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Pensions Strategy

Volume 577: debated on Thursday 20 March 2014

With permission, Mr Speaker, I would like to make a statement setting out the Government’s strategy for future pension provision in the light of the Chancellor’s bold and radical reform proposals announced in the Budget statement yesterday.

Our first priority has been to do the right thing by people who have already retired—people who have spent a lifetime paying in to the system and who now have a right to expect a decent income in retirement. That is why one of the first measures taken by this coalition Government was to implement the triple lock policy, which ensures that the basic state pension increases each year by the highest of the growth in earnings or prices, with a minimum increase of 2.5%. As a result of this policy, the basic state pension is now a higher share of the average wage than at any time in the past two decades. But we also need a system that works for tomorrow’s pensioners. That is why we have introduced the single-tier state pension. This will provide a simple, single, decent state pension, set above the level of the basic means test, so that working people will know what they will get in retirement from the state and can plan accordingly.

We also needed to reverse the decades-long decline in workplace pension provision. With barely one worker in three in the private sector building up any pension provision at all, urgent action was required. That is why in 2012 we began the process of automatically enrolling more than 10 million people into workplace pensions. That programme has been a stunning success. Last week, we announced that over 3 million workers have already been automatically enrolled. Only about one in 10 workers is exercising their right to opt out of the scheme, as most realise that the combination of an employer contribution and tax relief from the Government make this a very attractive proposition. Figures published at the end of last week for April 2013 showed the biggest rise in workplace pension coverage since figures began in 1997, and we expect the figures for 2014 to show a much bigger increase.

We need to make sure that these pension savings are invested in value-for-money schemes that are well governed, and we plan to publish next week measures to deliver this policy goal. We will also ensure that individuals do not build up multiple stranded small pension pots but that their pensions follow them when they change jobs so that they build up a worthwhile sum in their current scheme. In addition, we will create a new “defined ambition” framework for workplace pensions, enabling new forms of risk sharing between employers and employees.

Having ensured that the vast majority of workers build up a worthwhile pension pot on top of a simplified state pension, we now have a new opportunity to think about the choices people have in retirement. In the past, retirement was often a relatively short period of time, and the priority for most was to turn their pension savings into a regular income for as long as they lived. But in a world where people will routinely live for 25 years in retirement, we need to think more creatively and give people new options about what they will do with their own money. In the past, Governments were concerned that if people had freedom over their pension pots, they would run them down too quickly and then depend on state support in later life. The single-tier pension provides a game-changing opportunity to rethink this model. With people receiving a full single-tier pension already clear of the basic means test, the state need be much less prescriptive about how people use their accumulated pension savings.

That is why the Government have announced a plan for radical liberalisation of the retirement savings market with effect from April 2015. Gone will be the detailed rules on how quickly people can turn their pension pot into annual income. Instead, for the first time, we will treat people as adults, giving them the flexibility to choose how best to use their hard-earned savings in the way that suits their personal circumstances. People will still be free to take a tax-free lump sum and turn the balance of their pension pot into an annuity, providing a guaranteed income for life, but they will also be able to withdraw the whole of their pension pot as cash to spend as they see fit, subject only to taxation on the balance in excess of the tax-free lump sum. Or they can decide to allow their money to go on growing, drawing cash as and when they wish, perhaps as part of a phased retirement—something that we have talked about for years and are now delivering. By lifting the rules, we anticipate that industry will respond with new products that meet consumers’ income needs in new and innovative ways.

These reforms will increase the attractiveness of saving for retirement, and will allow people to shape their finances in retirement as they see fit, not as the Government tell them. To support people in making good choices we will introduce a guidance guarantee—a legal requirement on pension schemes to offer all scheme members a conversation about their options with someone who is impartial. This may lead them to take full independent financial advice, or it may enable them to make informed choices without further advice. As a down payment on these increased flexibilities, we will dramatically relax the rules on turning small pension pots into cash and the rules on existing drawdown products with effect from 27 March.

We anticipate that annuities will continue to be an important part of retirement provision and the FCA will continue with its review of the workings of the annuity market, to ensure that consumers get maximum value for money from their hard-earned pension savings. But we also expect that our reforms will pave the way for new financial products which will give people new freedoms over how they turn their retirement savings into quality of life in retirement, as well as potentially link to options for funding the long-term costs of social care.

The pensions system that was inherited by this coalition Government was broken. Declining coverage of workplace pensions and a declining basic state pension meant that mass means-testing had become the order of the day. We were determined to reverse that spiral of decline. We have done the right thing by today’s pensioners by starting to restore the real value of the state pension through the triple lock. We have reformed the state pension to provide a simple, decent foundation for retirement saving and have implemented automatic enrolment, leading already to millions more in workplace pensions. And now we have ripped up the red tape that prevented people in retirement from making their own choices about how they want to spend their own pension pot. This is truly a pensions revolution, and I commend this strategy to the House.

No one can say that pensions is not a fast-moving and exciting world. The Minister was halfway through his statement before yesterday’s announcements were mentioned. The reason for that is straightforward. The announcements yesterday cannot be bold and radical and also be a logical extension of the Government’s existing pensions policy, as the Minister strains to claim. Let us be clear about that.

There is a wider context to the statement. Given that so much time was spent on the wider pensions strategy, it is surprising that the Minister made no mention of his retreat, so far at least, from clamping down on fees and charges in individual pension schemes. The stridency of the Minister’s statement results from the fact that he knows that on that fundamental issue he has not delivered for the millions of people saving in the new pension schemes for which he claims all the credit. It is important to put that on the record.

We welcome greater flexibility and choice, especially in the announcements— which are easy to understand and the impact of which is easy to interpret—regarding the changes from 26 March this year. It makes sense to allow greater flexibility, particularly for those with small pots, which the new auto-enrolment system is producing. An annuity will not deliver value for money for these small pots, so we welcome the changes. With the increase to £30,000 in the trivial commutation rules and the changes to the number of pots that can be taken in cash, some individuals will be able to take, by my calculations, up to £60,000 as cash. That is to be welcomed.

Let us probe a little more deeply, especially the new developments surrounding the changes from April 2015, which the Minister dealt with in the second half of his statement. He made great play of the fact that there will be a statutory right to guidance via pension providers. We welcome that. It is our policy, which the Government have taken. After all, imitation is the sincerest form of flattery. Is the guidance to be mandatory for all those approaching the point where they turn their pension pot into retirement income? If not, how does it deal with the cardinal feature of the current annuities market, which is that the majority of people do nothing other than take the current offer from their provider? Government Members have gone quiet now. When we get into the detail, which they do not understand, the picture looks a little different.

We need clarity on that guidance. We need to know what protections there will be for savers in the new investment products that are to be developed. What is the track record of the investment industry in delivering innovative new products that deliver value for money at low cost? [Interruption.] The Secretary of State says something but he has no idea of what he speaks.

What will be the safeguards around the guidance? Will it be mandatory? Will it ensure that people get the best possible deal for their cash? These savings measures are supposed to be part of a Budget that is meant to be for savers. Why, then, does the OBR forecast that the savings ratio will fall? Will the Minister tell us what these changes will mean for savings in future? There is nothing in the Budget about the savings ratio. More widely, how many people will continue to annuitise? The Minister talks of a radical liberalisation, but if a significant number of individuals continue to annuitise, surely the priority should be to ensure that that annuity market also delivers value for money.

Finally, the Minister made great play of his defined ambition agenda, which is buried in his statement. How can one develop the collective pensions to which he subscribes when they depend on intergenerational risk-sharing? As we understand it, intergenerational risk-sharing becomes extremely difficult, if not impossible, if people exit the system at the age of 55. On all these questions—the safeguards surrounding the guidance, and the recognition that the Minister has, to some extent, taken our policy, which we welcome—how do these reforms marry with the wider pensions agenda? We look forward to the Minister’s response.

I am grateful to the hon. Gentleman for his wholehearted endorsement of our plans. The guidance guarantee is as it says on the tin: it is guaranteed. It is a right of members of the scheme. It is a duty on schemes to make sure, for the first time, that people coming up to retirement have a conversation with someone who is independent and who is on their side, and the schemes will have to make that happen. The Financial Conduct Authority will oversee that process. We will look into whether we can involve the voluntary sector and the advice sector in that.

We often hear the phrase “advice gap”. The hon. Gentleman suggests that we started from a blank sheet of paper, but we did not. We started from a situation where many people coming to retirement were making the wrong decisions and buying poor value products. This is the sort of thing that we have had to address.

The hon. Gentleman asks whether the Budget was really one for savers. To me the increase in ISA limits sounds like good news for savers. The new pensioners bond coming in next year sounds like good news for savers. New freedoms for pensioners with regard to how they can use their pensions sounds like good news for savers. Perhaps the hon. Gentleman wanted still more, but I quote to him Dr Ros Altmann, who said that yesterday was like London buses—all the good news for savers came at once.

The hon. Gentleman asked the question I thought he might ask. If I paraphrase it loosely, his question, as a former academic, was on “the consistency of the defined ambition framework with liberalised decumulation”. I think that is what he wanted to know about. It is perfectly reasonable for people to have collective provision in accumulation. People can build up pensions collectively and many people will go on buying annuities. Many people will still want an income, but we are giving them new options. Plenty of people will want a scheme in which to go on investing their money into retirement. That will be their choice. Our whole agenda is about new models and new options, not just going from one extreme to another.

The hon. Gentleman asked about action on charges. I assume that he had written his questions before he read my statement. Given that we gave him the statement well before the speech, I am surprised at that. I confirm that next week we will announce the conclusions and the action we are taking—action to tackle problems that were never tackled in 13 years of a Labour Government.

The hon. Gentleman says that guidance is Labour’s policy. I am delighted to hear that, but why was there none in place when his party was running the country? It is good of him to support the plans.

This is bold and radical stuff. People will have guidance for the first time and new flexibilities. Some Labour MPs are saying that this should be blocked because we cannot trust people to spend their own money. I think we should.

I welcome the reforms announced by my right hon. Friend the Chancellor yesterday and the further detail my hon. Friend the Minister has given today. I urge him not to overlook the Pensions Advisory Service and the Money Advice Service as potential sources of advice for people approaching retirement. How will he take forward discussions with the industry and the regulator to ensure the availability of good quality products for new pensioners that not only represent good value for money but are properly regulated?

My hon. Friend has great knowledge of these matters from his time at both the Treasury and the Department for Work and Pensions. He is absolutely right to say that we need to make sure that people have guidance that enables them to make informed choices. They will still be able to proceed to formally regulated independent financial advice, but the industry will have to up its game, because now people will have much more choice to take cash, and if they want to take an annuity they will have to be persuaded that it is good value for money. That will be a market impetus to provide better quality products. We have asked the FCA to make sure that a good guidance regime is in place, potentially involving groups such as the excellent Pensions Advisory Service, to which my hon. Friend referred.

The beauty of theses proposals is that individuals will choose: if they want to spread their income over their retirement they will pay less tax, and if they bring forward their cash they will pay more tax. We think people will take advantage of those freedoms, which will bring forward taxation revenue in the shorter term, and there will be a reduction later on. People will be able to make free choices, something I hope the hon. Gentleman is in favour of.

I am genuinely not sure what the previous position was on whether the pension pots of elderly people going into residential care contributed towards the total assets they were allowed to retain before they got help from the state. If that was separate and did not count, will the fact that pension pots can now be turned into cash disadvantage people going into residential care in terms of the assets they can retain, or will the situation remain unchanged from their point of view?

The interaction between these measures and the funding of long-term care is important. There are various rules. If someone takes their pension pot as income, it will be counted as income in the means testing for residential care. If they have capital assets, we assess them on a different basis. We have to make sure that these measures are joined up with our policy on long-term care so that we have the right outcome. What we hope will happen is that new financial products will allow people to use their pot to possibly get care insurance as well. The industry has asked for this; now it has to raise its game.

Beyond the guidance guarantee, will the Minister assure us that when these innovative products are offered for sale, the regulator will be able to guarantee that it will in effect have pre-assured them, not least regarding the transparency of charging schemes?

As the hon. Gentleman knows, we are taking steps to make sure that charges in the pension sphere are made much more transparent. Any new products, particularly if they are sold, will be regulated by the FCA. The guidance is simply a conversation, as it were, with someone who will enable people to get basic information. People will still be able to take regulated independent financial advice, and that will be a regulated process.

The Minister has rightly championed the triple lock, making sure that the pension goes up by whichever is highest: earnings, prices or 2.5%. That is making a huge difference to pensioners in my constituency and, I suspect, the constituencies of hon. Members across the House. Will he confirm that it is the Government’s intention to make that very important change a permanent feature of the pension landscape so that it gives people certainty for the future? As part of the guidance guarantee, will he ensure that a linkage is made to the duty in the Care Bill to provide information and advice in respect of care?

I am grateful to my right hon. Friend for making the crucial point about the link between this new freedom and the level of the state pension. If we are able to keep the triple lock going, what will happen with a means-tested earnings-linked pension credit is that there will be more and more clear blue water between the means test and the triple-locked pension, which will greatly reduce the risk of anyone falling back into means testing in retirement. I would certainly like to see that continue beyond this Parliament.

On guidance on care, we will liaise with our colleagues at the Department of Health to make sure we are taking best advantage of this conversation.

Given the track record of the DWP and the Government on universal credit, the employment and support allowance, the personal independence payment and universal jobmatch, I think people might be a little sceptical about a proposal that appears to have been drawn up on the back of an envelope. The Red Book expects the savings ratio to fall from 7.2% to 3.2% by 2018. How will these proposals help savers?

We heard earlier that these are Labour policies, but now we hear that they were drawn up on the back of a fag packet. Perhaps both statements are true—I do not know. Just to be clear about what the Labour party has been demanding: it has been demanding not a guidance guarantee, but annuity brokers. It wanted everyone to buy an annuity. This is about freeing people up. That is why it will be good news for saving. Let me give the hon. Lady a brief example. Under auto-enrolment, the people most likely to opt out are the oldest—people in their 50s and beyond—partly because they do not want to tie up their money late in life. This will give them a guaranteed return, in cash, within a few years, and we think it will lead to more pension saving and that it will be a boost to savers.

The older someone is, the higher their cost of living. Does the Minister agree that our reforms of the state pension and these new freedoms in private provision should result in increased income and opportunities for people in retirement, and that it is therefore vital that they get good quality financial advice?

My hon. Friend is right. The key word she used was “opportunities.” If people want to take more of their pension wealth earlier in retirement—perhaps when they are more fit and able—they should be free to do so. As she says, however, they need to make informed choices, which is why the guidance guarantee is so important.

Although I am generally supportive of the changes to the private pension—they are sensible, especially for those with smaller pots—I wonder what the difference is between one of these new pensions and other savings vehicles. Will there be any impact on the assessment of someone in their late 50s who unfortunately finds themselves seeking means-tested benefits? Will they be looked at differently compared with the current pension plans, given that they will now be able to draw down money at any time and it will no longer be necessary for them to purchase an annuity at the end of the scheme?

The hon. Gentleman is right to say that we are going to have to think about pensions and retirement saving in a new way. One of the differences between workplace pensions and other forms of saving is the employer contribution. Whereas someone of working age can save through any savings vehicle they like, it is only through workplace pensions that they get not only tax relief but the employer contribution. They will, therefore, remain particularly attractive products, including for people on low wages.

Thousands of people in my constituency work in this industry, from the blue-chip leaders working for Legal & General and for Fidelity to those working for two companies that have led the way in innovative products, namely Partnership and Just Retirement, whose share prices took a hammering yesterday because of the language being used about the future of annuities. Will the Minister make it absolutely clear that the delivery of good guidance is essential—that would reinforce the position of those who are delivering innovative products—and that annuities will be an extremely important part of the industry in future provision?

We know that many people will still choose to have an income for life rather than a capital sum, so we do not think this is the death of the annuity. We think it will give a bit of a jolt to the annuity market and make providers do better. For example, Standard Life, a major annuity provider, said yesterday:

“Today’s wide ranging reforms of the UK savings and pensions regime have the potential to provide the simplicity, choice and flexibility for savers we have been calling for.”

A representative of the Association of British Insurers was on the radio this morning, and the providers are realising that this is an opportunity. They will have to up their game, but this is a chance for them to provide new and innovative products and we are happy to work with them on that.

How will the Government’s measures protect people like a constituent of mine who is a baker in his mid-70s? He had a lump sum pension pot of £250,000 and received independent advice, but that advice was poor and he lost almost everything. He is in his mid-70s and does not think he will ever be able to retire.

As the hon. Lady knows, there are redress mechanisms for people who receive poor quality independent financial advice. It is a regulated process. [Interruption.] I cannot hear what she is shouting at me. When there is a process of regulated advice, there are compensation mechanisms, which is right and as it should be.

I have to thank my hon. Friend because the statement and what was announced in the Budget yesterday take pensions to a whole new level. Now we have the single-tier state pension, we can free people to make their retirement decisions. Frankly, the Opposition do not seem to recognise the issues that people on defined contribution schemes have had or how annuities have fallen, so I really welcome what he has said today. In particular, will he tell us a bit more about when pensioner bonds will come into effect?

Certainly. My understanding is that National Savings and Investments will bring forward pensioner bonds next January. The Chancellor has indicated that the gross interest rate will be about 2.8% for a one-year bond and about 4% for a three-year bond, but that will be reviewed later in the year. It depends on market movements between now and then, but it is designed to be a market-leading rate to recognise that people who have worked hard and saved hard should get a decent return on their money.

It is interesting that the consultation is coming after the facts in this case. Will the Minister place in the Library a list of all the people he consulted prior to the announcements today and yesterday, as well as the risk assessment of where the Treasury will benefit or lose out from the proposal and, importantly, of the impact on women, because I suspect that women will yet again be net losers?

There is a risk of being rather patronising to women in saying that giving them new freedoms will somehow result in their losing out. The hon. Lady will have seen that the markets moved following the announcement yesterday, so there is a sense in which such decisions have to be made through a confidential process. We are in constant dialogue with trade bodies and providers, and we will continue to be so. It is a three-month consultation, so we want to ensure that we get it right. On the principle of giving people freedom, she is shaking her head; I think that Labour Front Benchers might support it, but I really cannot tell.

I warmly welcome the reforms, which are a great step forward for the pensions industry. The solution to the annuities problem is perhaps more radical than even the Work and Pensions Committee envisaged. May I urge the Minister to make sure that the new guaranteed guidance arrives before people reach retirement age, so that they can have a plan in their mind about what they want to do and what is there for them to choose before they reach that date?

My hon. Friend is a distinguished member of the Select Committee, which has scrutinised the issues very effectively. He is quite right that the guidance must come at the right time. We want people to think about their retirement planning much earlier. Certainly, when they are thinking about buying financial products—or, in the jargon, decumulating—we need to make sure that there is someone on their side to give them impartial guidance. We will make sure that that happens.

The Financial Conduct Authority is not only a process regulator but a product regulator. Will the Minister ensure that it is seized of the need to look carefully at new, innovative products, because the group of people with whom it is dealing are very vulnerable, and it is important for the regulator to keep an eye on the market?

The hon. Gentleman is quite right that products must be properly regulated. The difference between the current situation and what we propose is that, under our proposals, before going to independent financial advisers, people are guaranteed to have a conversation with somebody who is independent and on their side to talk them through their options. All too many people simply do not get that at the moment, and they risk making the wrong choice as a result. We will put that right.

Despite the Labour party’s scaremongering since the Budget yesterday, will my hon. Friend confirm that other countries—such as the United States, Australia and Denmark—do not restrict access to pension funds for those seeking to access them on retirement?

Yes. My hon. Friend is quite right. Many countries have different systems, but the presumption that as soon as someone has a pension pot, they are forced to take annual income is far from universal. We clearly need to make sure that people have proper guidance before they do so, but giving people freedom is what my right hon. Friend the Chancellor’s announcement was all about.

I welcome the further detail given by the Minister on the savings and pensions elements of yesterday’s Budget. By contrast, we have had the bizarre spectacle of the shadow Pensions Minister chuntering—yak, yak, yak—like an excited tourist on a Tibetan plateau. Clearly, there are huge elements that will help savers in all our constituencies. Will the Minister say a little more about one of the most important of those elements, which is the axing of the 10p tax rate on savings income of up £5,000, which I believe will affect 1.5 million low earners in all our constituencies?

Gladly. My hon. Friend is quite right. The Opposition have asked, “Where are the measures for savers in the Budget? How does it help savers?” We have already gone through a list, and he has kindly added another element, which is the abolition of the 10p tax rate. As my right hon. Friend the Chancellor said yesterday, when this Government abolish a 10p tax rate, we take it to zero, not double it as others have done.


Wales Bill

Presentation and First Reading (Standing Order No. 57)

Secretary David Jones, supported by the Prime Minister, the Deputy Prime Minister, Mr Chancellor of the Exchequer, Secretary Alistair Carmichael, Secretary Theresa Villiers, Danny Alexander, Mr David Gauke and Stephen Crabb, presented a Bill to make provision about elections to and membership of the National Assembly for Wales; to make provision about the Welsh Assembly Government; to make provision about the setting by the Assembly of a rate of income tax to be paid by Welsh taxpayers and about the devolution of taxation powers to the Assembly; to make related amendments to Part 4A of the Scotland Act 1998; to make provision about borrowing by the Welsh Ministers; to make miscellaneous amendments in the law relating to Wales; and for connected purposes.

Bill read the First time; to be read a Second time on Monday 24 March, and to be printed (Bill 186) with explanatory notes (Bill 186-EN).

We now come to the main business of the day, but may I ask for brevity? There are 30 Members down to speak, so I also make that appeal to Front Bench speakers.

Ways and Means