§ (". Part I of this Act shall not have effect until comprehensive legislation embodying the pensions proposals outlined in "A new contract for welfare: Principles into Practice" (Cm. 4101) has been introduced.")
§ The noble Baroness said: The amendment is in my name and that of my noble friend Lady Turner of Camden.
§ When the Committee has a chance to look at the amendment it will realise how very reasonable it is. The Minister laughs, which I am afraid shows rather clearly the Government's attitude to the whole question of the fundamental reform of pensions in this country.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)
My laughter was because I was sure that my noble friend would not dream of bringing to the Committee any amendment that she deemed unreasonable.
§ Baroness Castle of Blackburn
The big question is what the Committee thinks, and it is, I hope, on behalf of the whole Committee that I am now speaking.
The amendment seeks to say that Part I, which deals with the stakeholder pension, shall not have effect until the Government have produced in legislative form their comprehensive plan for pensions provision in the coming millennium. The question that will be uppermost 1076 in most people's minds is "Why?" Why have the Government brought one item only of all the work on which we have been engaged for the past three years and put it this Bill? What are they up to? To fragment pensions provision is to confuse. I used to accuse the Government of the noble Baroness, Lady Thatcher, of having the principle of "confuse and move". But are we not in danger of emulating them?
What the Government ask us to do in Part I of the Bill is to say, "Here's your stakeholder pension. Pass it. Trust us. And trust us, incidentally, with a great deal of the details", because the House is left entirely in the dark as to many aspects of the Government's plans even for the stakeholder pension. It is all to be prescribed by regulation. So we are voting blind in any case.
What should have preceded the Government's introduction of what they call fundamental reforms in the pensions provisions of this country is a speech of explanation showing how each proposal fitted into all the rest; because they must interface if the whole edifice is not to fall apart. What I object to—I hope that the whole House will object to it—is having to vote blind. It is not good for democracy; and it is certainly not good for the pensions provisions of this country.
We have had three years in which the pensions review body, on which a number of us have served, has had intensive discussions on every possible aspect of pensions policy. What should be the role of state insurance? What should be the role of private insurance, the occupational pension scheme, and even—that unhappy experience—the personal pension scheme? The Government should have told us their plan and what kind of security system we would have at the end.
Goodness knows, the Government have consulted enough. It has been going on and on. Some of us began to realise that we were wasting our breath, and that the Government had in their own mind a master plan which they were not prepared to share with the rest of us. The stakeholder consultation document came out months after the pensions review body had been into its work. It is a later edition; yet it is the first to be legislated upon. Why? Why take it out of context? Can the Minister convince the House that there is in that anything but an attempt to disguise the whole plan—because if it were revealed in its whole, I think that there would be a large revolt on these Benches? My reading of this Government's tactics over this is that they always had a master plan. Secretaries of State for Social Security have come and gone in the past three years; and in the end the Treasury prevailed. We had the Treasury man; and this is his first product.
The Minister, Mr Darling, is a very nice chap. I like him very much. The hand may be the hand of Beveridge, but the voice is the voice of the Treasury. The Government always intended to let state insurance in this country wither on the vine. It is to go: "It's not proper insurance, is it?" Instead, society is divided into two halves. In the one half there are those who can afford the risks and costs of private insurance schemes; and in the other, those who cannot, who are to be haled out with means-tested charity.
1077 The Government will not fight us cleanly on that because they know that they would not win. So they say, "No, you're quite wrong. We've got a stakeholder pension. Our aim is to ensure that everyone who does not benefit from an occupational pension scheme shall have a stakeholder pension to fall back upon. This is so clearly a noble principle that we can put it in separately, and without telling everyone else what will happen to the state insurance scheme, the basic state pension, SERPS, and other aspects of the policy, we'll all admit that occupational pension schemes are a jolly good thing". But I am afraid that the number who have those is declining; and many are abandoning the principles which govern the defined pension at the end of so many years' service in favour of money purchase schemes.
We are told, "Don't worry. We're going to spread these benefits". Yet the Government do not tell us what their ultimate purpose is. It is certainly not clear from the Bill, is it? Only two principles of the stakeholder pension are made clear on the face of the Bill. The first is that they must be money purchase schemes. They cannot be guaranteed defined pensions. Secondly, the only duty on the employer is to provide access to a stakeholder pension for employees. There is nothing to prevent the employers who have been contributing under occupational pension schemes switching to the cheaper and more insecure stakeholder pension scheme.
During debate, we can come to the detail of some aspects of the proposal. But on this amendment, I wish to concentrate on the fact that it is unfair to this House, and to pensioners, to say, "We've had three years of consulting, listening to your points of view, and all the rest of it. We shall give you one salami slice of our pensions policy". I happen to think that it is a rather inadequate slice. But it cannot properly be judged against what we know the Government intend to do, for instance, about fulfilling their manifesto commitment to make the basic state pension the foundation of their pensions provision. How do they propose to do that while refusing to restore the earnings link? Perhaps—heaven knows!—there might be a bright light of conversion shining in their eyes and they will give us the earnings link at last, the logic having overpowered them.
But there is this second great question mark: what will happen to SERPS? Noble Lords will understand that I have a right to be nervous because the Government change their tune from day to day. For instance, the Minister told us in the Second Reading debate that we have no manifesto commitment on SERI'S. Minister, you had better read the document. I have it here. It is worrying.
If the Minister does not know about commitments, why on earth should the Government be intending to enforce them? The manifesto states:Labour will retain SERPS for those who wish to remain".That is a manifesto commitment. Perhaps the Minister may say, "Ah, but we never intended to retain SERPS as an option for anyone". So we have to watch the words carefully and read the small print. It is only fair to all of us who have to legislate on these matters and to the pensioners concerned to be clear, to be detailed and to be honest about what you are seeking to do.
1078 I think that the Government always intended to smuggle out SERPS through the back-door. Bu: they did not say, "We will not retain SERPS as an option for anyone who wishes to make use of it". I know millions of people who would like to. How can we judge the stakeholder pension unless we know what are to be the alternative options open to people? Are we not right to wonder whether it is a bit of a smoke-screen for other designs that it will be harder for the Minister to make sound reputable?
So I make a plea to the Minister: please accept this amendment. It does not reject the stakeholder pension. It says only that you cannot expect us to accept it, except within the wider context of a comprehensive pensions policy. What is it going to be substituted for? I have no doubt that the Minister will have a very fluent answer indeed, but it will all be in general principles.
Here we have a legislative commitment that we are asked to commit ourselves to and we are merely saying that until an equal legislative commitment is put in front of us covering the whole area we ought not to be expected to judge. Once we pass this legislation it will be said, "Oh, it's a framework", and then the battle will start on regulations. By then people will be told. "It's too late to do anything about it. We have got it arid the Parliament agreed, didn't it? You had an opportunity to express doubts but you didn't. You took things lying down". So I urge the Committee, regardless of party, to say, "We have a right to know the whole picture before we are expected to vote on a piece of it" I move.
§ Lord Higgins
It was said:Age cannot wither her nor custom stale her infinite variety".The more I listen to the noble Baroness, Lady Castle of Blackburn, the more it seems to me that the first part of that description of Cleopatra could not be more appropriate in describing her speech today. As regards the infinite variety, one has only to look through the Marshalled List to realise that, as is often the case, she has done a great deal of homework. Certainly, having sat opposite her in one place or another for many years, I thought that she put forward in an extraordinary way and with such cogency her view on pensions, the area in which she has played such an important role.
First, I must declare an interest as chairman of an occupational pension scheme. Perhaps on this occasion I should be a little more specific and say that it is one of the final salary kind. During Second Reading I suggested that the Bill comprised four or five Bills all rolled into one. It presented us with some problems because it was impossible to deal with some of the Second Reading points in detail, which we would have done had the pensions section or the section on the disabled been presented to the House separately. However, the noble Baroness's amendment, which she has moved so eloquently, perhaps gives us an opportunity of looking at the legislation in a broad framework.
Perhaps I may make two procedural points. If we are to discuss the remainder of the Bill coherently, there is some danger if we use the expression "a second pension" loosely and generically. If we are talking about 1079 stakeholder pensions there is a case for describing them so, and if we are referring to the state second pension we should also use that expression; otherwise the discussion will tend to become confused.
Secondly, as regards the groupings, we on this side of the Committee have sought to focus attention on particular issues relating to stakeholder and other pensions so that we can debate the particular issues rather than joining them together and discussing them in a general context.
The noble Baroness's amendment is concerned with two issues. The first is timing and the second is the context in which the Government's proposals have to be considered. The issue of timing is most important, as we shall see in relation to subsequent amendments. Of course, the reality is that it is not proposed to introduce the stakeholder pension for some considerable time.
As the noble Baroness rightly said, there has been a great deal of consultation. However, we waited a long time before the Green Paper appeared. The noble Baroness always suggested that there was a secret agenda. If that is still the case, I suspect that today's secret agenda is different from that in the first year of government when Mr Frank Field was a Minister in the department. There has been a significant change since his departure.
The fact is that while there have been delays, there have been fits and starts. We discovered that the consultation process was not completed before the Bill reached Committee in another place. As the noble Baroness rightly points out, there are still many provisions about which we are unclear. I believe that today the Committee will wish to clarify the Government's position on a considerable number of specific issues.
Furthermore, we must put the matter into context, in particular with regard to the other pension products which the Government are putting forward; for example, the state second pension. So far as we can see, that will be deferred for a very long time. However, we understand that it is to be a replacement for SERPS. The noble Baroness rightly pointed out that the manifesto referred to retaining SERPS. Apparently, it is not proposed to retain it for this Parliament but not for the next. It is difficult to see the justification for saying, "We have a manifesto commitment", when it is apparent that the Government have no intention of maintaining that commitment into the following Parliament, should they be fortunate enough to be re-elected. But the reality is that SERPS will go and a state second pension will be introduced.
It was also suggested that the Treasury has taken over these matters. I have addressed that theme from this Bench on a number of occasions in recent months. I believe that that is clearly the case. But curiously in this instance, while the Government and the Department of Social Security are putting forward stakeholder proposals, the Treasury has turned up with a different proposal; namely, a lifetime individual savings account. We do not know what the relationship is between the stakeholder pension and the lifetime individual savings account.
1080 As was rightly argued, we need to look at the matter in context.
I say "we" and, of course, a number of different interests are involved. There are potential or actual pensioners and there are the providers of the pensions. All have an interest in seeing matters in context. As was rightly pointed out, a whole range of aspects and alternative products are involved, which we cannot consider specifically when we look at the proposal for a stakeholder pension. I believe it is arguable that the stakeholder pension provides one more option to consider alongside all the other pensions, some of which can be held instead of a stakeholder pension, some in addition to it, and so on.
I take up the point, defended by the noble Baroness for many years, of the position of the basic state pension and the issue of up-rating it in line with earnings, which has always been a difficult issue for those on this side of the House. I say that honestly. None the less, the basic state pension has formed the bedrock of state provision in this country. However, there are serious fears that that bedrock is being undermined. We are told that there will be a guaranteed minimum income, which Age Concern rightly describes as income support, and the undermining of the contributory principle.
The other day the noble Baroness, Lady Hollis, slightly misunderstood what I was saying in relation to that. I was referring to the clauses later in the Bill—Clauses 68, 69, 72 and 73. In those clauses we find that people will receive what previously had been called "contributory benefits" without contributing. They will be deemed to have contributed. The combination of the minimum income guarantee and the undermining of the contributory principle gives one cause for concern about the safety of the universal non-means-tested state pension. I believe that we are right to consider that in the contest of the remarks of the noble Baroness.
Having said so much in favour of the argument of the noble Baroness, I am puzzled as to why she should attach this amendment to the document Principles into Practice, Cm. 4101. I had some difficulty in finding anything about pensions in that document. There are other documents to which she could have referred. However, I was struck by the extraordinary way in which the document is produced. I take, for example, some of the principles: Principle Eight says:The system of delivering modern welfare should be flexible, efficient and easy for people to use".Anyone would suppose that the Government were to bring forward a system that was not flexible, was inefficient and difficult to use. Apparently, that is a principle that the noble Baroness set out in the document. I also refer to Principle Three:The new welfare state"—not government—should provide public services of high quality to the whole community, as well as cash benefits".That appears to be unexceptionable. I am puzzled to understand why anyone would pay £5 for this document and I am a little puzzled as to why the noble Baroness should have attached her amendment to this document.
1081 In reality, when looking at the possible range of products—I believe "products" is the right word—which are before us, we should consider the danger of the mis-selling of private pensions, about which, I fully accept, we have all been rightly concerned. In many ways, that has been a disaster which is very difficult to put right. Having said that, I believe that there is a great danger—implicit in what was argued in proposing the amendment—of considerable mis-selling of the new products because we do not know what the inter-relationship of them will be. Also, in legislation, we have to consider something that is being taken on its own without regard to the alternatives.
On the timing issue, it is not clear what those who may consider taking out a stakeholder pension in due course ought to do in the meantime. As it will be a while before the stakeholder pension is introduced, perhaps the noble Baroness, Lady Hollis, will give us an indication of what people should do in the meantime. It may be two years before the stakeholder pension is introduced, and two years in the course of pension contributions which are paid at earlier stages of the contributory period rather than towards the end can have a significant effect.
There is widespread concern outside the House about such issues. Perhaps I may end by quoting from an Age Concern document:The Government has concentrated on providing additional help for current pensioners through income support"—which Age Concern refers to as a "minimum income guarantee"—While increases to income support are welcome they are no substitute for a basic state pension paid at a reasonable level. The Government should be looking to minimise dependency on means-tested support yet by 2050 they still expect one in four pensioner households to be getting income support…Many older people with modest levels of savings and private/occupational pensions are already excluded from the minimum income guarantee and wonder why they bothered saving. There is a great danger that focussing on means-tested support will act as an even greater savings disincentive to future generations of older people".To be frank, there are some aspects of the views of the noble Baroness, Lady Castle, with which I do not agree, but with regard to the points that she made on timing and the question of discussing the issues in a sensible context, I find myself in agreement with her.
§ 4.30 p.m.
§ Lord Goodhart
I have listened with great attention and respect to what the noble Baroness, Lady Castle, has said. As we all know, the noble Baroness was the author of the pensions legislation of 1975 which, to a considerable extent, is still the basis on which our pensions are built. No one in this House or outside it could possibly speak with greater authority than she does on the subject.
I have a good deal of sympathy for what the noble Baroness has said in support of her amendment. My party supports, broadly and in many respects warmly, the Government's proposals for the reform of the pensions system. We believe that the idea of the basic state pension, the state second pension and the stakeholder pension as an alternative to the state second 1082 pension is an ingenious system that will move matters a long way in the right direction. In our view, the right direction is undoubtedly shifting pension provision as much as possible, so far as is consistent with the welfare of pensioners, from unfunded to funded. Of course, the state second pension is intended to provide for that.
However, we have difficulty with the fact that we now have provisions for the stakeholder pension only and, as yet, we have no details on the state second pension. It is important, indeed vital, to understand the interaction between the stakeholder pension and the state second pension.
We have seen from the Government's White Paper—not the earlier one to which the amendment refers—that the stakeholder pension is intended to be a funded alternative to the state second pension for those who are on incomes above £9,000. This is absolutely crucial. We need to know what the arrangements will be for opting out of the state second pension and into the stakeholder pension. But how can we know about that until we have an opportunity to see the legislation on the state second pension? Indeed, what has been brought out of the oven so far is no more than what might be described as a half-baked version of the stakeholder pension, because we know nothing about this crucial interaction. Until the state second pension is introduced, the stakeholder pension will be little more than a cheap and cheerful version of the long-standing and familiar personal pension.
I am sorry that the Government found it necessary to delay introducing legislation in regard to the state second pension. Until that happens—I hope it will happen soon and I should like to know what the Government's proposals are on this—we are able to see only half the picture, and that is a pity. Therefore I have great sympathy with the views expressed by the noble Baroness.
§ Lord Haskel
I too admire my noble friend Lady Castle and cannot improve on the compliments paid to her by noble Lords opposite. However, I feel that she is wrong to say that there is no context in which these pension proposals are made. The context is modern working life.
In modern working life people are in and out of work much more frequently; they change their jobs more frequently; indeed, many people are self-employed. The Government tried to take care of that with the minimum wage and the working families' tax credit. In that way they seek to ensure that people receive a decent rate of pay. If people receive a decent rate of pay it gives them a chance to build up their own flexible pension which they can take with them from job to job. Indeed, if they are temporarily out of work or become carers, the Government have undertaken that the contributions will be paid.
That is the context within which stakeholder pensions are being proposed and it is a logical context in which they should be discussed and debated.
§ Baroness Crawley
My noble friend Lady Castle puts forward persuasive arguments, which is hardly 1083 surprising given her great expertise in these policy areas. I had the privilege of sitting with my noble friend for five years in the European Parliament and watched her forensically take apart good and bad arguments of parliamentarians from several member states of the European Union. No doubt, therefore, I shall be given a medal for foolhardiness for questioning her wisdom today.
I am not convinced that it is realistic to delay this part of the Bill on stakeholder pensions until all the Government's other pension proposals are debated and introduced. The new stakeholder pension, as I see it, should be introduced sooner rather than later; not least because as a new, flexible, low-cost pension it will allow up to 5 million people access to a value-for-money funded pension for the very first time. No one can say that the present system is working for the benefit of everyone in this country, and we know that, unless action is taken quickly to modernise the pension system, one in three pensioners—those are my figures; the noble Lord, Lord Higgins, may be right to say one in four, but it is certainly millions—will end up relying on means-tested benefits in retirement in the middle of the 21st century.
There is therefore more than an air of urgency about this debate. As noble Lords will know, the way in which pensions are provided for people continues to evolve. My noble friend Lord Haskel was right in saying that that evolution takes place in the context of rapidly changing markets, the increased supply of pensions to that rapidly changing market place and people's need for mobile pension schemes to suit their new working patterns. The delivery of pensions in the 1990s has become a partnership between the public and the private sector. The private sector delivers to those who can afford to save for their own retirement. The state should concentrate on what it does best; that is, alongside the basic pension, underpinning through the minimum income guarantee and the second state pension the incomes of those least well off.
We need to reflect on the fact that, because of this Labour Government's initiatives such as the minimum wage and the working families' tax credit which is to be introduced in November, 80 to 90 per cent of women earners, who are the traditional losers when it comes to the pay and pension stakes, will be taken above the lower earnings level. They will therefore be able to build up a contributory pension scheme. While that does not at a stroke solve the pensions consequences problem for low-paid women, it represents some progress and it should be seen as such.
Finally, I hope that we will not delay the establishment of a legal base for stakeholder pensions. They are an essential component of the whole reformed pensions package, not least because early legislation in this area gives time to potential providers to gear themselves up for the new schemes.
§ 4.45 p.m.
§ Lord Peston
I intervene with some trepidation because, first, I do not agree with the amendment of 1084 my noble friends, Lady Castle and Lady Turner and, secondly, unlike everybody else who has spoken, I am a mere amateur. I am not an expert on pensions.
I should perhaps declare an interest which is the counterpart of that of the noble Lord, Lord Higgins; namely, I am an occupational pensioner. I have three pensions at least, all index-linked and I am a great believer in all these matters. I too am delighted the amendment was tabled because the topic is well worth exploring.
Perhaps I may start with one or two random remarks. I would love to believe that the Government have a master plan. If they do, no one has told me about it and perhaps my noble friend Lady Hollis will give me a copy of the master plan marked "Secret. Not for anybody else to see". I have read the published documents but my noble friend Lady Castle is talking about the master plan and not the published documents. If there is a master plan I should love to see it.
We must start from the position that the existing state of affairs with respect to income for the elderly is a complete mess. It is not something that any member of this party can support. It has gone from not very good to very bad indeed, especially for anybody who has to live on the state pension. I say to my noble friend Lady Castle that I too totally support the earnings-related update; I put my hand up to that. I have no doubt about that whatever. The problem is that the earnings-related update will be paid by the existing labour force. And how are we to persuade all those people who are currently in work to agree to what I would advocate; that is, a rise in taxation? I am still an old-fashioned person who strongly believes in progressive taxation and redistribution. The problem is persuading people to vote for it.
I have argued cynically for a great many years that I am astonished how, for 18 years, a lot of the relevant labour force voted for the party opposite, which abolished the earnings-related approach to this matter and, to a large extent, abolished progressive taxation. But when those same people, having voted for that, retired, they asked, "Where is our earnings-related pension?". It is a cynical view. When I address meetings and people question me about it, I respond by asking them, "What did you vote for all those years?"
If I had a vote, I would still vote for progressive taxation and uprating, but the problem is to persuade the workers in work to do so. I have to say that I am not convinced that they all will. So that is the nature of that problem. My noble friend Lady Castle ought to know that if she needs one supporter in favour of earnings related update, then I am it. Unfortunately, that does not help in a general election, particularly as I do not have a vote.
I turn now to the other problem that I have with this amendment. It is rather like the way that the Opposition have been approaching the House of Lords reform; in other words, it is based on the proposition that until you can do everything you should not do anything. I agree that this is only a first step. The way to judge it is to ask whether it is a first step that improves the current 1085 state of affairs. I have to say that I am persuaded that it will at least, within its limits, lead to an improved state of affairs in order to help. especially in the longer term.
I do not disagree with my noble friend Lady Castle. I think that my noble friend the Minister owes it to us to give us as much practical detail as possible. If she cannot do so now—and I doubt that she can—we would at some point like to see precisely how some of these measures will work. Both my noble friend Lady Castle and the noble Lord, Lord Higgins, said that they would really like to see step by step how it would work. I, too, should like to see more of that, but that does not mean that we should not proceed with the legislation as it is or try to move forward.
I have one further point to make about the question of what we can do. I actually believe that there is a broad sense in which the pension problem is insoluble. Indeed, it is fairly commonsensical; if it were an easy problem to crack, even noble Lords opposite would have cracked it. Certainly my noble friend Lady Hollis, who is brilliant at these things, would have got it sorted out by now. But we are discussing a number of rather conflicting difficulties. We have the problem of pensions for people who are in work, we have the problem of uncertainty with work and we have the problem that we do not have full employment. We also have all sorts of problems with the economy about which we do not even know.
Essentially, as the noble Lord, Lord Higgins, and others pointed out, we have the incentive problem. We certainly want to tell people that they will be safe in their old age. None of us has any doubts about that as a moral principle, but if we then say that we will guarantee it, you may ask, "Why should I guarantee it?" It is the classic problem and not one that is easily solved, although we all say that we favour solving it.
I have to tell my noble friend Lady Castle that I think she is being a little harsh in this respect. I stand second to no one in my willingness to attack my noble friends in government, especially as it turned out that I was not to be one of them. However, on this occasion my noble friend is being at least slightly unfair. The problem will not be easy to solve. But where people are in work and where the Government can deal with the mis-selling problem (which they can with appropriate controls), where they can say that, on average—not when you are poorer—if you can make provision for yourself within recognised schemes you should do so and where the Government then say that below that average they will use the tax system to try to help people, I think it is worth giving the kind of support that my noble friend would like to have on this occasion.
I conclude my remarks by saying that I am delighted that my noble friend Lady Castle has raised this matter. It has given me a chance to say a few words in support, as well as make other comments. I entirely agree with her that we want more detail, if we can have it. But I hope that she does not in any way force us to vote on 1086 the matter today and that she will content herself with at least hoping that my noble friend the Minister will give us some enlightenment and some answers.
§ Baroness Hollis of Heigham
As we have heard, the amendment tabled by my noble friend Lady Castle would insert a condition that Part I of the Bill should not have effect until comprehensive legislation has been introduced on our wider proposals for pensions reform. Behind this lies a belief held by my noble friend that our pension plans are incomplete and that they are secret—indeed, I think she actually said that our policy was to fragment and confuse. In other words, we need the comprehensive policy laid out so that people can understand where this part of the Bill fits, and only then would she feel able to give it a possible endorsement.
I take the criticism in the point made by the noble Lord, Lord Higgins, that if you were to rely on the document cited in the amendment—namely, Principles into Practice—you would find that it does not say very much about the detail of pensions. Therefore, my noble friend is right: there is no coherent pension policy in it to enable her to put what we are proposing today into context. But, as that document made clear, it was never designed to do so. It was the first document and was subsequently followed by the major pensions document Partnership in Pensions, which came some nine months later. The first document was produced in March 1998, but the latter came out in December 1998 and was introduced by myself by way of a Statement. Indeed, my noble friend was one of the most senior contributors to the debate which followed.
Therefore, I take it as being a little odd that my noble friend should claim that the Government have not produced a coherent policy which they have brought to the House as a framework document within which the policies of the Bill can be understood, appreciated and debated. We did precisely that last December and, as I said, my noble friend was one of those who took part in the debate and who pressed me perfectly properly on her concerns. I hope, therefore, that my noble friend will accept that her basic premise—namely, that the Government do not have a policy, or, if they do. they are concealing it—is simply unfair. She must recognise that fact because she took part in that debate.
My noble friend has rightly said that we need more detail, as indeed have other noble Lords. That is perfectly reasonable. We are producing that detail in a series of consultation documents which will go out to the appropriate bodies. On the basis of that, we shall issue our proposals. That is surely the right way to proceed. This is a highly technical process, involving a major sector of industry and we are handling it in that way. To say that we have no coherent framework simply runs in the face of this document, especially when my noble friend contributed to the debate on it last December.
In that Statement, in the subsequent debate and in this document, we made clear that our approach is to build a modern and affordable pensions system which will ensure that everyone has the opportunity to achieve a decent income in retirement. No Member of the Committee today has disagreed about the substance of 1087 what we need to do. But if we leave pensions are they are, too many people will passport the inadequacy of low wages into the poverty of old age. My noble friend and I entirely agree in one respect: we want to ensure that today's pensioners and, above all, tomorrow's pensioners can enjoy as comfortable a retirement as possible.
My noble friend obviously prefers to argue the case of the SERPS proposals that she established in 1978. She was right then to do so. SERPS served some pensioners well, but I have to point out that it does not help those who need it most; that is to say, those on low earnings or those who move in and out of the labour market. Equally, as has already been said, occupational pension schemes are one of the great welfare success stories. But, as we all know, they are not available to everyone. Personal pensions can be a useful substitute for those who do not have access to an occupational scheme or those who change jobs frequently. But, again, as everyone knows—indeed, as we have said time and again in this Chamber—they are not suitable for everyone, especially those with moderate or low earnings or where the scheme carries heavy charges that can top-slice 25 or even 40 per cent off the pension of those who contribute for only a modest number of years.
We know that the combination of SERPS, occupational pensions and personal pensions does not now address the problems of the modern labour market. As my noble friends Lord Haskel and Lady Crawley emphasised in their contributions today, we have to adapt that pension framework to pick up those who are currently falling between the holes and the meshes. That is why we produced this document—121 pages of it—laying out where we want to go, followed by consultation papers which have gone to those in industry. We have not gone by the rules for consultation documents because the industry would have been perfectly right to complain.
We know where we are going. I would have hoped that your Lordships also knew where we were going. We seek to deliver a pension promise to those who are at present ill served by the offers in the market-place to ensure security in retirement. We have not been slow in doing that, despite the charges made by my noble friend.
We introduced last April the new minimum income guarantee, which provides immediate help to today's poorest pensioners—often the elderly widow in her late 70s or 80s who has never had the chance to build a decent pension—and we have increased income support by three times the rate of inflation, so that single pensioners receive £75 and couples £116. To ensure that the value of that is maintained, next April the increase will be based on earnings and our long-term aim, if resources permit, is for that minimum income guarantee to be increased in line with earnings, so that all pensioners share in rising national prosperity.
We believe that helping through the minimum income guarantee is the most effective way of helping those currently in need. It makes a real difference quickly to those who are poorest. But that is not all we are doing. In addition, we introduced winter fuel payments at a cost 1088 of £200 million, increased them in the Budget to £100 a year, and have provided extra help in terms of VAT, scrapping eye-test charges, and so on.
Those are the first steps. We will also set out our plans to reform state and private pensions so that everyone with a lifetime of work and caring behind them will build up rights to a pension that will take them above the minimum income guarantee. That is a safety net and we want to lift people above that safety net as far as we can. How are we doing it? The answer is in two ways: we are going for a state second pension and for a stakeholder's pension. At the moment, SERPS covers something like 7 million people. We expect 5 million of those to go into the state second pension.
As a result, because that state second pension will assume that anyone earning between the lower earnings limit of £3,400 (or whatever) to £9,000 will receive a pension as though they were earning £9,000 a year. It will be more distributive—as my noble friend Lord Peston called for that—than anything we have so far seen in the pension world. Anybody on an income of £3,500, £4,000, £5,000, £6,000 and so on will get a state second pension as though they were earning £9,000 a year. That is something SERPS could never do, because it was earnings related. It gave the least help to those who needed the most help. That is why it is not an adequate framework for our future.
So part of our policy will be a state second pension, with carers and disabled people credited into it. We expect, therefore, that in that new state second pension there will be 5 million people: 4 million coming from SERPS; half a million from personal pensions; half a million from occupational pensions and perhaps 2 million carers. Of the other 2 million people currently in SERPS, we would expect the equivalent number to go into the stakeholder pension, which is safe and financially more generous than people could get under SERPS. That is why we have a two-tier policy. We expect that the state second pensions to attract 2 million from SERPS, plus 2 million from an approved personal pension and, of course, those who are very badly served in the pension market at the moment—the 1 million people who are self-employed.
That is where we see the present SERPS "clientele" going. Those who are among the poorest, earning under £9,000, will go into a second state pension, unfunded, pay-as-you-go, but genuinely and decently redistributed so that the poorest get the same as those who are on £9,000 a year, which SERPS never did. For those earning over £9,000 and up to £18,000 or £20,000, we are for the first time going to offer the stakeholder pension, a second pension in which the rebates have been recycled to produce a pot which will be available for a funded pension which is portable, cheap, secure, properly governed, available to the self-employed and which, if you are out of work for whatever reason for up to five years, you can continue to keep ticking over.
Together, the state second pension and the stakeholder pension will do what SERPS was doing in the late 1970s but which it can no longer do because the labour market and the world around us have changed. Short-term work, part-time work, women's work, 1089 contract work, low-paid work and being self-employed or moving in and out of the labour market: these were contingencies ill served by the SERPS that we inherited. I know that my noble friend did her best when SERPS was first established to meet some of those contingencies, but those provisions were stripped out.
We believe that in this document we have set out our framework and that in this Bill we are starting the job of initiating stakeholder pension schemes. We do not think it is right to delay until both can come in at the same time. Even a short delay in starting pension arrangements can have a considerable impact on the level of pension which is available at retirement. We are particularly concerned at the lack of pensions suffered by so many people, or the inadequacy of personal pensions. Something like 50 per cent of personal pensions expenditure merely recycles the next rebate, which will ensure that those people will still need income-related benefits in retirement. We therefore need to move as speedily as we can on this. That is why we have brought forward this legislation at the earliest opportunity following the Green Paper. Potential scheme-providers need time to prepare.
The Government need to ensure that the necessary administrative and regulatory arrangements are put in place. We need to act with some urgency and we are also conscious of the need to get the details right. Earlier this month, my right honourable friend the Secretary of State set out proposals for minimum standards, including charges. Further consultation papers will follow shortly.
My noble friend would say that we can do nothing about stakeholders until everything else is in place. As my noble friend Lord Peston said, we cannot do anything until we are ready to do everything all at the same time. I can understand that concern. I appreciate that pensions policy has to be judged in the round otherwise problems arise—very much as happens with yellow lines on the road when the traffic tails back somewhere else down the system. You need to see it coherently.
We believe that the Green Paper sets out all that. We shall take action as soon as we can and as soon as legislative time permits the introduction of the state second pension after this parliamentary Session. We cannot offer guarantees on that, but we hope to introduce it as speedily as possible. In the light of that, I hope that my noble friends Lady Castle and Lady Turner will feel able to withdraw their amendment. We do have a coherent pensions policy. It was shaped here and my noble friend took part in that debate. We are introducing it in two steps, partly because the industry needs the extra preparation time for what are essentially privately provided stakeholder pensions.
We see this as a set of coherent policies. We shall be bringing forward proposals for the state second pension as soon after this parliamentary Session as time permits. In the light of that, I hope that my noble friend will accept that together the two elements—the state second pension, unfunded, and the stakeholder pension—do what she was seeking to do with SERPS, but in a more appropriate way which reflects the conditions of the 1090 labour market in which we now live. We all want to see security and decency of provision in old age. We believe that the stakeholder pension marks the first step and, complemented by the state second pension, will achieve precisely that.
§ Lord Higgins
I wonder if I may press the Minister on one or two matters. Several of her remarks threw a new light on the present situation as opposed to what we previously believed to be the case. What she has not. done is to explain why the Government cannot bring forward in this Bill the state second pension. As I understand the situation from previous statements, it has been previously anticipated that the state second pension would not come into operation for some five years after the stakeholder pension. Can she say whether that is so or not?
The other point the noble Baroness made which is of considerable interest relates to the fate of the people in SERPS. The noble Baroness is now suggesting that some 2 million people who are now in SERPS will move into stakeholder pensions. Perhaps she will elaborate on that a little given the different structure of the two measures. As regards the others who are in SERPS, will they be able to remain in a SERPS system or will they be compelled to move to the state second pension?
Are the Government delaying implementation of the state second pension because of the manifesto commitment, or is that being done for some other reason? The comments that the noble Baroness has just made seem inconsistent with that manifesto commitment; namely, that the Government propose to legislate in the next Session of Parliament—not the next Parliament—to introduce the state second pension. I hope that the noble Baroness will clarify those points.
§ Baroness Hollis of Heigham
I said that we have no intention of affecting accrued SERPS rights. They will continue to exist and they will be protected. However, as the state second pension and/or the stakeholder pension come into play—particularly the state second pension—those rights will be carried over into the new pension format. In other words, SERFS will not continue to run in parallel; it was never intended that it should. The introduction of the state second pension Is planned for April 2002. However, that is subject to time being made available to introduce the primary legislation. Should all go well—I have no reason to doubt that it will not—and subject to legislative time being available, I hope that we shall move as quickly as possible from consideration in this Session of the stakeholder pension to the introduction of the state second pension.
§ Lord Higgins
Would that mean that people on an earnings-related pension—namely, SERPS—would go into the state second pension which is not earnings related?
§ 5.15 p.m.
§ Baroness Hollis of Heigham
They would do so only if that would be to their financial advantage. In other 1091 words, the choice is available to go into a stakeholder scheme. Someone who at the moment earns £3,500 or £4,000 a year frankly receives pennies out of SERPS. Under the state second pension the return for someone who currently earns about £3,000 or £4,000 a year would be four times what they would currently receive under SERPS. Under SERPS someone on £3,000 or £4,000 a year might receive only £11. However, he or she would receive about £40 under the state second pension. The state second pension is infinitely more generous than SERPS every step of the way. We are not talking about a reduction of rights but rather a huge increase in returns.
§ Lord Peston
; Before my noble friend sits down, I hope I may ask her one other question which I forgot to ask earlier. I forgot to ask about the element of compulsion with respect to the stakeholder pension. I think of someone who is starting work rather than someone who is already in work. Is it the Government's view that everyone who is in work must now compulsorily have a stakeholder pension? According to my reading of the Bill, that matter is slightly ambiguous.
§ Baroness Hollis of Heigham
If the straight question is whether everyone in work will be compelled to be a member of a pension scheme, the answer is no. We do not propose that at the moment. We have consulted on this matter and there has been quite a lot of support for that proposal. However, I want to qualify that by adding a few more points. First, anyone who is in employment—that is, an employee—is, by virtue of the current SERPS arrangements or the occupational scheme arrangements, already effectively compelled to belong to a pension scheme. My noble friend Lady Turner who knows so much about pensions nods in affirmation. If employees do not have access to an occupational scheme, they enter SERPS. Therefore any employee is already in a pension scheme and our proposal will not reduce that provision.
Secondly, as my noble friend Lady Crawley rightly said, by virtue of the minimum wage, many more women who hitherto have not been over the lower earnings limit, and therefore have been unable to enter contributory pension schemes, will be able to do so. About 85 per cent of married women in work and 88 per cent of unmarried women in full-time work will pass the lower earnings limit. Between 60 and 70 per cent of those in part-time work will pass the lower earnings limit. They will come into a contributory scheme and therefore into a compulsory pension scheme, if you like, in so far as they are employees. As I believe we all recognise, the difficulty concerns whether compulsion should apply to those below the lower earnings limit; that is, those low earners who are perhaps working six or eight hours a week and earning, say, £2,000 a year. One could end up guaranteeing them a pension which is more generous than their earnings. There is a real dilemma there.
The second problem concerns how best to help those who are self-employed. If we were to make pension membership compulsory, I suspect that the group on 1092 which that would bite most would be the self-employed. Many self-employed people regard their business as their pension. They believe that to "top slice" money which they consider could be more appropriately invested in their business and put that into a pension scheme would not be in their best interest. We have consulted on this matter. As I say, at the moment we do not propose to go down that route, but we are not closing the door on it. We hope that the new stakeholder scheme will be sufficiently attractive to encourage the self-employed to take out pension provision to an extent that has not been the case in the past. If we find that we are unsuccessful in that aim and that other avenues need to be explored, I promise the Committee that we shall reconsider the matter. We want to ensure comprehensive pension coverage. I believe that all Members of the Committee will understand the dilemmas that this Government and the previous administration—I refer to the Pensions Act 1995—have faced.
§ Lord Peston
Some of these matters will be discussed when we discuss the next amendment which I gather my noble friend Lady Turner will put before the Committee. However, I have to say that in my judgment young people are incapable of taking a rational decision that will affect them 40 years ahead. Some time ago I remarked in this Chamber that I was incapable of taking such a rational decision in my youth. I am delighted that I had no choice in the matter and that I was forced to have a pension, the result of which is that I am not on the breadline now. I believe that we cannot let this issue of compulsion drift. It is hopelessly naïve to assume that people can take the right decisions with regard to provision 40 years in the future. That is the only reason I have intervened, but further points can be raised when the noble Baroness, Lady Turner, moves the next amendment.
§ Baroness Castle of Blackburn
Has the noble Baroness finished her comments? One never knows; it goes on, does it not?
§ Baroness Castle of Blackburn
We have had the initial run of a worthwhile debate, not least because it enabled the noble Lord, Lord Peston, to get many of his repressions off his chest! I believe that the discussion has revealed the unsatisfactory position in which we find ourselves in that we are having to discuss on the basis of a narrow piece of specific legislation, a wide range of rather generalised promises. My amendment does not seek to say that the enforcement of the different aspects of pension policy must all take place at the same time, but that we must have the Government's whole proposition in front of us in legislative form. It is only when we come to draft the measure in statute that some of the vagueness disappears and we find that we do not like what we see.
I stand by the claim I made that we ought not to have been asked to deal with one tiny slice of legislation. The position is also unsatisfactory because it enabled 1093 the noble Baroness, Lady Hollis, to give a wonderfully eloquent tirade about the wonders that are to come in the light of the Green Paper, when I had narrowed my contribution to the question of timing and the context of the measure. I do not want to filibuster because I am anxious not to give the Government justification for keeping us all here until the early hours on the grounds that we were all trying to wreck the Bill. If it comes to wrecking the Bill because of filibustering, I think the noble Baroness had better measure the length of her own speeches and compare them with mine!
I think it was worth while to have this preliminary run. The whole issue of pensions—as, God knows, I know—is extremely complex. I do not intend to press my amendment for one very specific reason: it has been pointed out by the noble Lord, Lord Higgins, and the Minister that my amendment is wrongly drafted. They seemed puzzled as to why I had chosen the earlier document to quote in the amendment. Frankly, I was a bit puzzled when someone read it to me. There is a simple explanation. The Committee will be tired of hearing me say that I now suffer from very low vision and that everything has to be read to me. When I detailed the job I said, "I am talking about the Green Paper; look at the title", and the wrong one was looked at. I am not trying to push the blame on to anybody else. It was intended to be a reference to the Green Paper, so perhaps I will not be accused of inconsistency.
Of course I have read the Green Paper; of course it is full of noble sentiments—but the Committee will forgive me if I am a bit cynical. The glossies with which we have been inundated are no substitute for the hard statutory force of policy. I am not surprised that people have difficulty in finding their way through the glossies that come from the Government. After all, the manifesto glossy had a reference to SERPS which is now being interpreted in rather different ways than seemed to be intended.
With the permission of the Committee, I will withdraw the amendment with a view to living to fight another day.
§ Amendment, by leave, withdrawn.
§ Clause 1 [Meaning of "stakeholder pension scheme"]:
§ Baroness Turner of Camden moved Amendment No. 2.
§ Page 1, line II, after ("conditions") insert (", including a minimum level of employers' contributions,")
§ The noble Baroness said: I beg to move Amendment No. 2. Although this amendment is grouped with Amendment No. 10, I do not intend to speak to or move that amendment.
§ The Bill contains the provision that employers must facilitate access to stakeholder pension schemes. However, there is no requirement for employers to make any contributions themselves; they simply allow the providers of such schemes access to their staff. The object of the amendment is to provide for a minimum level of employers' contributions. We think that otherwise what the Government propose may not 1094 increase or improve the general standard of pension provision. In fact it could accelerate a trend away from high-quality employer final salary schemes.
§ Employers may be tempted to review their schemes, possibly redirecting the lowest paid into the state second pension and possibly middle earners into stakeholder schemes; higher employer contributions could then be confined to higher graded staff. That is not a development that most of us would want to see.
§ A further point is that very few employees are likely to understand how much they may have to pay into a stakeholder scheme if they have to fund entirely themselves. It has been estimated that a young person joining a scheme funded on a money purchase basis would need to accumulate a fund of around £200,000 by age 60 in order to receive a pension of about £10,000 a year—adequate maybe, but not exactly luxury. A sum of £200,000 seems impossible to most young people.
§ If stakeholder pensions are to fulfil the task envisaged by the Government of making retirement a pleasure rather than a time to be feared, employees will have to put aside a substantial sum at a time in life when many will be paying off mortgages and bringing up children. There seems no reason why employers should not be asked to bear some of this burden. That is the aim of this amendment.
§ Lord Higgins
This amendment brings out a very important point which the noble Baroness has rightly emphasised. At the moment, a number of employers have schemes—nowadays, generally speaking, they are of a money purchase kind rather than a final salary kind—where they make contributions towards them. It is likely to be the case that, since the stakeholder pension does not have that provision, the benefits on that existing scheme may well be superior to what will eventually emerge on a stakeholder scheme.
The noble Baroness paid tribute to occupational schemes. It is common ground that they have been a great success—no one is disputing that—but it may well be that to some extent there is an element of inertia in them. If suddenly employees, particularly perhaps of smaller firms, are told that the fashionable thing to do now is to have a stakeholder scheme in the terms set out very clearly on the face of the Bill, employers may well ask, "Why is it we are going ahead with the existing scheme rather than simply giving our employees a stakeholder scheme?" Because of the Government's—I was about to say "propaganda"—position on this, they may consider that that is something which the Government regard as perfectly reasonable. In short they will say perhaps, "We are being excessively generous'. In practice, employers are likely to close the existing scheme to new members and then introduce a stakeholder scheme.
A real danger of the stakeholder scheme is that this kind of situation to some extent adversely affects a number of people who continue to have the opportunity of being in an occupational scheme. Having said that, there are much wider issues about the extent to which employers should be compelled to provide, contributions, which in effect is what I understand the 1095 amendment to say. That raises other difficult questions. The trend, if I may put it that way, which I have just described and which I think the noble Baroness supports gives one some cause for concern.
Another concern is the extent to which one has to make contributions to ensure a worthwhile pension. That matter will arise more specifically on later amendments. There is obviously a danger—Mr Frank Field has expressed this in glowing terms which I will not repeat in this House—that people will decide they should spend the money rather than put it into a scheme from which, in the event, they may get no benefit because the level of the minimum income guarantee comes above the level of pension provided by the contributions they have made. I understand the concerns which the noble Baroness has expressed, although I think there may be real problems in going down the road she advocates.
§ 5.30 p.m.
§ Lord Goodhart
We support very strongly the spirit behind the amendment moved by the noble Baroness, Lady Turner of Camden. My noble friend Lord Russell and I have tabled Amendment No. 19 which is intended to cover the same issue. In the draft grouping it was grouped with Amendment No. 2. I am not sure why it has been degrouped because it seems to me that this is the appropriate place at which to discuss this and one or two other closely related issues. I intend to save the time of the Committee by raising my points in this debate and not moving Amendment No. 19.
As I said in the debate on Amendment No. 1, we give broad support to the Government's proposals for the troika of basic pension, second state pension and a funded stakeholder pension as an alternative to the second state pension. However, we do not believe that stakeholder pensions will provide adequate pensions for employees unless three conditions are satisfied.
First, membership must be compulsory for those serving above a certain level unless they already belong to a contracted-out occupational scheme or another pension scheme to which the employer makes appropriate contributions. Secondly, employers as well as employees must contribute, as the amendment proposes. Thirdly, the minimum contributions from both employer and employee must be sufficient to build up an appropriate fund. Amendment No. 2 deals with the second point—that employers should contribute—but it does not propose that membership should be compulsory for employees. Without that requirement, I do not think it will work. For reasons to which I shall come in a moment, compulsory membership will be essential.
Perhaps I may go into a little more detail on those three points. First, I believe that membership should be compulsory. The second state pension is intended, as the Government have explained, to be a flat-rate pension. The level of that pension will be fixed so that those earning sums greater than £9,000 a year will in effect do better by switching to a stakeholder pension. It is perfectly legitimate to say that people can choose for 1096 themselves whether to stay in the second state pension or shift to the stakeholder pension. But on that point I agree with what the noble Lord, Lord Peston, said in the earlier debate. Furthermore, inertia is a powerful force. The Government are in effect deliberately setting up a scheme which means that people on earnings of more than £9,000 a year will not get their money's worth if they stay in the second state pension. To rely on inertia to reduce the numbers opting out is something approaching mis-selling. The Government should lay down rules which provide that at some point people must switch to a stakeholder pension.
What is that point in terms of earnings? That is a matter of detail. I certainly think that £9,000 is too low. The incomes of many people will fluctuate to some extent. Someone's earnings may have gone up £9,500, but they may go down again next year, so that should not mean that at that point they are required to change. Since the value of the stakeholder pension is not wholly predictable, there is a need to leave a margin. We do not want people to be forced out of the second state pension only to find that they would have been better off to stay in it. I suggest that earnings of £12,000 might be the point at which people would be required to make the switch.
Secondly, employers as well as employees must contribute. Pensions are now recognised as a form of deferred earnings. In effect, therefore, they are part of pay. It is the duty of employers to contribute to the pensions of their employees. Many employers already recognise that duty either by providing occupational pension schemes of their own or by contributing to group personal pensions for the benefit of their employees. However, not all employers do so. It is not practicable for some employers, particularly small employers, to set up their own occupational schemes. It will become much easier for them to contribute to a stakeholder pension.
I therefore believe that employers should, if they are making no other adequate pension provision by means of their own contributions, contribute to stakeholder pension schemes. But the employer cannot contribute unless the employee is a member of that scheme. That reinforces the argument that membership must be compulsory above a certain salary level. There will be a problem if employers have to contribute whenever their employee is in the scheme but it is not made compulsory for the employee to join the scheme. If employee membership is not compulsory, employees will come under great pressure from their employers not to switch out of the state second pension because of the greater burden it will impose on the employer.
Finally, what is the appropriate level of contribution? The minimum needed is at least 10 per cent of current wages if the target is to provide a pension in due course of around half average wages. Some people say that that 10 per cent is not enough and that closer to 15 per cent is needed. However, it may be reasonable to say that it should not be as high as that and that the compulsory level of contribution should he 10 per cent of wages between the lower earnings limit and the upper earnings limit. That would be a reasonable level. I also suggest that two-thirds of those contributions should be paid by 1097 employers and one-third by employees. That corresponds roughly to the proportions in which contributions to SERPS are made, as demonstrated by the current rates of rebate. It would be necessary to phase it in over a period of some years. The present contribution level via SERPS on personal pensions is about 5 per cent. Doubling that in one year could cause problems and certainly would be inflationary.
Compulsory membership of stakeholder pensions and compulsory contributions cannot take effect until the state second pension is in position. But when legislation for the state second pension is introduced, I hope that that legislation will also include provision for a compulsory switch to stakeholder pensions for those who have incomes from earnings significantly above £9,000 and for compulsory contributions by both employers and employees.
§ Lord Higgins
I am grateful to the noble Lord for giving way. If he is advocating compulsion in that sense, does he feel that there needs to be some protection to ensure that the pension which is eventually paid is above the level of minimum income support?
§ Lord Goodhart
In principle, yes. If it was contributed over a lifetime of work, that would be the case. However, some people might be in employment for only a relatively short period of time and then might unexpectedly lose it. They would be unable, therefore, to build up enough rights. But I would certainly hope that the level of contribution would be such that people who had been in employment for most of their working lives would be at a level above income support.
Without proposals of this kind, stakeholder pensions will never guarantee proper pensions for those in the lower and middle earnings ranges—that is, £12,000 to £25,000 a year. I hope the Government will accept that they need to move in the direction which I have proposed.
§ Lord Freeman
I have considerable sympathy with the amendment moved by the noble Baroness, Lady Turner. I think that her diagnosis is right. We need to encourage employers to make a contribution to pension provision for their employees. But I think that her cure is wrong. I have proposed an alternative route in Amendment No. 17, which seeks to permit dual membership. I believe that the noble Baroness's amendment is flawed because, as the noble Baroness, Lady Castle, said in a powerful speech on the earlier amendment, we must do everything we can to ensure that we do not move away, or encourage a movement away. from defined benefit to money purchase schemes which are cheaper for the employer to contribute to but are a poorer deal for the pensioner.
The noble Baroness's amendment might encourage employers to close a defined benefit occupational pension scheme and make the minimum contribution to the stakeholder pension scheme, which is a money purchase scheme. That would help the cashflow and the cost base of the employer but it would be to the detriment of the employee. I strongly believe that 1098 anything which encourages employers to move away from defined benefits schemes should be resisted. I look forward later on to proposing an alternative route.
§ Lord Peston
All my emotional instincts are to support my noble friends on this proposal but I think that there is a small problem with the economics of it which I feel obliged to draw to the Committee's attention.
First, as a broad principle, the pension received by the average worker will in any system be paid for in full by the worker. Unless one believes that switching from one system to another—for example, from a state system to a stakeholder system or to an occupational pension scheme—leads to an economic revolution and suddenly the economy improves beyond all recognition. there are no free rides. In other words, all pensions are paid for. In general, the average person pays for what he or she receives. One hopes that in a decent system the rich finance the poor. I have made that point previously. I agree that it may be highly controversial to noble Lords opposite, but it has never been a problem for me. That is one part of the background. I shall say more about the numerical consequences in supplementing the points drawn to our attention in an important way by the noble Lord, Lord Goodhart.
The difficult economics question is: who pays die employer's contribution? The naïve view is that the employer does. I have spent my life teaching economics and pointing out that that is not true; the worker does. The noble Lord, Lord Goodhart, has already alluded to that. The employer's compulsory contribution is simply part of the remuneration of a worker. In any reasonable labour market, unless the employer has monopoly power to a degree that I do not think employers have even in our system, the worker pays. I am not against the compulsory approach, but we should not mislead workers into believing that they are getting something for nothing. They are not. So there is nothing wrong with the idea of compulsion—
§ Lord Peston
That is right. My noble friend puts it much better than I can.
The idea is not a bad one so long as workers are not under the impression that they did not pay for the pension in the first place.
En passant, there seems to be a new rule now; namely, we can debate any amendment at any time we like. Therefore—
§ Lord Freeman
There is a difference, is there not, between an occupational pension scheme where the employer makes a contribution to the deferred pay of the pensioner in addition to the employee's contribution and a stakeholder pension where the employee pays the whole amount?
§ Lord Peston
I am not convinced of that either. My point is that the employee receives whatever the market 1099 has to pay the employee to get him or her to supply—if I may use the Marxist term—his or her labour power to the firm. Most economists would argue that the form in which that is done is irrelevant.
The noble Lord, Lord Freeman, raises another important point in his Amendment No. 17 which also enables me to reveal my ignorance. It had never occurred to me that the problem that he mentions was a problem. It had never occurred to me that people could not have more than one pension. It may be convenient for my noble friend Lady Hollis to elaborate on the point in replying to this amendment. As someone who believes that saving and deferred pleasures are good, I had taken it for granted that the more pensions a person has and the more a person saves, the better—for the very good psychological reason that I prefer not to be dependent on anyone else, not least the state.
Perhaps I may make a remark on a subject that intrigues me. Again, it relates to the point that people pay for what they get. In broad terms, I have assumed that if one is in full employment for 40 years, and lives for 60 years, essentially one's contribution would be approximately one-third. That is what would be taken out of one's pay. But then we switch to the fact that one would not require equal consumer spending through life. We divide the final part by two, and we get the state pension of approximately half of average earnings; so we get to 15 per cent. It seems to me that, assuming that one has paid for one's house, that part can be knocked off, plus paying for one's dependants, and one ends up within the range of 10 to 15 per cent of income as the likely contribution procedure. I believe that that is what the noble Lord, Lord Goodhart, had in mind. For those of us who have lived through university life, that has broadly been the case. I think I contributed 5 per cent and my employer 10 per cent, but I know that I actually contributed the whole 15 per cent. If my contribution had been nought, I should simply have received 15 per cent less income in the first place.
The numbers are manageable. My real point is this. Let us assume that we do not have stakeholder pensions—which I support—but pensions on a fully taxed basis. We are then talking about adding 10 per cent to the standard rate of tax. In other words, to repeat my point, one gets nothing for nothing; one gets something for something.
In conclusion, compulsion is vital. The noble Lord, Lord Goodhart, made a telling point. I should like to see it done by way of some compulsory employer contribution. But I do not think that any of us in this House should even remotely mislead our fellow countrymen and cause them to believe that even this great Government have devised a scheme whereby everyone can be better off when they are older without contributing anything while they are working.
§ Lord Stoddart of Swindon
I tend to support the amendment. I believe that it is necessary for employers to make a contribution to a pension scheme—a stakeholder scheme or call it what you will. I do not quite agree with my noble friend Lord Peston that in the field of pensions people cannot get something for nothing.
1100 One great problem is that there are people at the present time, as Frank Field explained, who are in fact getting something for nothing because neither they nor their employers contribute to any basic pension scheme. The result is that when the many people who have paid contributions into a private pension scheme all their life and have forgone income as a consequence reach 60 or 65, they find that there is a range of state benefits that are not available to them because they have paid for their own pensions but which are available to those who have not paid any contributions—those people gain twice: they have not lost the income earlier in their life but they receive the benefits at the end of their life. That is the argument for compulsion. I believe that it will be absolutely necessary if any scheme is to stick over a long period of time.
I am sure that the Government are doing their utmost to bring forward a scheme that will be beneficial and lasting. Although I appreciate the difficulties in relation to businesses, I fear that if the scheme is not made compulsory it will break down for the reasons I have mentioned.
My noble friend is also right in saying that employers never pay. It is the employee who always pays. I know that to be the case. When I used to negotiate with the CEGB on the Electricity Council, and when I attempted to grind some extra wages out of the employers, they said to me, "Ah yes, Mr Stoddart, but you must not forget the large contribution that the CEGB and the electricity boards pay into the pension fund". So I appreciate what is being said.
Nevertheless, for many of the reasons that have been mentioned, I believe that the employer should be part of the stakeholder pension scheme. The employer should have some influence on the provision, not only of a livelihood for the personnel throughout their lives but also to see that they have a good livelihood at the end of their lives. I believe that that will help employees to support good pension schemes. For that reason, the amendment should be given a fair wind.
§ Lord Desai
Since we are having a very good seminar this afternoon, perhaps I may be allowed to contribute to it. I agree that if people are irrational, and especially the young who do not want to take part in saving, giving them the illusion that the employer pays a pension is a perfectly welcome piece of subterfuge. Of course, people themselves pay, but if they think that the employers pay, that is fine.
Given the remarks of my noble friends Lord Peston and Lord Haskel on an earlier amendment, in the new labour market will there be administrative problems in tying employers down, because employers change? It is not like working for the electricity industry over a lifetime. I have worked for only one employer for 34 years—I hope that I do not get sacked for another six years! If people work for different employers, going in and out of employment, how can one best manage to obtain the element we want? It is an important question 1101 which we ought to face. I do not know the answer, but the modern labour market does not make for simple rules.
§ Lord McIntosh of Haringey
My noble friend Lord Desai described this as a seminar. I am not too keen on seminars which take place in the afternoon given that some people stay for the afternoon but not for the rest of the work which has to be done in the evening. I am not talking about anyone in particular, I hasten to say, but it is a trend that seems to have arrived in recent months and years.
I am pleased that the noble Lord, Lord Goodhart, has brought back the link between Amendments Nos. 2 and 19. We originally grouped them together but some centrifugal force which I do not understand took place and separated them. They ought to be debated together because you cannot have compulsion for employees without having it for employers and vice versa. It has been a sensible debate and I am grateful for that.
I should declare a past interest as one who ran a pension scheme for 30 years which, until 1988, was an occupational pension scheme, a final salary scheme. It was wrecked by the government of which the noble Lord, Lord Freeman, was a member. His government not only wrecked SERPS by reducing the outcome from the average of the best three of the last 10 years to the average of the last 20 years so that the value of SERPS was much worse after the Conservative Government wrecked it; but they also wrecked much of the final salary occupational pension schemes by removing the compulsory element of membership of those schemes. So I do not take any moralising about compulsion from any Conservative Members of the Committee. The compulsion was removed. My scheme was largely wrecked because I had many young people who knew they would move on. In my business you do not stay for 40 years working for the same employer. The young people would not join the scheme and it lost its funding rationale. I had to introduce a group personal pension scheme instead.
Of course, any good employer—and I was a good employer—will want to contribute to a pension scheme. I shall not become involved in the economists' arguments about transfer charges; we do not need to do that for the purposes of the Bill. The argument is about who ultimately pays. The good employer will want to contribute to a pension scheme and will encourage his employees to do so precisely for reasons of self-interest, if that is the way to maintain, retain and motivate staff. Therefore, we should be doing everything we can to encourage employers to contribute to pension schemes. That is not necessarily to say that compulsion is the right solution.
Stakeholder pensions are aimed at those people who do not have access to an occupational, salary-related pension. I say that to the noble Lord, Lord Freeman, who seemed to think that they were a generalised alternative. They are designed specifically to provide a cheap, value-for-money way for people on moderate earnings to build up a funded second-tier pension. So it is vital that we make the schemes as attractive as possible, both for employees and employers. In 1102 considering subsequent amendments, we shall consider the tough terms for insurance companies on which we wish stakeholder pensions to be built up, making them attractive to employers by making as limited and bearable as possible the burden on them. That is to ensure that they collaborate with stakeholder pensions.
In Clause 3 we propose that employers should offer access to a stakeholder pension scheme for those employees who are not offered access to an occupational scheme. This will be an additional burden on employers, but we believe it is a reasonable requirement. We have made it clear that we shall strive to minimise the burden.
There is nothing in the Bill which will prevent employers choosing to offer contributions to their stakeholder pension scheme. In many cases, they will and we shall give them every encouragement.
If it is any consolation to Members of the Committee who are worried about the minimum income guarantee question, we have looked at the amount of money that will be achieved after the basic pension and the statutory second pension which will be paid at the level of £9,000, even for those who earn less, including carers and the self-employed. After a reasonable working life, we can say that the return on the basic and the SSP will be more than 100 per cent of the level of means-tested benefits. That really makes a difference for those who think that there is a realistic alternative of refusing to have anything to do with it and relying on the state at the end. There is, therefore, already an element of compulsion in the pension scheme.
§ Lord Higgins
Perhaps I may press the Minister on the question of more than 100 per cent. That would suggest it would be a small amount above. Presumably he has done the calculations and can tell us what percentage the Government expect above the 100 per cent.
§ Lord McIntosh of Haringey
It is a different figure according to the number of years. It is 105 per cent at 25 years, I believe, but if I am wrong, I shall have to write to the noble Lord.
§ Lord Higgins
So after all the contributions, all you get is 5 per cent more than the means-tested benefit.
§ Lord McIntosh of Haringey
Yes, if you have only the statutory second pension and the basic pension. But we are not talking about the stakeholder pension here. The whole point is that everything you put into a stakeholder pension on top of the basic and the SSP is above the minimum income guarantee and therefore it is returned to the pensioner in due course. I was talking about the SSP and the basic pension, not about the stakeholder pension.
I said that there was an element of compulsion in the pension system. National insurance contributions are paid by all workers except the lowest paid. They provide entitlement to the basic state retirement pension which is the basic building block of pension provision available to all workers, with the assistance of credits 1103 and home responsibilities protection to many carers and disabled people. That is another difference which must be taken into account.
In addition, national insurance contributions for employees give entitlement to the state earnings-related pension. Employees who choose to make an equivalent arrangement through membership of the contracted-out occupational pension—I mean those who choose to or are able to because one is on offer to them—or an appropriate personal pension can receive a rebate of national insurance contributions.
State pensions have many strengths and it is important to recognise that current compulsory pensions do not ensure a decent provision for many people, particularly the lowest earners. That is partly because SERPS has been cut back from its original design and because demographic and labour market changes are tending to reduce the periods over which people are able to contribute; SERPS also, by its nature, gives the smallest benefit to the lowest earners.
We considered whether it was right to increase the level of compulsory saving in the system, which is what is being urged by Members of the Committee in Amendments Nos. 2 and 19. I do not believe that it is the right answer to the pension problems we face. I say to my noble friend Lord Peston that it is not that it is not viable; it is. We would not have considered it if we did not think we could do it; but it would provide little extra pension for the lowest earners, who would be likely to find the burden of higher compulsory contributions the hardest to bear. At the same time, it would force higher earners to build up a significantly larger pension.
Compulsory contributions by higher earners are already at a level where the resulting pension is likely to lift them well clear of the minimum income guarantee in retirement. We know that two-thirds of those who earn over £15,000 a year already save an extra 5 per cent of their earnings voluntarily in occupational schemes or personal pensions. Compulsion is a blunt weapon. The new framework that we propose for pensions, in particular the new state second pension—I appreciate that it is difficult to view the stakeholder pension without reference to the state second pension—will ensure that those who need the most help, in particular low earners and carers, get higher pensions without the need for extra compulsion.
At the same time, we believe that many people who can afford to do so will benefit from making extra pension provision. We want to encourage higher voluntary savings and need to make it worthwhile. The state second pension will provide a decent second pension for all workers and carers and remove the threat of means-testing in retirement. We want to ensure that more people are aware of the need for pensions, and we intend to improve the information that is available.
I hear what the noble Lord, Lord Goodhart, says about our two cut-off points, but I do not believe that the difference is other than one of degree. We are working towards the same objective. The development of stakeholder pension schemes will ensure that all 1104 moderate and higher earners have the option of a good value funded pension arrangement to which they can add extra contributions as their circumstances allow. We have indicated that when stakeholder pension schemes are properly extended we plan to move to a flat-rate state second pension with all moderate and higher earners contributing to an occupational scheme or their own funded pension.
The new clause introduced by Amendment No. 19 also provides for a compulsory employer contribution which, as I understand it, would be set at no more than half the rate that applied to employees.
§ 6 p.m.
§ Lord Goodhart
I am most grateful to the Minister for giving way. I am afraid that an unfortunate glitch has arisen. What I intended to say was that the contribution rate should not exceed 7 per cent. Therefore, it would be twice the contribution rate of employees.
§ Lord McIntosh of Haringey
I am grateful to the noble Lord. What he says corresponds with my experience. I had two group personal pension schemes. As to one of them, I said that I would not as an employer put in anything unless employees put in 5 per cent. If they did that I would also put in 5 per cent. As to the other scheme, my fellow directors said that they would put in money even if the employees put in only 2 per cent. I thought that that was quite inadequate. I do not believe in encouraging employees to deceive themselves into thinking that they have adequate pensions. It is right to make a real contribution, and that is what good employers should do.
§ Lord Peston
I have been listening to my noble friend most attentively but occasionally I become lost in the technicalities, in particular his argument on compulsion. Perhaps at a later stage we can come back to it. I thought that my noble friend's argument on compulsion was decisively in favour of it, and then he suddenly concluded that he was against it. He lost me completely on that. The remarks of the noble Lord, Lord Goodhart, on compulsion—in particular that within a firm one would not want to have similar workers with different packages—were overwhelmingly correct. We can return to that on another occasion. But I became really lost when my noble friend spoke about the self-employed. I believe that the self-employed are eligible for the stakeholder pension. We keep switching—outside the rules of the game—to the state second pension. I am trying to keep that out of my mind because, as I understand it, that is not part of this Bill. Nonetheless, as we have wandered into that matter, will the self-employed be eligible for the state second pension—or is it wrong of me at this stage even to ask the question?
§ Lord McIntosh of Haringey
I hope that I did not give a false impression. My noble friend is right to say that the self-employed are able to join the stakeholder pension. I did not mean to suggest—if I did—that a 1105 decision had been taken about the self-employed and the state second pension. We are still consulting on that matter.
I hope that I have made clear that we are very strongly in favour of giving every encouragement both to employees and employers to participate in adequate pension schemes. It is not because of any antagonism to employer contributions that we resist these amendments. We believe that, because of the effect on lower paid workers in particular and the need to provide encouragement at both ends, it is a better to rely on encouragement rather than compulsion at this stage. Therefore, we must resist Amendment No. 2 and, in due course, Amendment No. 19.
§ Baroness Turner of Camden
I thank my noble friend for his very comprehensive answer to all the arguments raised in what I believe has been a very useful and interesting debate. However, I still hold to the view that it will be very difficult to persuade younger people in particular to contribute the necessary amount to provide them with a proper pension when they reach retirement age. Very few people will understand just how much of their disposable income they are expected to invest if they are to be properly looked after when they reach normal retirement age. For that reason, my amendment suggests that employers should make a minimum contribution.
My noble friend said that everything possible would be done to persuade employers and employees to participate in pension provision, and for that I am grateful. However, I should like to consider what has been said in the debate this afternoon, with much of which I agree. For example, I agree absolutely with the noble Lord, Lord Freeman, that everything possible must be done to encourage defined benefit schemes as distinct from money purchase. On the other hand, the amendment is designed to ensure that whatever method is used, whether money purchase or defined benefit, there is still a necessity for the employer to make a payment.
§ Lord McIntosh of Haringey
Before my noble friend leaves that point, perhaps I should respond to one point made by the noble Lord, Lord Higgins. He suggested that it would be necessary for employers to close occupational pension schemes, if I understood him aright, as a result of our proposals. That is certainly not our intention. Those who offer occupational pension schemes will face no extra requirement, and those who offer an occupational pension scheme to some employees but not others can extend that scheme if they want. I thought it necessary to make that clear in case that was in the mind of any Member of the Committee.
§ Lord Higgins
I am trying not to be disorderly. I did not want to make an intervention in an intervention. The noble Lord misunderstood me. I am suggesting that people who are in a scheme where the employer makes 1106 a contribution may well feel that they should switch to a stakeholder pension which does not require a contribution.
§ Lord McIntosh of Haringey
That was what happened after 1988 when occupational pension schemes could no longer be part of a contract of employment. That happened under the Conservative government—and a very bad thing it was, too. That shall not happen in any additional way under this proposed legislation.
§ Baroness Turner of Camden
The comments of my noble friend remind me of the debate on pensions that we had at that time. I remember tabling an amendment to try to provide for compulsory membership of occupational schemes. That amendment was defeated because it was opposed by the then government. I agree with the noble Lord, Lord Goodhart, that if there are compulsory employer contributions there must, therefore, be a compulsory contribution by the employee. I agree that that is completely logical, and I would feel inclined to support it. However for the time being anyway, I do not intend to seek to divide the Committee, and I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Lord Higgins moved Amendment No. 3:
§ Page 1, line 12, leave out subsection (2)
The noble Lord said: Clause 1 (2) reads as follows:
The first condition"—
of a stakeholder scheme—
is that the scheme is established under a trust or in such other way as may be prescribed".
§ We change gear slightly at this point, moving from the broad issues we have been discussing to something which is much more specific, because we have sought to focus some of the amendments on particular points. This is one which has already received a great deal of consideration.
§ What is slightly puzzling at a rather tedious level is this: if establishment of the scheme can be prescribed in "such other way" as may be thought appropriate by the Government, why does "trust" have to be mentioned at all? Perhaps in a way it is fortunate that the Government have mentioned it, because that has resulted in many representations from outside bodies. The Government now seem very confused about whether some of the schemes will be trust schemes and some will not, or whether none of them will be trust schemes, or whatever.
The outside representations seem by and large to come down against trust schemes. The National Westminster Bank said in its response:
We don't believe a trust-based governance is necessary. Trustees can add little extra protection but will make schemes more complex and expensive to administer.
The Green Paper's proposal on establishing independent trustees for stakeholder pensions will increase rather than decrease the cost of administering the schemes.
§ Therefore, I hope that the Minister can indicate what the Government's position is given that it has become a little unclear whether they are or are not in favour of a trust-based scheme.
§ It seems to me that there could be two quite different animals. There could be a scheme with trustees, which in effect would be the same sort of set-up as we have with an occupational pension scheme; presumably the trustees would be responsible for operating the trust and would employ fund managers to manage the assets and so on. On the other hand, a scheme could be entirely on an insurance company sort of basis, where no trustees are involved.
§ My particular concern is this: if one is to do it on a trustee basis, where will one find the trustees? They will not necessarily be paid. I would guess that most trustees are not, so the cost point which is made in the response to the Green Paper which I have just quoted is perhaps a little unfair.
§ That having been said, the responsibilities of trustees are very considerable. Following the Pensions Act, which was rightly introduced to deal with events following the Maxwell scandal—when the trustees seemed to hold the most incredible views on the difference between the assets of the trust and the assets of the company—those responsibilities are even more onerous than they were before. Some of the hazards were exemplified in a report in Pensions Week a little while ago, which said that OPRA "takes charity to court." The trustees of a particular charitable pensions fund, who had not fully conformed with the requirements imposed by the legislation and by OPRA, found themselves open to prosecution and considerable prison sentences. The Government may well find it not all that easy to have a stakeholder pension scheme with trustees, given that they are unlikely to be paid and that they will expose themselves to very considerable problems with regard to the administration of the trust.
§ Am I right in thinking that the Government are fairly clear now that they are not going down the trustee path; or is it otherwise? When I look at some of the other pension provisions, I am not at all clear what will happen about the state second pension. I presume the point does not arise there at all. No doubt the noble Baroness will clarify that. My understanding is that LISAs certainly will not have trustees. The whole issue has become a little unnecessarily crowded, partly because of the wording of the clause, which seems to imply that there may or may not be trustees. Perhaps we may have a reply from the Minister which will clarify the situation.
§ 6.15 p.m.
§ Baroness Turner of Camden
I hope that my noble friend the Minister will not accept the amendment. Unions which have been involved in discussions over stakeholder pensions and so on are rather keen on the whole idea of having them written under trust law. The idea is that if trustees emerge as a result of some form of election, that will give people more confidence that 1108 the stakeholder scheme with which they are involved is under lay administration or governance to some degree, and they will therefore feel more protected.
I accept that trustees now have quite onerous responsibilities. Therefore, once trustees were appointed, it would be necessary to make sure that they were properly trained so that they could carry out their task on behalf of the members of the scheme. Frankly, I think that to have stakeholder pensions written under trust law is a good idea, and I hope that the Government will not depart from that.
§ Lord Goodhart
I cannot support the amendment. In my experience of dealing with pension funds in practice, occupational pension funds were to a large extent written under trust law. Some of the smaller ones were dealt with by direct contract between the employer and an insurance company, but certainly the great majority of the larger ones and many of the smaller ones were written under trust law. That was accepted as being entirely appropriate by the Goode committee in its report, and trust law has proved itself to be a very flexible instrument which, having come from completely different sources, has adapted itself to the pensions system very effectively and successfully.
I recognise, of course, that personal pensions are not generally written under trust law, but arise by virtue of a direct contract between the employee and the pension company. But, for the reasons that the noble Baroness, Lady Turner of Camden, has just given, there may very well be pressure for stakeholder pensions to be written under trust law. I hope that there will be, because it seems to me to be another element of protection for the employees, for the pensioners. I can see that there may be cases in which it would not be the only appropriate system, but I certainly hope that it will be encouraged, and I should like to see this subsection stay in the Bill.
§ Lord Higgins
Perhaps before the Minister speaks, or other interventions are made, I should make it clear that the amendment's purpose is to clarify the Government's position. I am in no way against arrangements which involve trustees. As I mentioned, I am myself a trustee of a pension fund, and I think that the system has considerable advantages. But what has seemed a little unclear is exactly whether the Government are going to say that every scheme should have trustees, or not, and precisely what type of scheme they see: the trade union one, which the noble Baroness, Lady Turner of Camden, mentioned, or something more general. I am simply seeking to clarify the Government's position, not to take a position for or against trustees.
§ Baroness Hollis of Heigham
I certainly accept that the amendment, like so many others, is a probing amendment to clarify the Government's position rather than to challenge the views that the Opposition understand the Government to hold.
The amendment would remove the requirement for stakeholder pension schemes to be established under a trust. In response to the noble Lord, Lord Higgins, I should like to explain why we consider it to be an integral part of stakeholder pension proposals. As was 1109 said by the noble Lord, Lord Goodhart, and by my noble friend Lady Turner, who served for many years on OPRA, which is the major regulatory body, trust law is already extensively used in the pensions sector and it has been widely tested in the past. It provides valuable security and protection to scheme members.
As the noble Lord, Lord Higgins, recognised, following the Goode report trust law was heavily strengthened in the Pensions Act 1995 which was led for the Government by the noble Lord, Lord Mackay. I remember the efforts by myself and my noble friends Lady Turner and Lord McIntosh to strengthen even the trustee provisions to ensure, for example, representation of pensioners and issues about the balloting mechanisms and the like.
Trust-based schemes are an effective way of ensuring that schemes have a governance structure which ensures that they look after the interests of their members rather than those of the pension provider. Supporting a trustee structure will have some costs for schemes but these are unlikely to he excessive. If trustees are able to deliver even a small reduction in overall scheme costs by negotiating on behalf of scheme members, as we expect them to do, this is likely to outweigh the direct costs of trustees.
Stakeholder schemes need to have a governance structure which ensures that members' interests are looked after. Trust-based schemes run by a board of trustees provide an effective way of achieving this. Trustees will ensure that contributions are used to secure value for money from providers and that schemes comply with the minimum standards. They should help to ensure that members receive good quality information and high standards of service.
That is why we say that the legislation for stakeholder pension schemes should be set up under trust law. However—in response to the question pressed on me by the noble Lord, Lord Higgins—we want to retain some flexibility and that is why we are considering alternative governance arrangements, provided that they are capable of delivering the same degree of protection and a comparable outcome for members. Indeed, we have said in the pensions Green Paper that we welcome views from the industry on alternative structures which could provide those comparable benefits for members. That invitation for views was echoed in the consultation paper by the Treasury and the DSS on new flexibility in pension investment. We shall shortly issue a further consultation paper on the detail of trustees and alternative governance arrangements for stakeholder pension schemes.
The noble Lord, Lord Higgins, asked two questions. First, were trustees involved in the state second pension? It is an unfunded scheme so the question does not arise. Secondly, he asked who were the trustees. We envisage that they could be drawn from members, employers and affinity groups such as trades unions—providers where the independence of the overall board of trustees can be protected; or indeed independent of professional trustees according to the type of scheme.
We think that a trustee scheme is at present our best established method of protecting the interests of members, but we are happy to consider alternative forms 1110 of governance where these offer a comparable degree of protection for members. I hope that noble Lords will be reassured by that explanation and that, in the light of it, the noble Lord will be able to withdraw his amendment.
§ Lord Higgins
I am grateful to the Minister for going some way to clarify the situation. I shall need to consider carefully what she said.
Am I right in thinking that the Government do not intend that a scheme which does not involve trustees would not meet the requirements of the legislation? Are the Government now clearly of the view that some of the schemes will have trustees and some will not?
§ Baroness Hollis of Heigham
We are saying at present that stakeholder schemes have to come within trustee law as regards their form of governance as well as meet the bench-mark standards which we shall lay out. But we are willing to consider that some stakeholder schemes should not come within trust law provided that they can—and only if they can—offer an alternative form of governance which offers at least equivalent protection for members. As I said, the Government are about to issue a consultation document to that effect.
§ Amendment, by leave, withdrawn.
§ Lord Higgins moved Amendment No. 4:
§ Page 1, line 14, leave out subsection (3)
The noble Lord said: This is a probing amendment. I do not understand what the subsection is intended to cover. It seems to cover almost everything. Subsection (3) states:
The second condition is that the provisions made by the instruments establishing the scheme comply with such requirements as may be prescribed".
§ That seems to be totally devoid of content; or it contains everything that one can think of. Perhaps the Minister would like to explain why the Government wish to take such wide powers. I beg to move.
§ Baroness Hollis of Heigham As the noble Lord would expect, it is somewhere in between the two. It is neither devoid of content, nor absolutely encompassing.
§ The amendment would remove the power to set out the requirements as to the content of the instruments that set up a stakeholder pension scheme. Perhaps I may explain why we think it is necessary to include such a power in the Bill.
§ We have just discussed the proposed governance structure for stakeholder pension schemes. We have taken these amendments together; I do not know why they are ungrouped. I have emphasised the importance we attach to having a governance arrangement that ensures members' interests are looked after. Clause 1(2) and (3) provide the basis for defining the structure of stakeholder pension schemes.1111
§ The governance arrangements for stakeholder pension schemes will need to be set up in such a way that value for money can be secured from providers and that schemes meet the minimum standards. We intend to use the power in subsection (3) to ensure that this is possible. For example, in the case of a scheme set up under trust, the trust deed should give trustees control of the scheme so that they are free to appoint and dismiss the organisations or individuals that provide services to the scheme. And the regulations can be used to prescribe the composition of the trustee board—it is part of the previous amendment—so that, for example, it requires a specific proportion of trustees to be nominated by members of the scheme.
§ The effect of Amendment No. 4 would be that any type of trust arrangement (or alternative governance arrangement) would meet the stakeholder pension condition in Clause 1(2). It would not allow for the features of a strong governance arrangement to be specified.
§ I hope that the noble Lords will accept the necessity of this piece. I am repeating myself. But we originally expected to group the amendments. I do not know why they were ungrouped. We are in discussion with the industry on how best to develop workable schemes. We are still consulting on the details. I repeat: we shall shortly be issuing a further consultation paper on trustees and governance arrangements. So, in the light of the explanation I have given, I hope that the noble Lord will withdraw the amendment.
§ Earl Russell
I am sure that the Minister did not expect to get away without one speech from me on "such requirements as may be prescribed". The noble Baroness knows that those are words to which I am somewhat allergic.
I understand that in a subject as complex as this, and where small changes in response to circumstances may be needed as often as this, the regulatory power cannot altogether be avoided. So that is not an issue between us. However, this provision is drawn in very general terms. It really does say that the Secretary of State may do whatever he likes. I should like a more defining purpose clause to say what it might be.
If we are to have this sort of open-ended regulation, the provisions for parliamentary scrutiny and control of regulation have to be a great deal better than they are now. Some of your Lordships probably heard the Business Motion moved by the noble Baroness the Lord Privy Seal at the beginning of today's business. That related to the regulations renewing the provisions of the Prevention of Terrorism Act 1989, from which the Government happened to have left out two rather important sections. In the course of two years no one noticed that they had done so.
We talk about scrutiny and reassurances as always relating exclusively to scrutiny. But is it not a fact that practising scrutiny without control is a little like practising football with the goal blocked up. It really 1112 does not engage the interest. If this sort of thing is to become general, the treatment of regulation in this Chamber will need some more attention.
§ Baroness Hollis of Heigham
I might have guessed when the noble Earl entered the Chamber that such phrases as this might catch his eye. They have indeed done so in the past.
What I plead in mitigation is that the Bill has been thoroughly scrutinised by the Delegated Powers and Deregulation Committee. As far as I am aware it has not commented on this proposal. It took no objection to it. It suggested only some modest changes to the entire Bill and every one of those we are happy to accept. So all I would say is that the watchdog appointed by your Lordships' House was apparently content with the phrasing in this clause.
§ 6.30 p.m.
§ Earl Russell
I fully accept that, but the watchdog did not notice what happened to the Prevention of Terrorism Order renewal either.
§ Lord Higgins
I am far too junior in this House to challenge the decisions of the body referred to by the Minister. Nonetheless, I find it a wide power.
As regards the groupings, they arrived late yesterday afternoon. In suggesting the grouping, it seemed to me that there were separate issues with regard to trusts, for example, as opposed to the broad powers referred to by the noble Earl, Lord Russell. It seemed helpful to take the trust issue separately, rather than deal with it under the clause which gives these wide powers. However, another strange situation has arisen for which I am not responsible. The next two amendments, Nos. 5 and 6, go together and I am equally puzzled as to how they became separated.
§ Baroness Hollis of Heigham
Perhaps I may intervene. I have with me the Government's original set of groupings. We proposed to group Amendments Nos. 2 and 10, for example, with No. 19. We also proposed to group together a number of issues on governance. Those groupings were published at the appropriate time around midday yesterday. I understand that the Opposition savagely ungrouped all our groupings and produced a shopping list virtually of single amendments, even though we visit some issues several times.
If I have misunderstood the position and during the dinner break the noble Lord is happy to do some hasty regrouping, that would be to the convenience of the Committee and greatly welcome. We produced groupings which were one-third to one-half the number of separate debates now listed because we would otherwise be repetitive, which would be to no one's advantage.
§ Lord Higgins
It would be best if the noble Baroness and I were to discuss the matter outside the Chamber. The list seemed to come out very late in the day, but no doubt we can go into that. I suggested that we should 1113 de-group some of the amendments because it seemed that it would speed up the proceedings and give a more coherent debate, but the next two amendments clearly go together. Perhaps we can chat about that during the break.
§ As regards Amendment No. 4, which raises much broader issues, I beg leave to withdraw it.
§ Amendment, by leave, withdrawn.
§ The Deputy Chairman of Committees (Lord Murton of Lindisfarne)
If Amendment No. 5 were to be agreed to I should be unable to call Amendments Nos. 6 or 7 owing to pre-emption.
§ Lord Higgins moved Amendment No. 5:
§ Page 1. line 17, leave out subsection (4)
The noble Lord said: There may be a case for taking this amendment and Amendment No. 6 together. It is a probing amendment. The legislation specifically provides that the stakeholder scheme, with,
such exceptions as may be prescribed",
§ which undermines the whole thing, shall be a money purchase scheme within the meaning of the existing legislation. I was not clear whether that would include provision for straight insurance schemes or whatever. The noble Baroness, Lady Castle, has tabled an amendment proposing the opposite—that it should not be a money purchase scheme—and no doubt we shall hear her views on that in due course. I beg to move.
§ Baroness Castle of Blackburn
I rise to speak to Amendment No. 6 which, as the noble Lord, Lord Higgins, pointed out, is more than a probing amendment. It is a very decisive amendment. It is designed to make it clear that approved stakeholder pension schemes will not be money purchase schemes.
I was disappointed in the speech of the noble Lord, Lord Higgins, in moving Amendment No. 5, because I seem to remember that earlier he warned us most effectively that there was a drift in occupational pension schemes towards money purchase schemes which could become a torrent. Stakeholder pension schemes have to be money purchase schemes. I was beginning to say to myself. "Well, if our minds go on meeting like this, people will start to talk". Obviously, I was premature in my assumption.
I have heard a number of gentlemen opposite warning us about the drift from the major merit of the occupational pension scheme, which was that it would be a defined pension. People would know to what they were contributing and what they would receive in relation to the number of years they served, salary and so on. During our debates today, we have heard widespread warnings that the whole tendency of the stakeholder pension, as it has been revealed to us, is to the poor man's occupational pension scheme; the inferior one. It is to have neither compulsory employers' contributions nor a guarantee of being a defined pension.
Once that is injected into the pension scheme, the noble history of the occupational pension scheme will shrivel and die. We know that some workers are in a 1114 good occupational pension scheme, but under SERF'S people could contract out only into an approved occupational pension scheme. We were very determined to keep up the standards gained for working people in this country; and we surrender those standards at our peril.
We look like having a stakeholder pension which will probably be weakened by not having employers' contributions, and it is doubtful whether even employees will take part in them. The employers' obligation is only to ensure that their workforce has access. That is a lovely word, but all it means is that when somebody or other has set up the stakeholder pension scheme, the employers' obligation will be confined to the check-off. That is taking the worker's contribution from his pay packet. It was one of the convenient arrangements which trade unions tried to reach with employers over trade union dues. Incidentally, I helped them in my notorious In Place of Strife.
However, now we reach the question that is the nail in the coffin of good occupational pension schemes and I urge everyone in the House to think about it carefully. We are given one of the few definitions in the Bill that is not to be prescribed later. We are told that stakeholder pensions "must" be a money purchase scheme. So the risk to the employee is doubled. It is no longer a defined pension. It is at the mercy of stock market plays—the ups and downs and the vagaries of the stock market—and the employer need not contribute.
What are we trying to do? Are we trying to turn back the clock to the pre-war age, before the 1945 Labour Government started to put a platform under the feet of working people and give them standards below which nobody would be allowed to fall? Is all that to go? Is the New Labour philosophy to be "The market reigns, OK"? I think that the House ought to hesitate before it passes this subsection of the Bill. Tonight, I hope that the Minister will make a statement that she is aware of that platform and that she will carefully consider not only what I say but also what other Members of the House have said.
§ Earl Russell
The noble Baroness, Lady Castle of Blackburn, describes this scheme as the "poor man's occupational pension scheme". I take her point and, to a degree, I share her concern. However, I believe that the Minister can imagine what the noble Baroness, Lady Castle, would have said if she had begun by saying that this is the rich man's occupational pension scheme. The speech that would have followed would have been a much less gentle and much less calm speech than the one to which we have just listened.
The noble Baroness has raised problems that go a great deal wider than her speech indicated. A great deal can be said for a final salary scheme. It is more reliable, more secure and in many cases a better form of provision. However, it is also important that the Bill should provide for as many people as possible. We have heard the Minister, the noble Baroness, Lady Castle, and many others speak about people who are left out of pension schemes. Too many people are left out arid we do not want any more.
1115 Since the noble Baroness, Lady Castle, was Secretary of State, there have been large changes in the labour market and not necessarily changes for the better. However, to attempt to reverse those changes is not within the powers of the Bill. A fairly large number of years of continuous employment are needed to make a final salary scheme work. Alas, that is now a rare thing indeed for a great many people. The "casualisation" of the global labour market means that many people will be left out of such schemes which could not be money purchase schemes. That would be very unfair.
If the noble Baroness, Lady Castle, is saying that she wants to reverse the changes in the labour market, I believe that that would be a difficult undertaking. However, I would listen to her on the subject with a great deal of interest were it first to be conceded that such a reversal could not be done simply and solely by the Act of a British Parliament. It would have to be approached through international institutions, by global agreements, and it would have to proceed very slowly and carefully with an immense amount of consultation. If the noble Baroness, Lady Castle, wants to embark on that attempt, I would be happy to join her and would approach it with great interest. However, I believe that she is trying to do more within the compass of the Bill than it is within the power of the Bill to accomplish.
§ Lord Freeman
The noble Baroness, Lady Castle, knows more about pension schemes than most noble Lords. Therefore, when she proposes an amendment one has to look carefully at the intention. If the intention is to ensure that stakeholder pensions are clearly not money purchase schemes—they must, therefore, be defined benefit—they will need an underwriter. If the underwriter is not to be the state, it must be an employer. Therefore, I find myself in agreement with the noble Baroness.
However, we already have a system of occupational pension schemes which for many employers provide defined benefit schemes, where the employer makes a contribution and the pension received is dependent upon the years of employment and, typically the final salary. Therefore, the effect of the amendment is to wreck the stakeholder pension scheme, if that is designed, as I would hope it will be, as an alternative, and in some cases a supplementary mechanism by which individuals can top up their pension contributions.
Therefore, I am not persuaded by what the noble Baroness, Lady Castle, has said. The effect of her amendment would be to deny a mechanism to those earning between, say, £10,000 and £20,000 during their working lives to continue making contributions to a stakeholder pension scheme, which I support, but it would be a top-up mechanism to occupational pension schemes that already exist. The working life of such people may move from employment to self-employment to unemployment and back to employment, where there may not be an occupational pension scheme or perhaps to later employment where there may be one.
The noble Lord, Lord McIntosh, although not attacking me personally, took a swipe at former Tory Ministers who in the past moralised on pensions 1116 legislation. The reason that the compulsion to ensure that those in employment had to join an occupational pension scheme was lifted from employers was the reason why I am concerned about this legislation. The Inland Revenue would not permit those in a single employment to be in an occupational pension scheme and to take out a personal pension. Therefore, because we wish to promote personal pensions, we have to lift that compulsion in order to permit those in employment to take out a personal pension scheme. Some pension schemes were mis-sold and some had inadequate transfer values attached. I am well aware of the history and the problems. It was not for dogmatic reasons that that compulsion was lifted but because of the Inland Revenue rules that existed at the time. In a later amendment I shall argue for the change.
§ 6.45 p.m.
§ Lord Higgins
I agree entirely with the noble Baroness, Lady Castle, that there is far more to be said for final salary schemes than for money purchase schemes. Equally, I agree with her that it is a shame that the trend has been away from final salary schemes to defined contribution schemes.
The problem I have with the amendment—sympathetic though I am for the reason that I have just mentioned—is that the crucial difference between the two is who carries the risk. In regard to a final salary scheme, at the end of the day the employer carries the risk and. if necessary, has to make additional employer contributions in order to top up the scheme and to cover the provisions that the actuaries say are necessary to maintain the final salary guarantee.
§ Lord McIntosh of Haringey
It works in both directions. Workers have been known to take contributions holidays when they have over-funded the scheme.
§ Lord Higgins
That is so. I would not dissent from that view. The noble Lord is absolutely right. It cuts both ways. There are many decided cases on who owns funds and, even today, that matter is not clear. On that point we go off on a different tack.
If the noble Baroness were to say that they ought to be final salary schemes, it is difficult to see who in the context of a stakeholder pension will carry the risk. There will not be an employer standing behind the stakeholder pension scheme unless—perhaps this is a consideration—we take the kind of example mentioned earlier of a trade union scheme.
I now wonder what is the purpose of the expression that clearly was not written in by accident,exceptions as may be prescribed".For the reasons that I have mentioned, it is bound to be a defined contribution scheme rather than a final salary scheme. I am not clear what the Government think may 1117 be prescribed as the exceptions. Do they see a way in which the point made by the noble Baroness, Lady Castle, can be met?
§ Baroness Hollis of Heigham
If one now knew what the exceptions were, they would not have to be prescribed in the future. But I shall come back to that point if I may.
Clause 1(4) provides that stakeholder pension schemes must, with exceptions to be prescribed, offer money purchase benefits. Amendment No. 5 would remove the requirement that stakeholder pension schemes should be provided on this basis. Amendment No. 6 goes further by specifying that pension schemes must not offer money purchase benefits.
I do not want to repeat the discussion we had earlier in explaining why we are introducing stakeholder pensions. But as many Members of the Committee have said, we are adding to the current framework where there are gaps in provision. The current framework includes salary-related schemes, which are excellent for many. It includes personal pensions, which are also suitable for many, and it will include the state second pension to help those who cannot afford to save towards their retirement.
Stakeholder pensions will address a significant gap in the pensions market. For a large number of people they will provide affordable, funded pension provision for the first time, so that they can see their own "pot" of money grow and look forward to a secure income in retirement. We believe that the most effective way to promote financial security in retirement for most people is to encourage provision of funded pensions and personal savings.
For many of the reasons cited by Members of the Committee tonight, we believe that money purchase schemes are the most suitable arrangements for stakeholder pensions. I join with everyone else who has said that where the conditions are appropriate, a final salary scheme—that is, a defined benefit scheme rather than a defined contributions scheme—is the best scheme going. But it benefits those who are in long-term work with the same employer, especially men, and especially those on ascending salaries; that is, the better off. In other words, it particularly privileges the more middle-class occupations, which are dominated more by men than by women.
Let us be clear. That is the group that defined final salary schemes benefit. We need only to look at the structure of the occupational schemes to see who is in them. There are considerably more men—85 per cent of men compared to 75 per cent of women—in occupational pension schemes with those levels of benefit. So it belongs to a society where men could reasonably predict a long-term job with a long-term employer. For those people—and I have been a beneficiary of a final salary scheme—it is very nice; the Civil Service, the university world, teachers and so forth. But that is unlikely to be the case for many people.
For somebody who is mobile and moving from job to job—perhaps in information technology and moving within a couple of years between employers—they are not the answer. Defined salary schemes have relatively low 1118 transfer values. Part-time staff, who may be above the LEL, are not eligible to join defined salary schemes, and, if they did, the benefits they would receive would not be particularly generous. For those moving in and out of work, for whatever reason; for those who are self-employed or women who may take several years out to have children or work part-time while they do, there is now less than adequate pension provision—and even now, those people are not in money purchase schemes and are certainly not likely to qualify and benefit from final salary schemes. So to tie a stakeholder to a final salary scheme which duplicates the provision that is already in the market-place, but does little to add to the provision for those who need a decent scheme and cannot get access to it, is wrong. That is why it is right to go for a money purchase scheme.
The noble Lord, Lord Higgins, was right when jousting with my noble friend that behind a final salary scheme stands the employer to make good the pension promise: to underwrite the deficit and perhaps to take advantage of pension holidays. But there is no such person behind a money purchase or stakeholder scheme. Money purchase schemes are simpler, more flexible and will embrace those groups within our labour market that are currently ill served by the pension provision on offer. To do as my noble friend suggests would take stakeholder pensions effectively beyond the reach of precisely those people for whom they' are designed and we would he wasting our time.
Money purchase schemes also enable each member to have their own easily identifiable "pot" of money. That has a number of advantages. It is a concept of saving with which people are familiar. Scheme charges will be easier to understand and compare. Transfer of funds will be more straightforward.
One of the factors which currently discourages many people from starting a pension is the complexity of existing arrangements. We believe that providing benefits on any basis other than money purchase will inevitably be more complex and therefore less attractive to people who are thinking about moving into pensions for the first time. However, the Government recognise that pensions are a rapidly developing field and that suitable new arrangements may be developed in future. So the power to prescribe exceptions gives us the flexibility to allow other forms of arrangement, provided they still satisfy the other conditions for stakeholder pension scheme status. We would want Ito ensure that such schemes would remain secure, flexible and offer value for money. We propose to consider this issue further at a later stage in our programme of further consultation on the detail of stakeholder pension schemes. It is to allow headspace for alternative arrangements which offer the same benefits but which are not yet in the market-place that we include those phrases in the Bill.
In the light of that explanation—I doubt that I have satisfied my noble friends—I hope that the noble Lord will feel able to withdraw his amendment.
§ Lord Higgins: In light of that response, l beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.1119
§ Baroness Castle of Blackburn moved Amendment No. 6:
§ Page 1, line 18, after ("are") insert ("not")
§ The noble Baroness said: We have had a useful air-clearing this evening. We really began to see through the fog of obscurities of some aspects of government intentions. I would be much more impressed by the Minister's argument if stakeholder pensions were not intended to be a substitute for SERPS; if they were an option. Some of us have argued all along that we should give people a choice so that they can either continue with the SERPS with the Government's promise to retain it indefinitely, with newcomers entering a new SERPS with all the contribution details given to them, or choose a stakeholder pension which, by the Minister's definition, will be paltry in size. It will not have an employer's contribution. It is designed for people who are at the bottom of the scale and cannot afford SERPS and it will be risky.
§ Incidentally, SERPS, which has been applauded by Eagle Star as I quoted to the House at Second Reading, has the most portability of any scheme. There is just one fund—the National Insurance Fund—and it does not matter which job we move to, which remains the basis of our security. But I point out also that as SERPS never advocated final salary schemes for people and we wanted to give working people a second pension, we suggested that a pension should be based on the 20 best earning years of a man's or woman's life. That is the only effective way of meeting the point made by the Minister.
§ If the Government are honest with their figures, their statistics and information, people will be shocked to realise how little they will receive. They will be on their own. They carry their own risks and carry all the costs. I am asking the Minister to allow me to expand my arguments as she expanded hers. I am not suggesting that we should put it to the vote today. I beg to move.
§ 7 p.m.
§ Baroness Hollis of Heigham
We are in some difficulty here because Amendments Nos. 5 and 6 were grouped, and we have now effectively de-grouped them.
I take issue with some of my noble friend's assertions. I totally understand her degree of commitment to the SERPS, which she devised and which, at the time and under the conditions with which she surrounded it, was superb. However, some 20-odd years later and with so many of the conditions that my noble friend inserted into it—for example, the 20 best working years—the scheme is no longer meeting the needs that it could were we back in the late 1970s. In future, people who would have been protected by my noble friend's scheme will be able to go into a state second pension, which will offer to the lowest paid three to four times the levels of benefit offered by SERPS.
I turn now to the stakeholder pension, which my noble friend was dismissive of by saying that the contributions would be "paltry". I can tell the Committee that they will be no more and no less than those of the average money purchase scheme. In fact, the stakeholder pension will probably offer rather better 1120 value, given the tightness of its charges. From our research, we expect that perhaps one third to a half of employers may contribute; but that pension will offer better value as an alternative to many of the personal pensions which currently exist. On reflection, I hope that my noble friend will accept that the state second pension that we will be introducing is SERPS without the earnings related component and, therefore, better devised in today's conditions, as opposed to those in the late 1970s, for the poorest people in our society who do not have a pension. We take the spirit of what my noble friend was doing at that time and we are adapting it to meet the needs of the current labour market.
§ Earl Russell
I hope that the Minister will forgive me for taking up a few more minutes of the Committee's time to add a footnote to what I said on the previous amendment. The Minister is quite right to say that any final salary scheme must depend on a fairly long and continuous period of service. One of the things that I believe should concern us all about the funding of pensions is the reduction in the average number of earning years in some people's lives.
When I started work, I was in pensionable employment at the age of 23. I do not know how many of us have children of whom we can say the same; not very many, I suspect. I can remember when most people were in regular employment up to the age of 65, but the figures now for people over the age of 50 exempted from actively seeking work, and who have not been in employment in the past 10 years, are really quite frightening. If you lose your job when you are over 50, your chances of getting re-employed are really very small.
We need to be thinking about pensions in the context of the labour market. But if we are thinking about the labour market, we also need to be thinking about a rather longer period of earning years. I hope that we will keep that in the back of our minds throughout the discussions on this part of the Bill.
§ Amendment, by leave, withdrawn.
§ Lord Higgins moved Amendment No. 7:
§ Page 1, line 21, at end insert ("but there shall be no requirement to take a stakeholder pension in the form of an annuity by a specified age")
§ The noble Lord said: I am sure that the Committee will be well aware that problems have arisen with other types of pension scheme where the provisions are such, especially those imposed by the Inland Revenue, that a pension must be taken as an annuity by a specified age. Many people have suffered considerably in the past few years because they have had to take their pension at a particular time when, for a brief period, the stock market declined very substantially. In addition to that, annuity rates have plummeted.
§ I noted a press article some while ago which reported that the Annuity Bureau had said that a man with a pension fund worth £100,000 could have secured an 1121 annual income of £15,823 seven years ago; a year ago he could have got an annuity of £9,700; but today he would only get £9,494. That disregards the effect of stock market collapse at certain times. I made a calculation at about that time that, in some of the worst cases, people would he lucky if they got 60 per cent of the pension which they might reasonably have expected to receive 18 months previously. It is obviously a serious matter, and is set against the background of very low rates of inflation—indeed, as low as we have had since the 1960s.
§ There is no guarantee at all for the person who retired about a year ago, in the circumstances I described, that inflation rates will remain where they are. Indeed, all kinds of factors can come into play in the future. Whereas at the time of Beveridge the life expectancy of a man beyond his retirement age was something like two years, nowadays it can be very long. Therefore, someone may find that he is stuck with the kind of pension that I outlined but then goes on living for another 20 years. Inflation is not likely to be as low as it is now throughout the whole of that period; indeed, it could be substantially higher.
§ The purpose of this amendment is to seek to avoid a situation where the stakeholder pensioner is restrained in such a way. Of course, against the background that I described there are increasing arguments for saying that it should not be necessary to buy an annuity, or that one ought to be able to buy some other form of asset, which might cope with inflation in the future or perhaps give a better yield than the present rates of annuity, and so on. Similarly, widespread discussions are taking place which stress that the age of 75 should not be a deadline. One well realises that the murky hand of the Inland Revenue may appear at this point and say, "You got all the tax reliefs when you were paying in; and, therefore, you ought not to be able to extend the thing indefinitely". There are even bigger arguments about whether one should be allowed to cash in one's pension at that point and transfer it to one's heirs.
§ This situation has developed comparatively recently. As I said, rates are now down to where they were in the 1960s, but there seems to be a case for relaxing the rules as far as concerns stakeholder pensions. No doubt the Inland Revenue will have a view on that and doubtless the Minister has a view on whether or not this amendment is acceptable. But, against the background I have outlined, I should have thought that it is not an unreasonable consideration to put before the Committee. I hope that the Minister will give me a sympathetic reply. II beg to move.
§ Lord Monson
Unlike the noble Lord, Lord Higgins, I am no expert on this matter. Nevertheless, I am very pleased to be able to support him. One of the reasons that annuities are such poor value at the moment is that annuity yields are linked to gilt yields. For technical reasons, gilts are presently exceptionally high, even allowing for the current low inflation environment. If those retiring were allowed to invest their retirement fund directly into debentures or good quality euro bonds and, in addition, to withdraw a maximum of, say, 2 per cent per annum from capital, they might receive 1122 almost as much annual income as they would if they had to invest in annuities, but they would also have a capital sum left over to pass on to their families on their death. This capital sum would, of course, be subject to capital transfer tax, so the Treasury would not lose out.
§ Earl Russell
The point of the noble Lard, Lord Higgins, about taking a pension at a particular moment's valuation in the stock market is a serious one. I recall a story of my father's—it relates to a legacy, but the basic point is the same—about someone who was bankrupted by inheriting £1 million in shipping shares. She inherited the shares and they were assessed for duty in April 1929. The duty was payable in October 1929. The case is no doubt extreme but it illustrates the point. Whether this amendment is the best way to deal with it I do not know, but I hope the point will be taken on board.
§ Baroness Hollis of Heigham
Whether the story is relevant to our debate is one matter, but it is a very good story, and a revealing one. Amendment No. 7 seeks to remove the need for purchasing an annuity with a stakeholder pension fund. Clause 1(4) provides for stakeholder pension schemes to provide money purchase benefits, as we discussed just now. We have also discussed the reasons why we think that should he so.
Under Inland Revenue legislation the funds built up in money purchase schemes must be used to purchase an annuity. Perhaps I could remind your Lordships why this annuity rule exists. It reflects the fact that the tax privileges accorded to pension contributions are given in order to ensure that the beneficiaries have an income throughout retirement. The Government encourage saving for retirement on the understanding that the fund will provide a stream of income during retirement. This avoids the risk of an individual having to rely on a low pension income and perhaps income related benefits because they have spent the proceeds of their fund in the early years of retirement.
There is some flexibility in the annuity requirement. We propose that the pensioner age for stakeholder pension scheme members will be between 50 and 75. A tax-free lump sum will be available. These rules obviously follow the rules for personal pensions. The point which concerns your Lordships, and which I entirely accept, is the problem of falling annuity rates. That is the core of this issue. As your Lordships know very well, annuity rates are set in the market and reflect factors such as life expectancy and long-term interest rates. Obviously what we would all like are high annuity rates, low inflation and long-term life expectancy. Actually it is not very easy to put all those things together.
It is true that annuity rates have fallen recently, as has inflation. The annuities purchased therefore will have correspondingly greater purchasing power and many people with pension funds have benefited from investment yields which have more than offset the fall in annuity rates, particularly as their funds have grown. The noble Lord, Lord Higgins, asks what will happen if in future inflation should rise and someone is caught in an annuity with assumptions of lower inflation and so on.
1123 As the noble Lord will know, there are products in the market place and people are certainly well advised to consider the appropriateness of buying an inflation-proofed annuity from which you expect a lower figure now in order to get inflation proofing later on. Currently the gap between those two is relatively narrow and could provide good value. Certainly the noble Lord will know that in the marketplace you can get an inflation-proofed annuity or you can get a level annuity. Under the latter you get higher figures to start with or you can get an inflation-proofed annuity and you start with a lower figure which is protected. You can choose which to have. At the moment my understanding is that the inflation-proofed annuities represent good value.
The best protection the Government can offer to those purchasing annuities is to maintain a framework of financial stability which will ensure lower inflation in the future. This is what we intend to do. We will ensure that pensioners will have a guaranteed level of pension and we have set out proposals in the Green Paper. We recognise that pensions are a rapidly expanding field. The power to prescribe exceptions, as discussed between the noble Lord, Lord Higgins, and myself a few moments ago, will give flexibility if new schemes should develop. I hope that in the light of these explanations the noble Lord will feel able to withdraw his amendment.
§ 7.15 p.m.
Would the noble Baroness just return to the 75-year age point, which I think applies to this whole scheme of personal pensions? She is clearly right that life expectancy is getting longer. Would it not be the case that regardless of annuity rates there is a case for raising that age limit from the present age of 75?
§ Baroness Hollis of Heigham
The Government are certainly considering the whole range of issues. I hope I shall not be misunderstood when I say that that might go alongside a rise in age in the European countries regarding the average age of state retirement and pension age. We think at the moment, given the current retirement age, the age of 75 strikes a reasonable balance between flexibility for the individual and the need to ensure they have a pension which is secure for the rest of their lives. I am advised that the effect of mortality on annuity rates means that it is unlikely that individuals would actually benefit from deferral beyond the age of 75 in terms of mortality rates. Clearly that could change in terms of inflation rates, but there the protection would be in terms of getting an inflation proofed annuity.
I thank the noble Baroness for that answer. I do not want to prolong this but I was hoping that choice would come into the matter. I have an uneasy feeling that the Treasury does not like the idea of the deferment of income which would follow from raising the age of 75.
§ Lord Higgins
I think my noble friend is right in supposing that to be the Treasury view. I was somewhat 1124 astonished by the noble Baroness's statement that index linked annuities are very good value at the moment. There are some strange implications in that for the Government's view on interest rates, as against the market's view on interest rates.
§ Baroness Hollis of Heigham
All I meant was that if somebody seeking to buy an annuity shared the noble Lord's concern about future inflation rates they would have the option to purchase an annuity which protected them against any possible changes in inflation to their disadvantage. I absolutely was not making any suggestion that the Government's economic policy will not keep inflation at the present unrivalled low level which we all enjoy and which will do so much to strengthen our economy.
§ Lord Higgins
I shall read carefully what the noble Baroness has said—but anyway I shall assume that it was a DHSS brief rather than a Treasury one! Be that as it may, I am rather disappointed by the noble Baroness's reply. This is a serious problem. Everyone is looking at it in a broader context so far as pensions generally are concerned. It seems rather a shame not to build this flexibility into the stakeholder pension scheme in the way the amendment suggests. I would like to give further thought to this. One would have hoped that the deliberations which have taken place otherwise would not rule out this particular amendment. However, I beg leave to withdraw the amendment now but I may well wish to return to it at a later stage.
§ Amendment, by leave, withdrawn.
§ The Deputy Chairman of Committees (Lord Strabolgi)
Before calling Amendment No. 8 I must inform your Lordships that if this amendment is agreed to I cannot call Amendment No. 9.
§ Lord Higgins moved Amendment No. 8:
§ Page 1, line 22, leave out subsection (5)
§ The noble Lord said: I think I am right in saying that Amendment No. 8 is linked with Amendment No. 9. I therefore beg to move Amendment No. 8 which asks to leave out subsection (5). That subsection is concerned with the extent to which the income from a stakeholder provider can be used to defray the administrative expenses of the scheme—I presume whether it is a scheme written under trust or otherwise.
§ The other amendment seeks to restrict the expenses to 10 per cent. I was slightly surprised by that figure. Perhaps the Minister could give us some idea of what they expect the administrative expenses to be. This raises a whole series of questions as to what the "operating costs" of particular stakeholder pensions are likely to be. The Government have suggested that the limit should be a maximum fee of 1 per cent of funds under management. This produced a reaction in the press—perhaps not wholly surprising—from some of the potential providers who said that this was a very restrictive figure. Of course it has repercussions also for the issuers of advice, to which we will turn on a later 1125 amendment, and exactly what it is that the providers of the stakeholder scheme are producing for the potential pensioner.
§ I notice that Pensions Weekly states that the Government are suggesting that providers should perhaps make a loss in the early years of the schemes that they provide. Front-end-loaded costs are a feature of most conventional schemes. Therefore if one takes out a scheme and then withdraws from it in the early years, one may not even get one's money back, let alone anything on top. Will the Government indicate how they envisage expenses being spread over the life of a scheme? Some people may decide to take out a stakeholder pension and then subsequently withdraw from it. I refer to the competitiveness of the stakeholder pension in this regard vis-à-vis other schemes.
There are considerable problems here. I was rather surprised to notice the words which appear at the end of the subsection which I seek to delete which state,
may be used to defray the administrative expenses of the scheme, to pay commission or in any other way which does not result in the provision of benefits for or in respect of members".
§ Many criticisms have been made about the level of commission which is paid and the fact that charges are front-end-loaded. Therefore, conventional pension schemes are not good value unless one contributes to them throughout the entire life of a particular asset. I notice that the noble Baroness opposite nods in agreement. I do not refer to the noble Baroness on the Front Bench opposite, but the "back-up team", as it were.
§ I hope that the Minister can explain to us in what circumstances commission will be paid and why it is considered that it should be subject to a limit. One of the advantages—I concede that there are advantages—of the stakeholder scheme is that if such a limit is set, that is likely to put competitive pressure on conventional schemes, and perhaps to some extent encourage them to spread their expenses over the life of a scheme. This is an important point which it is right to raise. I believe that the noble Baroness, Lady Castle, has another amendment in this group which refers to a figure of 10 per cent. I hope that the Minister will also comment on that amendment. I beg to move.
§ Baroness Turner of Camden
Amendment No. 9, which is grouped with the amendment we are discussing, stands in my name and that of my noble friend Lady Castle. Originally we tabled this amendment because the consultation brief proposed a maximum figure of 1 per cent of the fund per annum. That would mean that a person who pays into a scheme for the whole of his or her working life would find that up to a quarter of his contributions could be swallowed up in charges. The amendment seeks to limit the reduction in the value of benefits to a maximum of 10 per cent. I shall be interested to hear the comments of my noble friend the Minister on this matter.
The noble Lord, Lord Higgins, has mentioned the problem of front-loading in connection with normal insurance contracts. There has been criticism about the cost of administration and about the level of commission. Those criticisms are not always fully 1126 justified, but they were often made in relation to personal pension provision. If a clear limit is placed on what can be charged for administration, I believe that people will feel much more secure with regard to the safety of their investment. That is an important point. We shall not press this amendment this evening, but I should welcome hearing the Minister's comments on the question of charges and administration.
§ Lord McIntosh of Haringey
I am grateful for the explanation that has been given of both these amendments. They both relate to the charging structure for stakeholder pensions although they are very different—indeed, opposite—in their approach. Amendment No. 8 would mean that stakeholder pension schemes could charge their members in any way and at any level they wished. Amendment No. 9 seeks to put on the face of the Bill a restriction on the level of charges in terms of a percentage of the benefits provided.
I shall set out the Government's thinking on this matter. We think that a simple and transparent charging structure should be one of the fundamental features, and indeed one of the fundamental attractions, of stakeholder pension schemes. The Green Paper proposed minimum standards for stakeholder pension schemes. Our proposals were set out in our consultation document published on 2nd June. As the noble Lord, Lord Higgins, rightly says, it has aroused a considerable response. There are those in the pensions industry who believe that tough standards have been proposed. However, others in the pensions industry believe that they can meet those standards. We propose setting restrictions on the way charges are made—both the amendments address this matter—and an overall limit on the charges.
Some personal pensions have a charging structure which bears heavily on those with low pension savings, or penalises those who stop paying into the pension scheme. The noble Lord, Lord Higgins, mentioned front end loading. Personal pensions often charge in a complicated way so that scheme members find it hard. to understand how the overall charge is worked out. I know that there have been some improvements in the terms offered by some personal pensions. That is good news, but we want to make sure that no stakeholder pension scheme is able to charge in a penal or complex way.
We have proposed that stakeholder pension schemes may charge only in terms of a single annual charge on the value of the fund. We have also proposed that there should be a 1 per cent limit on total charges. No additional charges will be allowed for transferring in or out of a stakeholder scheme, or for stopping or changing contributions. We have invited further views on those issues.
I understand the thinking behind Amendment No. 8. We know that the proposed limit on charges will be challenging for some schemes. However, we want to make sure that the members of those schemes get a good deal. Some have said that a limit is not necessary and that competition will drive down costs. However, many providers have come forward with proposals for 1127 lower-cost personal pensions which offer greater flexibility to their members. We welcome such initiatives and are pleased that our proposals for reform are having a beneficial effect. However, we do not think that this should be left to chance.
Every fraction on the charge means a lower final pension for scheme members, and a limit on charges provides them with important reassurance. We are determined to strike a hard bargain on behalf of the consumer. That is why we proposed the challenging but realistic limit of 1 per cent. We have taken into account responses to the Green Paper and have considered what charges are being levied. As I said, we have already seen charges being offered at this level and lower. However, we shall listen to what the industry has to say and take its views into account before a final decision is made on the wording of the regulations.
But even with a limit on charges, there will still be competition between stakeholder pension scheme providers and managers, and this should help to drive down charges below the maximum. The governance structure of stakeholder pension schemes, which we have already debated, should enable schemes to negotiate competitive charges for their members and obtain value for money.
Amendment No. 9 seeks to limit the amount that can be taken in charges to 10 per cent. The noble Lord, Lord Higgins, asked me what that meant in terms of numbers of years. If we assume that contributions rise in line with average earnings, at the 20-years point we would just about reach the 10 per cent limit. A large number of schemes finish before 20 or 25 years. I do not know what the proportion is, but a high proportion of schemes would be below my noble friend's limit.
The only way that we envisage Amendment No. 9 being workable would be for stakeholder pension schemes to make a single charge on contributions. A charge of 10 per cent on contributions would have the same outcome as the limit suggested in the amendment. We looked at the possibility of a charge on contributions. That would provide more revenue for the scheme in the early years, compared with a charge on fund value. But it would not provide schemes with any revenue when the scheme members suspend contributions, which is one of the conditions of the scheme. The other main option—a single charge on the fund value, which we favoured—produces an incentive for schemes to maximise the value of their funds, either by maximising investment returns or by transfers-in from other schemes. It should continue to provide schemes with some revenue from dormant accounts and means that those who suspend contributions to a scheme should not impose an excessive burden on other scheme members.
These are finely balanced arguments, but we came to the view in the end that a single percentage charge of fund value was the better scheme and that is the one favoured by the great majority of Green Paper responses.
Amendment No. 9 also seeks to quantify the limit on the face of the Bill. We do not want to do that yet. We are in the process of consulting further on the details of the minimum standards, including charges, and will lay down 1128 the detail in regulations to give us the flexibility to amend the standards in the future if as a result of regular review it becomes appropriate to do so. Setting standards that all stakeholder schemes must meet will ensure a level of conformity across schemes; it will allow individuals to compare what is on offer, which will be especially important when considering charges; and it will rebuild public confidence in pension schemes which are secure, flexible and value for money. On that basis, I hope that noble Lords will feel able to withdraw the amendments.
I did not respond to the point made by the noble Lord, Lord Higgins, about the costs in early years. It is true that there will be extra costs in early years; that is not uncommon in business. We do not expect that to be unmanageable.
§ Lord Higgins
I am grateful to the Minister for that reply. I raised one other point: I was not clear why commission should be included in the list of legitimate costs. I have always been better on concepts than arithmetic; I therefore have some difficulty in relating the 1 per cent charge per annum on funds under management to the amendment of the noble Baroness, which requires that the fund as a whole should not be reduced by more than 10 per cent. Am I wrong in thinking that if it is 1 per cent per annum and it runs for 30 years, that will be significantly in excess of the restriction which the noble Baroness was suggesting?
§ Lord McIntosh of Haringey
That is true. That is why I gave the figure of 20 years as being the cross-over point.
§ Lord Higgins
Even at 1 per cent the value of the fund will be quite significantly reduced. The noble Baroness's amendment would be much more stringent than the figure suggested by the Government. There are also more technical questions about discounting back and forth to get a present value and so on. I do not think we need to go into that on this occasion. Perhaps I may ask the Minister to answer my central point. Can he clarify why there is commission? Is it suggested that there should be different charges for investment in tracker funds rather than funds which are managed on a more general basis?
§ Lord McIntosh of Haringey
I am guessing now, but it seems to me that commission is a way of incurring marketing costs—and marketing costs are part of the costs of running a pension scheme. It is not up to us to decide how a pension scheme provider should allocate its costs. So far as concerns the customer, commission is the same thing as any other back office cost. Commission is like any other cost; it reduces the value of an individual fund. That is why we have set the 1 per cent limit on the total fund rather than attempt to distinguish between different kinds of costs. That would be too detailed. As to tracker funds, the same charging rules would apply as to any other fund.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 9 and 10 not moved.]1129
§ Baroness Amos
I beg to move that the House do now resume. In moving the Motion, perhaps I may suggest that the Committee stage does not begin again before 8.15 p.m.
§ Moved accordingly, and, on Question, Motion agreed to.
§ House resumed.