uttered today.