§ 5.12 p.m.
§ The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)
My Lords, with the permission of the House. I should like to repeat a Statement made in another place on occupational and private pensions. The Statement is as follows:
"I wish to make a Statement on our Green Paper—Simplicity, Security and Choice: Working and Saving for Retirement.
"Decisions on pensions are some of the most important of our lives. Since coming to office in 1997, this Government have faced three specific challenges on pensions: the challenge of affordability, of pensioner poverty, and of expectations. Rising longevity poses important challenges for the affordability of pensions systems right across the developed world. The old age dependency ratio is expected to more than double in the European Union, with even greater increases in other developed economies such as Japan. People living longer is good news. However, if people want to see continuing rising standards of living in retirement, they either have to save more, work longer, or a mixture of both.
"The United Kingdom is in a stronger position to meet this demographic challenge than most other developed countries, not only because our dependency ratio is expected to increase by half as much as the European average, but because of the choices we have made over the past five years to ensure that the UK pensions system remains affordable.
"We rejected the demands of those who said we should link the basic state pension to earnings because this short-term solution would not have been sustainable over the long term. Instead, because of our targeted approach, projections show that public spending on pensions in this country will remain stable over the next 50 years at around:5 per cent of GDP. In contrast, EU forecasts show that other European countries such as Germany and Spain will require increases of between 40 and 80 per cent in public spending on pensions over the next 50 years in order to meet their pension liabilities.
"It is this same targeted approach that has enabled us to meet the second challenge—that of pensioner poverty. Since 1997, we have strengthened the foundation of basic state support through the introduction of the minimum income guarantee and, from next October, the pension credit. As a result, next year, the poorest third of pensioners will be on average £1,500 a year better off.
"I can tell the House that we continue to reject calls from the pensions industry and others that all targeted support for pensioners should be scrapped and instead added to the basic state pension. Such a move would mean an increase in the maximum basic entitlement of £10 a week for some pensioners, but 570 at the expense of a £17 a week cut for the poorest pensioners—redistributing resources from the poorest to the richest pensioners.
"Over the past five years, as we have taken action to tackle pensioner poverty, the pension contributions of people on high incomes have risen by 40 per cent, increasing the incomes they can expect in retirement. The challenge facing society today is therefore one of the expectations of middle-income earners, people who expect to see continuing rising standards of living in retirement, but who in order to do so will either have to save more, work longer, or both.
"Evidence shows that perhaps 3 million such people are currently not saving enough for their retirement. And others may not be saving enough to provide the pensions they want. At the same time, occupational schemes have come under pressure from rising costs and increasing complexity. Some employers are closing schemes or cutting the level of contributions, and many people are leaving the workforce earlier.
"There is a choice to be made about how we meet these challenges. There are some who believe that a radical strengthening of the voluntarist approach to pension provision can never be made to work and that the UK should move beyond it, for example, adopting further compulsory pension contributions. We believe that the partnership between government, individuals, employers and the financial services industry has long been a strength of the pensions system in the UK and that the proposals we are setting out today will renew this partnership and reaffirm the responsibilities of each member.
"Our proposals show how, with all partners playing their part, the voluntarist approach can work to maximum effect. The test will be whether, with this radical strengthening of our approach, employers and employees can rise to the challenge voluntarily or whether we will need to introduce more compulsion.
"In a voluntarist system, over and above the level of support provided by the state, individuals are best placed to judge their own long-term savings needs and aspirations for retirement. However, the success of this approach rests on the information and understanding people have and the clarity of the options open to them. It will fail if the complexity of products and the cost of financial advice mean that people are deterred from saving.
"Since 1997 we have taken action to rebuild trust in the financial services industry, to clear up pensions mis-selling, and to introduce new savings products, like ISAs and stakeholder pensions, opening up opportunities for more people to save. However, for too many people, pension planning has remained an incomprehensible maze. As I said to the House in July,'Pensions simplification has to be at the heart of any strategy to encourage greater pension provision'.—[Official Report, Commons, 11/7/02; col. 1053.]571 "Nowhere is this truer than in taxation of pensions, which has grown so complex as to challenge even the experts. There are currently no fewer than eight different sets of tax rules in use for pensions, each with its own annual limits on contributions and benefits, imposing unnecessary inflexibility, driving up costs, and—worst of all—discouraging people from saving.
"So today I can announce a radical simplification of these rules. We propose to sweep away the eight existing pensions tax regimes, with their associated limits on annual contributions and benefits. In their place, we propose a single lifetime limit that is assessed once only, at the point of retirement, and we propose to set that limit at £1.4 million.
"The lifetime limit will be complemented by a light-touch compliance regime, based on an annual limit of £200,000. This limit will not affect the vast majority of people. Further details are set out in an Inland Revenue consultation document, published today by my right honourable friend the Chancellor. And, as my right honourable friend announced in the Pre-Budget Report, the tax free lump sum will remain. Existing tax reliefs for pension contributions for employees, the self-employed and employers will also remain.
"These proposals will help people to make clear and confident decisions, encouraging more saving and enabling more people to build up a bigger tax free lump sum. They mean far greater individual choice and flexibility about when and how much to save in a pension.
"Over 99 per cent of the population will be able to save more in a pension—with tax incentives—than under current rules. The proposals will reduce administrative burdens on employers and pension providers alike. Taken with other measures I am announcing today, they could save employers between £150 million to £200 million a year in pensions administration.
"We shall match this radical simplification of pensions taxation by breaking down other barriers to pension saving. We shall provide individuals with more information about their own circumstances. Our proposals would increase the availability of state pension forecasts and extend the coverage of combined state and occupational pension forecasts.
"We shall promote total benefit statements in the workplace, and highlight the additional value tax relief makes to saving in a pension. To broaden access to advice, we shall work with the financial services industry to develop mass-market financial advice in high street banks, and shall consult on options for a possible requirement on employers who do not provide pensions to provide financial advice free of charge through the workplace.
"I can confirm to the House that we shall implement the recommendations of the Sandler report to make it easier to save through simpler products, dramatically stripping out regulation and sales costs. We propose to offer the self-employed 572 the right to opt in to the state second pension. And I can also announce that we shall increase product choice and flexibility in the annuities market by consulting on proposals to allow limited period and value protected annuities.
"The proposals we are setting out today will also reaffirm the role and responsibilities of employers in the pension partnership. Many employers recognise the important benefits to recruitment, retention and staff motivation that good pension provision brings. But, elsewhere, some employers have been reducing their financial commitment and contribution to workplace pensions, causing anxiety and damaging confidence in pension saving. There is a difficult balance to strike here. We want to increase member protection without imposing burdens on employers.
"I can announce today that we propose to create a new proactive pensions regulator to focus on schemes where there is a high risk of fraud, bad governance or maladministration. We are also setting out proposals for a fairer sharing of assets when schemes close, with more priority for workers closer to retirement or those with more years of contributions. We propose stronger protection for members where employers wind up schemes, and the capping of provisions to prevent executives abandoning ship and taking the lifeboat with them. We recognise, as good employers already do, the vital interest employees have in their pension arrangements, so we propose requiring employee consultation before schemes are changed. We can expect to enhance protection for employees only if we make it simpler and easier for employers to run schemes.
"Following Alan Pickering's report we propose radically to reduce the regulatory burden on occupational schemes by simplifying the contracting out rules, including reforming the reference scheme test and ending restrictions on how and at what age contracted out rights can be drawn. We shall also replace the minimum funding requirement with scheme specific funding requirements, saving companies £80 million a year and consider allowing employers to make membership a condition of employment. I can also announce our aim to consolidate all pensions legislation into a single pensions Act.
"These radical reforms mean big cuts in the administrative burdens on employers and schemes. We shall also work with a new employer-led task force, including trade union membership, to identify and promote good practice.
"Enabling people to work a few years longer can make a huge difference to retirement income. The 1980s and early 1990s saw the employment rate for older male workers decline. That trend has been reversed, with 900,000 more people over 50 now in jobs than in 1997. But we must go further, doing away with inflexible and outdated approaches to retirement. Our proposals will allow people to choose to work for longer if they want to.
573 "We propose to promote flexibility in retirement by building on the success of the New Deal 50 +; legislating against age discrimination; ending compulsory retirement ages; and raising the normal pension age for most groups in the public services to 65 for all new entrants.
"To smooth the cliff edge between work and retirement we propose to allow people to carry on working while drawing an occupational pension. And to improve the incentives for those who want to work past state pension age, we shall bring forward increases to the extra state pension people get by deferring. This means that a single pensioner who has accumulated £100 a week state pension and second pension entitlement could choose to take their pension at 70 and get £150 a week instead.
"We are also consulting on the chance for those who defer to take a lump sum instead of the enhanced pension. For a single pensioner, this would be a one off payment of £20,000 on top of their normal pension, or £30,000 for a couple.
"I have one further announcement to make on the state pension age. We have received representations for a significant change, with persuasive arguments to move to a higher state pension age, releasing resources for use elsewhere in the pension system. I have carefully considered this option and have concluded that it would impact disproportionately on the poorest workers most dependent on the state pension, many of whom have had hard working lives. As well as being forced to work for longer they would, because of lower life expectancy, see a bigger than average slice of their retirement taken away. I have therefore decided that we should not raise the state pension age. Our measures to give people far greater choice about flexible retirement are the right way to address this issue.
"The proposals we are setting out today seek to renew the pensions partnership in the UK. They show how, with all partners playing their part, the voluntarist approach can be made to work to maximum effect. As I have said, there are some who believe that the voluntarist approach to pension provision can never be made to work and that the UK should adopt a system of compulsory pension contributions. There is a choice. The case for compulsion has not yet been made. But because of the magnitude of such a decision and the need to help build a wider consensus on the way forward I am today establishing an independent pensions commission reporting to me as Secretary of State on whether the current voluntary system is sufficient to ensure that employers and employees rise to the challenge.
"I can tell the House that Adair Turner, former director general of the CBI, has accepted my invitation to chair this pensions commission. It will report to me regularly on whether there is a case for moving beyond voluntarism. The time has come for all the partners in the pensions system—government, employers, employees and financial services—to rise to the pensions challenge. I commend the Statement to the House".
574 My Lords, that concludes the Statement.
§ 5.26 p.m.
§ Lord Higgins
My Lords, I thank the Minister for repeating the Statement made in another place in a way that suggested not only that she believed it but also that she understood it. I declare an interest as chairman of a company pension scheme.
This is the second Green Paper produced by this Government. The previous one, Partnership in Pensions, was not as large as the current one and had a foreword by the Prime Minister. The current one merely has a foreword by the Secretary of State. I am not entirely clear as to the significance of that. Since that time we have had about 38 consultative documents. A whole mass of new material arrived today which we shall wish to study carefully.
We welcome the proposed simplification of regulations and pensions taxation, always provided, of course, that that does not conceal some stealth tax. We shall consider that matter very carefully indeed. A key feature of the previous Green Paper was that the Government wished to move from a situation where 60 per cent of pension provision came from government and 40 per cent from private sources to a situation where 60 per cent came from private sources and only 40 per cent from government. I ask the Minister: is that still the Government's objective? Time and time again government action has applied pressure in the opposite direction. Either it has an adverse effect on private provision or such measures as have been introduced to increase private provision have produced poor results. The result is that the industry and pensions provision generally are in a state of crisis. I am glad to see that I have support i n the form of nods from the Benches opposite.
The Green Paper published today shows remarkable complacency. The main attack on private provision was, of course, the notorious action with regard to ACT of the Chancellor when he entered office. As a result pensions have been deprived of some £5 billion a year—now £25 billion in total and rising—which has seriously affected their available resources and is a major contributory factor in the closure of many final salary schemes to new members. The rate of closure has doubled in the past year. However, one does not get that impression from the Statement. Some 55 per cent of leading companies have now closed final salary schemes to new members. Indeed, a number of companies have closed schemes completely, even to existing members. Against that background, it is also the case that some schemes have been wound up or closed. I am glad to welcome the proposals in the Statement that suggest that action will be taken to prevent members of schemes, who had expectations with regard to their pensions, being adversely affected, as some have been.
I also welcome the change being made, at long last, with regard to the minimum funding requirement. However, I am not at all clear how changing to a scheme-specific proposal, as mentioned in the Statement, will save companies £80 million a year. Perhaps the Minister will explain.
575 In addition to the adverse effect that the Government's policy has had on company schemes and private provision, their attempt to increase that provision has not been successful. It was expected that some 5 million people would take out stakeholder pensions, but I believe that the figure is less than 1 million. Will the Minister tell us what the actual figure is? I believe, too, that 46 per cent of the schemes imposed on companies by the Government have no members at all. Furthermore, I fear that even those in tracker funds, for example, will not produce a satisfactory return for those investing in them. That is a considerable deterrent to people engaging in schemes as the Government wish them to do.
As for the state second pension, a whole range of bodies including the NAPF, the Pensions Policy Institute and the IPPR have suggested that it is not ideal. As the Minister implied, they would prefer to have an improvement on the basic state pension. With regard to the state second pension, the Statement did not mention when the change would come from graded to flat-rate places.
The Government have included proposals allowing people to work longer if they want to, and the idea that people can draw their pensions while still in employment. That is scarcely a new idea; indeed, I believe that it has been proposed at least five times. It is a question not of "Have I Got News For You", but of "I Have Not Got News For You". We have found considerable doubts about the proposal, but we shall consider it with interest.
The Government have made the interesting suggestion of changing to a lump sum proposal if people defer the drawing of their state pension. The figure of £20,000 was suggested. Will the Minister explain where that figure comes from and whether it will be a tax free lump sum? I give an example from the experience of my family. My sister deferred her pension for a year in the hope of getting an increased return, but found that it took more than 18 months to get paid the increase that had been deferred for a year. Administration of the pension system is lamentably bad; it has not significantly improved over the lifetime of the Government.
No mention was made of the requirement for people to draw annuities at the age of 75. It will be a disappointment that no such provision is included in the Statement, given the fact that an amendment has been carried twice in your Lordships' House. It is all the more important because pressure on annuity rates will be upwards due to the Government's proposal to increase borrowing. Therefore, people who are unable to defer the drawing of their annuity will have to draw it in January, if they reach the age of 75 at that time, although annuity rates are likely to rise thereafter.
The complexity of the Government's proposals with regard to tax credits has resulted in an appallingly low level of take-up. The NAO report, recently issued, suggests that no less than 20 per cent of pensioners fail to take up their entitlements. Since 1997, the crucial 576 aspect of the Government's policy has been to move towards increased means testing and a system with the minimum income guarantee. That has been a considerable deterrent to saving, as people have to save a considerable amount before they draw anything over and above the minimum income guarantee. Will the Minister tell us what size fund one would need to get any advantage from saving, over and above what one is likely to get under the terms of the minimum income guarantee?
§ Lord Higgins
My Lords, I am asking how much one would need to save in order to get a return that is greater than the amount likely to be provided by the minimum income guarantee. We shall return to that point later, if need be.
At all events, Mr Pickering, who advises the Government on pensions, says that he does not believe that one can have a pensions credit and minimum income guarantee as a basis on which to build a pensions system for future decades. The combination of means-tested benefits in relation to the overall situation is a source of considerable concern.
I refer to the Government's proposals for the publication of forecasts of what people are likely to receive on retirement. That forecast will be based on many assumptions, but to judge the accuracy of such a forecast one has only to compare what people expected to receive a year ago to what they are likely to receive now, given the changes that have taken place in the stock market, the annuity rate and so on. The Government are apparently proposing to have a combined pensions forecast for individuals, for both state and private provision. That forecast is likely to be highly inaccurate. Indeed, it would have been very inaccurate, even in the case of people with an Equitable Life pension, who were already drawing it and had been drawing it for 20 years. They have recently discovered that their expectations have been greatly disappointed and that their pensions have been cut by perhaps 20 per cent. To start forecasting people's pensions on various assumptions seems more likely to mislead than to help them, despite the fact that people engaged in pilot schemes suggested that it had been helpful.
The document is complex and reflects a great deal of thought by the Government, but it does not represent the kind of analysis and proposals that are necessary if one is to reassure people that in 10, 15, 20 or 30 years' time they will have an adequate income on which to live. The pressure will be to put more and more people on to the means-tested benefit level. We see clearly from the latest figures the extent to which the number on means-tested benefit is increasing. The proportion 577 of people who are at that level, rather than at the level that might reasonably be expected given their previous incomes, is worrying.
§ Lord Higgins
My Lords, I have almost finished. The Statement is complacent, but we shall need to debate the situation in government time in the near future, when we can express our concerns in more detail.
§ Baroness Hollis of Heigham
My Lords, before the noble Lord, Lord Oakeshott, speaks, I point out that we are allowed 20 minutes for both Front Bench speeches and my reply. That means that if the noble Lord, Lord Oakeshott, takes only eight minutes, I cannot offer a word to the House on the two speeches.
§ Lord Higgins
My Lords, this is a very important Statement and I had understood from the Clerks that it has been the custom for rather more discretion in these matters to be shown.
§ 5.40 p.m.
§ Lord Oakeshott of Seagrove Bay
My Lords, I am of course conscious of the time. Although I sympathise with much of what the noble Lord, Lord Higgins, said, the House is put in a difficult position if one of the two main Opposition speakers takes 13 minutes out of a potential 20 minutes. Clearly, I shall do my best to be brief. Equally, this is an important and long-awaited Green Paper and I hope that the Minister will give substantive replies.
We have had over the past two weeks the most sustained government media operation since they came to power to spin down expectations for the Green Paper. Now we know why. I declare an interest as a cynical old pension fund manager who has seen far too many company chief executives massaging down market expectations before a disappointing announcement. The first thing that one learns in the City is that bad figures take longer to add up. Now we know that in politics bad Green Papers take longer to cobble together.
I start with a serious complaint about a great discourtesy, to put it politely, in the noble Baroness's ministry. I received just before 3 o'clock a copy of the Statement and of the Green Paper. The Statement had large chunks blacked out, as did the Green Paper. I really do not see the point of normal courtesies if that sort of thing happens. Vital sections were blacked out. Does the Minister condone that shabby behaviour? If not, will she please find out who was responsible and give a proper assurance to the House that such behaviour will not happen in future?
The collapse in confidence in pension funds and long-term insurance has seriously undermined savings in the economy as a whole. We used to have a culture of "save for a rainy day" but now it is increasingly "borrow and spend today and let tomorrow take care of itself'. As the NAPF put it,today's pressures tend to trump tomorrow's aspirations".578 That is why we on these Benches—unlike the other two main parties but like an increasing number of people and organisations throughout the country—believe that there is no alternative to ensuring that everyone on moderate and higher incomes is building up either a company or a stakeholder pension.
The Green Paper still bangs the drum for stakeholder pensions. We know that the take-up in the market so far has been very poor. The reason is simple: insurance companies are not charities and it is simply not economic for them to sell stakeholders at I per cent unless volumes are much higher. We on these Benches support the 1 per cent cap. However, can the Minister see that that will work only when we get the economies of scale that come with compulsory pension provision?
In pensions today, we are seeing a new version of Gresham's law: not bad money driving out the good but bad pension providers driving out the good, as John Lewis said only the other day, as all its competitors were closing down their schemes.
I turn to the announcement. What exactly will be the powers and functions of the new "proactive pensions regulator"? Will he be able to show the yellow card to rogue employers rushing to close down pension schemes without proper consultation? That is a bitter blow and usually means a sharp pay cut in practice. Does the Minister agree that that breaks a moral contract with employees? How will the Government deal with companies such as the Big Food Group, which has a current stock market value of £200 million and a corporate jet costing £400,000 a year to swan around in, but which has just closed its pension fund to existing members? Does that involve fraud, had governance or maladministration, or simply downright meanness and management with the wrong principles?
The Statement also projects public spending on pensions to remain stable over the next 50 years as a proportion of GDP. The reason for that is simple: we pay such rotten state pensions. NAPF shows us at the bottom of the European league. I have not time to go into figures, but they are publicly available. No wonder we are spending only 5.5 per cent of our national income, compared with much higher figures for other countries, which also have much higher pensions.
How will the new £1.4 million single lifetime limit work? We are told that it will be assessed at the point of retirement. But will that involve what one puts in or what one takes out? How will one know, when one is investing, how much it will roll up to? The basic problem is not that of people saving too much, which the scheme appears to address, but that of people on moderate incomes saving too little.
Finally, we are to have an independent pensions commission under Adair Turner to report on whether the voluntary system can save our pensions. Who will be the members, how will they be chosen and will they really be independent? What will be the balance 579 between the supporters of the Brown and the Blair view of pensions? In particular, when will it report?
Last year at conference, the Prime Minister said:In New Labour, we are at our best when at our boldest".In this regard, we have a mishmash of half measures on top of a morass of old Labour means testing. That is Labour not at its boldest and best but at its weakest and worst.
§ 5.45 p.m.
§ Baroness Hollis of Heigham
My Lords, I shall be as telegraphic as I can, given the decision of the House to confine the two Front Bench speeches and the Minister's reply to 20 minutes where possible. Rather than going into any of the more descriptive stuff, I shall try to answer questions as briefly as possible.
The noble Lord, Lord Higgins, asked whether it was still the Government's intention to move from 60:40 to 40:60. We are travelling in that direction and we seek to continue to do that. The noble Lord also asked about figures for stakeholders. Nearly 1.2 million have been sold, 40 per cent of them to people with incomes of between £10,000 and £20,000; 97 per cent of those people are of working age. We are indeed meeting some of the target audience whom we were seeking to help to build up a second funded pension.
The noble Lord also asked about S2P and why we were not following the advice given to us to build it into the basic state pension. Behind that is a question about what one's national insurance entitlement brings. Putting additional money on to the basic state pension is opposed to our targeted approach, including access to a state second pension. One does not have to be in the national insurance system to earn that—one can get it as a carer or disabled person. Targets help with those who most need it.
Noble Lords may well be aware that 90 per cent of men have full basic pension by virtue of a complete national insurance record. The figure for women having a basic state pension on their own NI record is 15 per cent. Any increases in the basic state pension would not be enjoyed by those women except through the sadness of bereavement. In other words, unless one targets, one does not help those who do not have a complete NI record. That may change over time but the gender discrepancy is huge. That is why it would be regressive, not progressive, to amalgamate S2P with the basic state pension.
The noble Lord asked when we might expect that to go to a flat rate. That will depend on our assessment of when we believe the time is appropriate. We have not yet made a decision. He also said that we were having a crisis in DB schemes. It is certainly true that last year about 1 per cent of DB schemes closed. However, the latest figures that I have seen show that of those in occupational pensions, 4.6 million are in DB schemes and less that 1 million are in DC schemes. They still remain the major pension form of occupational pensions. I suggest that what matters is not so much whether someone is in a DB or a DC scheme; DB schemes reward late career salary progression—that 580 involves men, mostly—and the employer obviously carries the risk. However, DC schemes may be more attractive to those who change jobs regularly or have more modest earnings, particularly women. The key issue is that of employers' contributions. The problem is not that of going from DB to DC schemes but that companies have taken the opportunity on average to more than halve their contributions: the average figure has dropped from 9.9 to 4.1. That is why DC schemes appear to be such a poor buy; the reduction in contributions by employers is involved. If that changes, DC schemes could be an equally attractive option for those with a rapid career movement.
The noble Lord asked whether the lump sum on deferring the state pension would be tax free. No, my Lords. We are saying that if at the moment, as a single person at the age of 65, one has a state pension of£100, by deferring for five years one will be able to draw a state pension with S2P of £150 but that one might prefer to take that increment as a lump sum instead. Those are the proposals.
The noble Lord raised the issue of annuity rates. He knows the Government's arguments. We believe that an annuity is pooled risk and ensures a reliable flow of income. It is worth emphasising that the average annuity pot in this country is £25,000. Two-thirds of people have pots of under £25,000. That is skewed by a figure at the top. Half of all annuity pots are under £10,000. So the rules at 75 years simply do not come into play. They are small sums and we need to make sure that people invest them wisely for their old age.
The noble Lord asked at what point people would be better off on pension credit. The bigger argument at the moment is that someone who has, for example, a small pension of £100 per month is no better off with that pension than they would be on MIG. Under pension credit, they will keep £60 of that £100. Therefore, every additional £1 over the basic retirement figure—£75 per week at the moment—is available to come into pension credit. So one will keep 60 pence of every additional new pound one earns up until the taper ends. So at £1 it is worth saving. It is a very directly targeted reward for small savers. I hope that, as a result, it will be welcomed, and particularly so by the noble Lord opposite.
The noble Lord queried pension forecasting. From the pilots that were quoted, we find it valuable. It led to 30 per cent of those who took part in the pilots seeking additional information and 8 per cent taking up further provision. While I accept some of the provisos that the noble Lord attaches, none the less the pilots show that pension forecasting can give people an early warning that if they wish to have a more comfortable old age, they need to make further provision.
Finally, the noble Lord gave us a critique of means testing. If one does not means test and one gives the flat rate to everyone, about one-third of the population cannot need it and one-third of the population will be 581 worse off. The point is that by targeting, we have helped those without complete NI records—mainly older women. If the noble Lord thinks that we should take away from elderly widows to give to Members of your Lordships' House, so be it. But that is not my position.
The noble Lord, Lord Oakeshott, referred to the blacked-out line. I queried it myself. I was assured that this was conventional where one is dealing with financially sensitive information coming from the Exchequer. It is common practice when dealing with Budget information. That is confirmed by the noble Lord, Lord Higgins. Therefore, no disrespect is suggested to the House; it is common procedure to protect information until it has been reported to MPs. I am grateful to see that the noble Lord, Lord Higgins, who has been a Treasury Minister confirms that.
§ Lord Oakeshott of Seagrove Bay
My Lords, if I may say so, that is absolute nonsense. If one looks in detail at what has been blacked out, one can see that there is no way in which that is the case. I operate in financial markets. I know what is market sensitive and what is not. I must ask the Minister to look in detail at what has been blacked out and to reply to me on those lines.
§ Baroness Hollis of Heigham
My Lords, I have looked at it in detail. I have been assured that it is Treasury policy not to release information of that kind before the Secretary of State has stood up to present it in the House. That is the assurance that I have been given. If the noble Lord wishes to write to me, I shall he happy to follow this up further. I can see how irritating it may be for him, but I am assured that that is the convention and practice.
The noble Lord, Lord Oakeshott, raised the issue of compulsion. He is absolutely right that unless employers contribute, neither do employees. With regard to stakeholders—all the information from Legal & General shows this also—where employers contribute, so do 70 per cent of employees. Where employers do not contribute, only 15 per cent of employees do so. That is a key point.
The noble Lord asked about setting up the commission. Its point is precisely to see—and to hope—that we can make the voluntary provision, which has been so successful in this country, continue to work. But if it does not, we shall have to review it because we are determined that people will have the pension coverage they need.
As to the noble Lord's point about people saving too little, that is true. But that is a judgment about what people think they should have in their retirement. They can make that judgment by deciding to save more or by working longer or possibly even by reducing their aspiration of what income they should enjoy in their retirement. At the moment, unless they have such 582 information and know what the options are, they will not be able to make informed choices. That is the push of this Green Paper.
§ 5.55 p.m.
§ Lord Fowler
My Lords, I do not know whether or not this was blacked out in the copy, but I certainly do not accept paragraph 7 of the Minister's Statement. That states:The United Kingdom is in a stronger position to meet this demographic challenge because of the choices we [the Government] have made over the past five years".To ascribe our position exclusively to what the Government have done over the past five years is utterly absurd, and it is entirely typical of the kind of ridiculous claims the Government make.
On a more fundamental point, is not the real danger that we are heading for two nations in retirement? We have the public sector, with guaranteed final salary schemes and assured retirement ages, watching, at times with some complacence, the private sector which, as my noble friend has said, is in undoubted crisis. Surely the reason for that crisis is not uncaring employers, but the fact that over the past five years—and this is the significance of "the past five years"—the Government have struck against personal provision, including by the notorious £5 billion per year pensions tax.
Is the Minister aware that although some of these proposals are undoubtedly useful, they also undoubtedly fall short of the radical action needed to encourage wider personal provision, including scrapping the rule that requires in all circumstances annuities at the age of 75?
§ Baroness Hollis of Heigham
My Lords, leaving aside the purple prose, the noble Lord, Lord Fowler, has made two points: on ACT and annuities. On ACT, he knows perfectly well where the Government come from. We believe that the old ACT system was a tax deformation. Money was sent out in dividends which would have been better invested in companies. I think as a result we have seen the British Economy in a better state—weathering the global recession—than almost any other economy.
Secondly, the Myners report also made clear that what mattered was not so much tax dividends—ACT—but the investment decisions and investment strategies made by managers. That was tenfold more important. I think that was the major push of the noble Lord's question.
§ Baroness Turner of Camden
My Lords, I thank my noble friend the Minister for this very comprehensive Statement. We need a great deal more time to consider it, as the noble Lord, Lord Higgins, said. Clearly, we have to make time for a debate on the subject. It is far too complex to be dealt with simply in questions on the Statement.
As to the Minister's Statement today, the issue of people not saving has again been raised. People generally, particularly poorer people, do not save because they cannot afford to. In those circumstances, 583 it is absolutely essential that the state basic pension is sufficient to enable people to live some kind of life. Indeed, I note that the NAPF has made this suggestion among its recommendations.
I still adhere to my view that the basic state pension should be linked to the earnings index. But the reason why a number of us feel that the pensions industry and pensions provision faces a crisis is what has happened recently in connection with final salary schemes. I declare my interest. I am a member of Amicus, the union that has been much involved in negotiating pensions for its members over the years. We were very proud that we had negotiated some very good schemes for our members, mainly final salary. We now know what is happening in a number of firms where these schemes are being wound up. New employees are being offered a deal that is fundamentally inferior to what was on offer in the final salary scheme. In some instances people who were members of final salary schemes are finding they will not get what they thought they would get under those schemes.
Clearly, there are major problems. It seems to me that something must be done to protect employees' rights in these schemes. I note that there will be a new pensions regulator. I do not know yet what role the pensions regulator will have. But clearly something must be done to protect employees' rights.
I notice that major unions have made statements this morning—the GMB, my own union and so on. The unions regard pension provision as deferred pay. They are concerned that if deferred pay is damaged, it is the same as wage cuts, and they are threatening dispute action in a number of cases. I have no doubt that if those developments proceed we shall see industrial disputes in some major companies. In that sense I believe that there is a crisis in the pensions industry.
However, there is no time this afternoon to conduct a full discussion of all the issues that arise in this important Green Paper. I hope that the opportunity will be afforded to this House to debate those issues in the near future.
§ Baroness Hollis of Heigham
My Lords, on my noble friend's last point regarding the shortness of time for debate, I do not believe I am breaching any great secret when I say that we are expecting, subject to the usual channels, one of our Back-Bench debates in late January to be made available for a debate on pensions as my noble friend suggests. As I say, that is subject to the usual channels and the arrangement of ordinary business. But I agree that we cannot deal with these complex issues in a quick Statement. We need time to reflect on the report, take advice and see how the debate develops.
My noble friend's second point related to the attachment to the basic state pension. I have already made the point that it does nothing to help those with incomplete NI records, of whom a large number are women. It is also the case that it preserves existing inequalities among pensioners. My noble friend may have been right in 1979 but she is wrong now.
584 Since 1979 the bottom one-fifth of pensioners have seen their income grow by around 30 per cent; the top one-fifth by 80 per cent. The average is around 64 per cent. In other words, inequalities have widened and to throw the same money at everybody preserves those inequalities and does very little to reduce poverty. As a result of the actions of my right honourable friends in another place, both the current and former Secretaries of State, the poorest one-third of pensioners have seen an improvement in their income in real terms by £1,500 a year since we came into office. I am sure that my noble friend will want to congratulate us on that.
Again, I have already answered my noble friend's points about DB schemes. At the core is the level of contribution. Provided the level of contribution is as high over time, DC schemes should produce the same sort of result as DB schemes. But not, as my noble friend said, if employers use the opportunity to cut their contributions.
§ Baroness Barker
My Lords, following on from that, can the Minister say why the greatest inequality in pensions is not mentioned at all in the Statement? I refer to the inequality between men and women. It is simply not mentioned in the Statement. Are any measures to be introduced to tackle that issue?
Secondly, the Statement says that the Government will consider allowing employers to make membership of a pension scheme a condition of employment. What is that if it not compulsion? Why is the only issue on which there is compulsion one that is directed towards employees and not employers when, as the noble Baroness in her reply to the noble Lord, Lord Higgins, spelt out, numerous employers have welched on their deals on pensions in the past five years?
Finally, can the Minister explain how the incentives for deferment of the uptake of the basic state pension can possibly be in harmony with the pension credit? What measures will there be to ensure that people who defer their state pensions do not subsequently lose out on pension credits because of their greater income?
§ Baroness Hollis of Heigham
My Lords, I ask the noble Baroness, Lady Barker, to look at Chapter 7 in relation to women. I admit that there is nothing on this in the Statement as such. But in Chapter 7, for the first time, we have a section on women's situations. For example, if I can draw her attention to section 7.1, paragraph 6, it says that most women work fewer hours for lower pay and for fewer years than most men. So they acquire less national insurance rights and have less occupational pension coverage. But that reduced pension income, given women's earlier retirement age and greater longevity, has to last them for longer. Therefore at each step of the way we have to intervene to ensure women's greater financial prosperity in old age.
My point is that women's financial penury in old age is a consequence of their situation in the labour market through their working lives. To put it another way, a man may start single, marry, have children, divorce, become single again, re-partner, but throughout that 585 time he almost certainly works full time and contributes to his pension. Almost every one of those steps will affect a woman's contributions to her earnings and therefore to her pension. She is therefore locked in that situation.
I hope that when the noble Baroness has the time she will read this report—it is very long. It will be seen that at each step we are trying to take measures to improve the situation of part-time workers; to improve childcare access for women; to improve their situation vis-a-vis national insurance schemes; to try to bring them into occupational pensions and to try to improve their situation through targeted support like S2P in retirement. But it must be analysed step by step, which is all I can suggest to the noble Baroness. It is locked into the inter-linking between their earnings and caring capacity in their working lives which generates such poor state and occupational coverage as reflected in their national insurance rates.
The noble Baroness asked about employers. The point on compulsion is that up until 1988 employers could make membership of a scheme compulsory as a condition of employment. That was then scrapped. We are putting forward for consultation—this is a Green Paper— whether or not we should go back to that situation and allow employers to make it a compulsory condition of employment. That is not the same as saying that employers themselves will necessarily contribute. But our experience is that where they have such a scheme, they tend to. The second issue of compulsion is one that we shall keep under review. At the end of the day, if employers do not contribute then, as we know from experience, many employees fail to contribute also and as a result they fall back.
§ Lord Forsyth of Drumlean
My Lords, the Minister spoke eloquently this afternoon about how people will need to contribute more to their pension schemes, save more, retire at a later date or enjoy lower living standards when they do retire. Will she be honest with the House and acknowledge that millions of people in Britain will be in exactly that position of having to retire later or save more as a direct consequence of her Government's decision to take £5 billion every year from their pension schemes?
In response to the question asked by my noble friend in relation to the need to encourage companies to invest more in their businesses, was the Minister saying that the Government felt that that was more important than the long-term prospects of pensioners in this country? Can we have a straight answer? If the noble Baroness wishes to persuade people—a proper goal—to contribute more to pensions, is it not high time that the Government reversed the damaging decision they took to take away £5 billion from people's pension funds when they had every expectation that that money would be there to look after them in their old age?
§ Baroness Hollis of Heigham
My Lords, I have given my answer on ACT and I shall not expand further on it at this stage. However, I am happy to come back to the new point raised by the noble Lord, Lord Forsyth, about people seriously under-saving.
586 The best evidence we have is that if we assume that people wish to enjoy, for example, 50 per cent gross income in retirement—it is worth emphasising that that means 62 per cent net income because they are not paying national insurance contributions and the like—then around 12 per cent of people are seriously under-saving. If however we are talking of having a gross income in retirement of 40 per cent or a net income of around 50 per cent, we are coming down to a ballpark figure of around 1 million.
So a serious problem arises for people with modest earnings. It does not arise for those 'with the poorest earnings. It will be seen on Table 2.7 in the Statement that up to £300 a week the state pension will give replacement values of 50 or 60 per cent or more; indeed, for the poorest it will actually give replacement values of nearly 140 per cent. But for those earning between £15,000 and £25,000 a year—the group seeing their pension promise reducing given longevity and the stock market turmoil—if they wish to enjoy higher pensions than they are currently in line to receive, they indeed have to save more, work longer or alternatively reduce their expectations. There is no way out of that, given increasing longevity.
§ Earl Russell
My Lords, when I was a rather feckless young man of 23, newly arrived in London and able to think of a thousand things on which to spend my money, I was furious to discover that I had to make a compulsory contribution to a pension scheme. Now, having retired six weeks ago, I am extremely grateful that I did. Does the Minister think that that helps to make out the case that my noble friend Lord Oakeshott of Seagrove Bay made in favour of compulsion, although not necessarily to contribute to one's employer's scheme?
Does the Minister remember—she probably does not—an occasion in the debate on the Address two years ago when I advised her not to claim for the Government all the credit for the success of the global economy and to remember that before she had to start saying that the Government were not to take the blame for all the failures of the global economy? Does she have the tiniest bit of regret that she did not take that advice?
§ Baroness Hollis of Heigham
My Lords, all that one need do is consider the state of the British economy, compared to other economies, to see how robust it is. We have higher employment than we have ever had and less long-term adult and youth unemployment than we have had since the late 1960s. Noble Lords should also consider the low level of inflation that we enjoy.
It is worth emphasising to the noble Earl that low inflation is of particular value to women. In the kind of high-inflation economy that we inherited, a rate of 10 per cent would mean that the value of a pension would halve in eight years; at 5 per cent, it would halve in 14 years. With the current level of inflation, it would halve only after about 29 years. That is a real return for the Government's investment in our economy.
587 The second point that the noble Earl made was about compulsory contributions. It is worth reminding the noble Earl that annex 4 to the Statement gives the composition of the group without pensions. We know that half are low-earners—with less than £10,000 a year—who have a real problem with debt. It might be better for them to rely on state provision. Two thirds are women, for the reasons that I suggested. A third work part-time. A third are young—under 30—and may be in the situation that the noble Earl, Lord Russell, was in. Half of those with slightly higher earnings had broken work records, but nearly all of them had partners who saved more than they did. We take isolated figures and do not consider household savings.
Given all that, the noble Earl can see why significant tranches of the population do not feel that a funded pension is for them. That is not to say that we should not try to persuade them to save for it, but, for many people, it is not sensible to go into a funded scheme. They would do better staying with S2P.
§ Lord Blackwell
My Lords, like other noble Lords, I recognise several useful measures in the Statement. However, the debate we should have is about whether those measures are adequate for the scale of the problem we face. As I have not seen the Green Paper, I wonder whether the Minister can tell us whether, to inform that debate, the Government have set out their view of a reasonable objective for future levels of pension income relative to wages. If not, can it be set out before we debate the matter?
§ Baroness Hollis of Heigham
My Lords, we say that it is a matter of choice. We give figures to show people what they would have to save, given certain assumptions, for a number of years, if they wanted a gross income of 66 per cent—80 per cent net—or a gross income of 50 per cent—62 per cent net. We set it out in that form, but, ultimately, it is someone's choice what level of income they wish to experience and what arrangements they will make to arrive at that level. It may be determined by their mortgage situation, whether they are putting children through university and other commitments.
§ Baroness Noakes
My Lords, the Minister said to my noble friend Lord Higgins, I think, that shifting to 60 per cent private provision was no longer a target, just a direction of travel. What is the current proportion of private provision to public? What does the Minister expect those ratios to be in 10 years' time as a result of the Green Paper?
Can the Minister also give the Government's position on defined benefit and defined contribution schemes? Are the Government now indifferent as between those schemes? I took from what she said that they were complacent about the continuance of defined benefit schemes, although my reading of the statistics is that the rate of closure is worrying, if one believes that such schemes should be maintained.
588 How transparent will the work of the new insurance commissioner be? How independent will the commissioner be—
§ Baroness Noakes
I beg your pardon. I meant the new pensions commissioner—the position being taken up by Mr Adair Turner. How transparent will the advice given to Ministers be? How is that position independent, given that Mr Adair Turner appears to be well entrenched, at least in Number 10?
§ Baroness Hollis of Heigham
My Lords, I cannot give the noble Baroness the statistics that she wants about the 60:40 per cent or 40:60 per cent point. I cannot say what the situation will be in 10 years' time. That will depend on what happens with the take-up of stakeholders, with the pension credit and the like. I emphasise that that is the direction in which we wish and seek to move.
I resent being told that I am complacent about DB schemes. I said—I am sorry that the noble Baroness did not hear me—that if DC schemes attracted as much investment as DB schemes, the return over time for the person in the funded scheme should be broadly the same. I complained that employers too often took the opportunity to move from DB to DC schemes, not just to reduce risk but to cut contributions by more than half. If that is being complacent, the noble Baroness and I attach rather different meanings to the word.
The noble Baroness talked about the insurance commissioner. I am not sure whether she was talking about the new pensions regulator or the new commission that will be headed, possibly, by Mr Adair Turner, the name that the noble Baroness mentioned. It will be independent, in the sense that it will seek to embrace sections of the industry, including—I hope—the trade union movement. It will make recommendations to the Secretary of State about the adequacy, reach and coverage of voluntary provision. In the light of that information, it is open to the Secretary of State, if he is not satisfied—and to Parliament—to return to the issue of compulsion, raised from the Liberal Democrat Benches.