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Pensions: Personal Accounts

Volume 687: debated on Tuesday 12 December 2006

My Lords, with the leave of the House, I shall repeat a Statement made by my right honourable friend the Secretary of State for Work and Pensions in another place. The Statement is as follows:

“With permission, Mr Speaker, I should like to make a Statement on the Government’s proposals to make it easier for more people to save for their retirement.

“Despite the welcome fact that people are living longer, millions of employees are either not saving at all or not saving enough for their retirement. As the Pensions Commission noted in its second report, we must take steps now to tackle this problem of under-saving or face serious problems in the future.

“We have already acted to make sure that the state pension provides a solid platform on which people can save. The Pensions Bill published last month will create a simpler and more generous state pension. The restoration of the link to earnings will result in a basic state pension that, by 2050, will be worth twice as much in real terms as it is today.

“More generous qualifying conditions will, for the first time, properly treat social contributions on an equal footing with cash contributions—delivering fairer outcomes, especially for women and carers.

“These and other changes will reduce the extent of means-testing in the future, making sure pension credit continues to be targeted at the people who would otherwise have been poor in retirement or who only have small savings. But we must build on this foundation by giving more people greater incentives and opportunities to save for their retirement.

“Overall participation in occupational schemes has been falling since the late 1960s, and disproportionately high charges are making the personal pensions market uneconomical for those on moderate to low incomes, who often stop contributing to private schemes after a short period of time. We will therefore be bringing forward legislation to create new low-cost personal accounts as the catalyst for a new savings culture in our country.

“This White Paper sets out proposals to give every employee in Britain earning more than £5,000 the statutory right to receive a contribution from their employer towards an occupational pension. Provided that they take responsibility by contributing to their pension from their own wages, employees will be entitled to an employer contribution of 3 per cent of their salary in a band between approximately £5,000 and £33,500. We will fix the level of employer contributions in primary legislation.

“From 2012, employers will automatically enrol their employees into personal accounts or into their own existing occupational pension scheme, as long at it meets the specified minimum standards. This simple but radical step will affect around 10 million employees in Britain and will be vital in overcoming the barriers that prevent many people making the decision to save. There will be a compliance regime to protect the right of employees to be automatically enrolled and receive an employer contribution. We will consult on the detail of this approach, but expect it to build on the light touch model for the national minimum wage.

“We intend to establish personal accounts along the lines proposed by the Pensions Commission. The Pensions Bill provides for the creation of a Personal Accounts Delivery Authority, an independent body with financial sector expertise that will in the first instance advise the Government on the design of the operational structure of the accounts and prepare to get the necessary contractual arrangements with the private sector in place. It will then be responsible for commissioning the infrastructure to deliver the scheme from the private sector. The authority will eventually be replaced by a new personal accounts board, which will be responsible for the live running of the accounts. Its decisions will be independent of the Government.

“Evidence suggests that moderate-to-low earners prefer not to make a choice of pension scheme administrator. Our approach will offer greater simplicity for savers and maximise participation levels. There will be a choice of funds for those who want it, which we expect to include the options of social, environmental and ethical investments and branded products. For those who do not want a choice, there will be a default fund.

“Low charges are critical to ensuring that people build up the maximum pension fund from their savings. The Government estimate that the long-term costs for personal accounts will be in line with those set out by the Pensions Commission of around 0.3 per cent of funds under management or even lower. Together with reduced marketing costs, this approach is expected to be 20 to 25 per cent cheaper than a system based on direct competition between firms for individuals.

“These reforms are designed to fill a gap in the existing market. We want them to complement the existing market, not compete with it, so alongside the creation of the new personal accounts we will take action to support existing pension provision. There will be no transfers into or out of personal accounts from or to existing pension schemes, and an annual limit will restrict the level of contributions that individuals can put into their accounts. This will be £10,000 in the first year to allow individuals currently without access to a good-quality occupational pension to save in other non-pension products before 2012 and then move to personal accounts. We propose a limit of £5,000 for subsequent years, but will consult on this.

“There will be a simple and self-certifying exemption test for employers who operate schemes of broadly equal value to personal accounts. In addition, we are consulting on whether companies that offer higher-value schemes should be allowed to have a reasonable waiting period before employees join the schemes. We are also interested to learn more about the NAPF’s proposal of a good pensions scheme quality mark to help employees to identify companies that offer such pensions.

“The Government are committed to minimising the burden of personal accounts on employers. Mandatory employer contributions will be phased in over at least three years. The reforms have to be simple to run for a small employer. The central clearing house will mean that employers need have only one point of contact for transferring contributions. The Government will make minimising the administrative burden on employers a key task for the delivery authority and subsequent personal accounts board.

“The vast majority of people can expect to benefit in retirement from saving in personal accounts or an equivalent scheme. Of course, all forms of saving have some uncertainty, but thanks to our reforms those who work or care throughout their working lives can expect to be better off from having saved. Indeed, now someone need only work or care for 24 years to avoid pound-for-pound withdrawal. Under existing rules, even the tiny minority of pensioners who receive the guarantee credit only could still see a return from their saving by taking a lump sum.

“Simple, low-cost, flexible and portable as people move jobs, personal accounts may generate an additional £4 billion to £5 billion of net new saving each year, equivalent to about half a per cent of GDP. They will help millions of people to take greater responsibility for building their retirement savings and embed a new pensions savings culture at the heart of a comprehensive and balanced pensions settlement.

“These reforms set a sustainable and sensible course. They are in the long-term interests not only of this generation, but of generations to come, and I commend the White Paper to the House”.

My Lords, that concludes the Statement.

My Lords, the House will be grateful to the Minister for repeating the Statement, the first of three this week, this time on pensions—not three from the noble Lord, I hasten to add, but I gather that we will get another one very shortly. Now we know—or do we?—what the body to be set up under the Pensions Bill is expected to be preparing for: setting up a fallback pension scheme to be, as I understand it, ultimately provided by the private sector.

However, before I get on to that, we should put the Statement into context. When the Government took over the country in 1997, we had a pensions regime that was the envy of the world. What did they do? They started by removing advance corporation tax. By so doing, they produced a double whammy for pension schemes. The net effect was to remove £5 billion each and every year from the purchasing power of pension schemes—which, as much of the schemes' investment is directly in the Stock Exchange, damaged that, too. The Minister must be as bored as I am with responding to me on this, but I will be going on and on—and, if necessary, on—until I get convincing answers.

The Minister said two things to me on Thursday last when we were discussing the freeing up of the financial assistance scheme. First, he said that the Government do not recognise the £5 billion figure. In that case, I put it to him directly: what figure does he recognise? What has been the effect on the Treasury's books of removing advance corporation tax? He also said that,

“the fall in the stock market during that period”—

I assume that he meant 1997 to 2004—

“was greater than these figures—even if we accept the £5 billion, which I do not”.—[Official Report, 7/12/06; col. 1331.]

I challenge him again: will he now admit that the FTSE fell further than it would otherwise have done?

Whatever the answer to those questions, I wonder whether even now we know what there is to be in next year’s Pensions Bill. Noble Lords will know that, in the Budget in April, the Chancellor removed the necessity for people to take an annuity from their SIPPs at age 75 and allowed a drawdown of capital sums at various points. Lo and behold, in last week's Pre-Budget Report, he signalled the removal of that beneficial act. He is to make pensioners either take an annuity, and thereby pass their pension pot on to the insurance company that arranges that annuity, or leave it to the state via a staggering tax of 80 per cent. That does not smack of consistency, so how do we know what changes there will be between today's announcement and the Bill next year?

What the Government are now doing is seeking yet again to persuade the 50-odd per cent of people who do not invest for their retirement to take a pension. They tried to do that in 2001, when they introduced stakeholder pensions, a scheme not marked by conspicuous success. I am told that only 10,000 people took them up. As a result of today’s announcement, the Government are expecting between 7.5 million and 10 million people to be attracted to the national pension scheme—quite a different order of magnitude, and I wish them well.

In this Statement, there genuinely is much to agree with. However, I would not be doing my job unless I did a certain amount of cross-questioning. The national state pension scheme—or personal accounts, as the White Paper calls them—will apply to everyone in employment who earns over £5,000 a year. People will be automatically enrolled into the scheme if they are over 22 and below state pension age. There is some confusion here; I wonder whether they actually will be. The executive summary says that they will be eligible for automatic enrolment—hence my confusion. Will they be able to opt out, as the commission of the noble Lord, Lord Turner, recommended? Why have the Government chosen a £5,000 cap, rather than the £3,000 that the Turner report recommended? Even with a £5,000 cap, the Pensions Policy Institute calculates that under this reform up to 50 per cent will remain on means-testing. Is this really what the Government want to happen?

Most important, many employers have pension schemes into which both they and some of their employees contribute much more than the 4 per cent and 3 per cent respectively that the Government are proposing. What is going to prevent employers from closing their existing schemes and opting for these new personal accounts, which would be so much cheaper for them? They are already closing final salary schemes in favour of defined contribution schemes at a rate of knots—a reduction of 30 per cent in 2005 alone, I am told.

These proposals are likely to do damage to the pensions that already exist. The Government propose to increase the cap to £5,000. Will this not dramatically increase the scope of personal accounts? How many people put more than £5,000 into a pension? This is money that would previously have gone into the private and existing pension sector. Both these features would almost amount to nationalising occupational pensions. This cannot be what the Government either intend or want—at least, I hope not.

That said, there is much to be said for what the Government are trying to achieve, which will, I am sure, provide many more employees with some savings for their retirement. However, people will want to know what to expect. Will the Government publish projections, as the private sector does, at varying levels of age, contributions, percentage growth, dates and so on? What is someone aged 23 on £12,000 a year to expect when they come to retire aged 68—that is, in 45 years’ time—after 2012 when this new scheme comes into operation?

There is a glimmer of hope on page 33 of the report. I see in the second chart that someone investing £1 of their income would expect to receive—via, I assume, an annuity, although I shall double-check this with the Minister in a minute—£255 when he comes to retire. For someone on median earnings of £22,000 a year, that is a contribution of £920. If you multiply that by 2.55, you get the marvellous sum of £2,346 extra income in retirement. I cannot say that that is Earth shattering, and I am sure that noble Lords cannot, either.

I welcome the Statement, but these and many other questions still have to be answered before there is any hope of reaching the consensus that both we and the Government are seeking on pensions.

My Lords, I declare my interest as a pension fund investment manager for the past 30 years. I thank the Minister for an advance copy of the Statement and the White Paper, including the executive summary. I wonder what a “non-executive summary” is; perhaps we could just have summaries in future.

Let us start with the consensus, so far as it goes. We support the principle of personal accounts; it would be churlish of us not to, as we floated the original idea three years ago. The Liberal Democrats called them “National Savings pensions” because we thought then, and still do, that the tried and trusted National Savings brand was probably the right way to do it. However, we are happy to support the principle as it is set out today. We particularly support the Government’s line on low charges and the importance of keeping to a 0.3 per cent charge. I take my hat off to them. There has been sustained pressure from the industry for higher charges, and they are right, as was the noble Lord, Lord Turner, to point out the significance of keeping charges as low as possible for long-term pension returns.

We are happy to support, and to work together to design and build, the best vehicle for the national pension savings scheme that we can. That, however, is about as far as consensus goes. The problem is that a car is being designed that not only has no petrol in the engine but that has no engine at all. It is simply not possible to try to design a national pension savings scheme of this type and to get it going while the Government are still totally failing to face up to the challenge of a much higher basic state pension. The Government’s Pensions Bill simply proposes no foundation on which this can be built. The Liberal Democrats are telling the Government that they risk a massive pensions mis-selling scandal in years to come unless they face up to the need for a much better basic state pension that stops the system being riddled with means-testing right up to 2040 or 2050.

The other critical aspect is that there must also be a massive expansion of integrated one-stop debt and pension advice centres. The problem with much of the White Paper’s analysis, and with many of the assertions that the vast majority of people are better off under the Government’s plans if they save—something that is not founded on fact—is that it completely ignores the relationship with debt. Forty-three per cent of people in this country do not pay off the debt balance on their credit card each month. That means that they are paying an interest rate on their debts that is well into the teens. How can it be right for many of them to be automatically enrolled into a pension savings scheme with returns of 6 or 8 per cent when they are paying very large amounts of debt at the same time? Not a single independent commentator or expert agrees with the Government’s assertions.

I had a meeting last week with the chief executive of Legal & General, Britain’s leading life insurance company, which produced some very interesting statistics that I am happy to share with the Minister and the Government. Legal & General makes it quite clear that, according to its figures, it is better for many employees with debt to pay off that debt, even if that means losing the employer contribution and the tax relief. That sort of analysis will come back to haunt the Government.

The noble Lord, Lord Skelmersdale, referred to the tables on page 33 of the executive summary. These tables, which the Government have picked out, are for a male median earner. I remind the Government that far too much of our pension system has been geared to the male median earner and for far too long. It is high time that female earners and carers were put at the top of our priorities. The fiddling around the fringes of our system and the miserable little changes that the Government are making to those categories in the Pensions Bill do not begin to add up. Only a universal state citizen’s pension at a much higher level can deal with these problems of persistent unfairness to women and persistent means-testing.

Does the Minister not understand the interaction of debt and pension savings? Can he not see how automatic enrolment will often be very wrong for the lower paid, because they will lose a significant part of their savings through means-testing for many years to come? That combination of high interest rates on debt and low returns on pension savings will be a toxic cocktail for millions of people for many years to come.

My Lords, I thank noble Lords for their comments. Before turning to personal accounts, perhaps I may respond to the noble Lord, Lord Skelmersdale, on advance corporation tax. We do not recognise the figure that he has put forward. Many other factors were considered on the pensions to which he referred. I want to bring a new illustration to the table. I do not know whether the noble Lord saw the article written by Anatole Kaletsky in the Times on 19 October 2006 on this issue. He refuted the argument that changes to advance corporation tax were the root cause of the problems for the pension industry. He said:

“Occupational pensions and life assurance were destroyed by foolish court judgments and well-meaning but misconceived regulations under the Thatcher and Major governments”.

He said that ACT was,

“supported by most business leaders and tax experts”.

I have never seen Anatole Kaletsky as a particular friend of this Government, but I look forward to further comments from the noble Lord, Lord Skelmersdale, when we debate pensions again.

Perhaps more seriously, I thank both noble Lords for their general support of the concept of personal accounts and auto-enrolment. Although they went on to make criticisms of the detail, general support is very important, because the whole point of the establishment of the Turner pension commission was to achieve consensus. I am still hopeful that we can carry on with a consensus approach and look forward to constructive debates when the two pension Bills reach your Lordships’ House.

I very much agree with the noble Lord, Lord Oakeshott, that low charges are very important. Clearly, for the target group of 10 million people with no private or occupational pension schemes, and who are medium to low earners, low charges are critical. In the remit that will be given to the personal accounts delivery authority, the requirement to achieve low charges will be very important.

I was very disappointed by the comments of the noble Lord, Lord Oakeshott, when he suggested that this would not work and then referred to the reforms that we propose for the basic state pension and the reduction in national insurance requirements, which will ensure that many more women will get full basic state pension from its introduction. I believe that our changes to basic state pension are substantial and substantive and provide one of the core foundations for taking forward the personal accounts proposals. Of course, the personal accounts delivery authority will have to give careful consideration to the information given to individuals who have been auto-enrolled and obviously, individuals will need to be helped to make the right decision. However, the Government believe that the large majority of them can expect to benefit. The risk of not saving is much greater than the risk of saving for most people. No guarantee can be given because saving, by its very nature, is aspirational because people are planning for an uncertain future. But we believe that within this target group personal accounts and auto-enrolment will very much enhance their retirement income and should be supported.

The noble Lord, Lord Skelmersdale, asked about projections. Future directions will be very much a matter for the delivery authority. I stress the point made in the Statement. The personal accounts delivery authority will be established by statute but it will not be run by the Department for Work and Pensions. It will be run by people with professional expertise from the private sector, which will give a great deal of comfort to those who are auto-enrolled in the schemes.

The noble Lord, Lord Skelmersdale, asked about the £5,000 cap and rightly said that it was larger than the original Pensions Commission suggestion. Of course, the Pensions Commission suggestion of £3,000 was based on an overall replacement rate of 45 per cent. Work undertaken shows that many people aspire to higher than that at around 67 per cent, which is a very good thing, and that is where the figure of £5,000 comes from. But it is subject to consultation and obviously we will listen to comments on that.

It is clearly very important to have a cap in terms of the relationship between personal accounts and the private pension sector in general. We are very clear that we want personal accounts to be complementary rather than competitive and having the £5,000 cap is one of the signals by which we can demonstrate that. The fact that we consider there should not be transfers in and out of personal accounts is another signal.

I take note of the comment made by the noble Lord, Lord Oakeshott, about the issue of debt and the decisions that individuals should rationally take in relation to debt as opposed to auto-enrolment. In a sense, that underpins the report produced recently by the Pensions Policy Institute which looked at the whole issue of whether there are individuals for whom auto-enrolment would not be right. The noble Lord will know that the PPI’s conclusion is that even though some specific people might be at high risk, in general it supports the introduction of personal accounts. It also makes the point that general financial literacy will be a very important component of taking these proposals forward. The noble Lord will probably know that the Treasury shortly expects to issue a long-term financial capability paper. Obviously that will be very relevant to those questions. My time is up.

My Lords, like other noble Lords, I very much welcome personal accounts, particularly as they will benefit women working for small employers who very often do not have any pension scheme at all. They are greatly to be welcomed.

I want to press my noble friend on an issue that has been raised already by both the noble Lord, Lord Skelmersdale, and the noble Lord, Lord Oakeshott. I refer to the interaction of personal accounts with stakeholder pensions and the degree to which they represent an advance on that thinking. The references in both the regulatory impact assessment and the major report are fairly scanty on this subject. Perhaps my noble friend can help me. It is clear that stakeholder pensions did not have the effect we hoped they would because, first, they were not compulsory and, secondly, there was no employer contribution. The L&G figures show that where the employer contributed there was something like an 85 per cent take-up; where the employer did not contribute there was only a 13 per cent take-up. Thirdly, they were not fully portable, which meant that there were high set-up charges. There was therefore low persistency and quite reduced returns for employees. They also excluded small firms with fewer than five employees.

On all of the fronts where the stakeholder scheme failed to go as far as many of us would have wished in the climate at the time, personal accounts are very much to be welcomed. Through auto-enrolment they will offer self-compulsion; they will have a modest—possibly not fully adequate—employer contribution; and they will be fully portable. They should, therefore, allow for persistency, high returns and low charges.

I have some questions for my noble friend. First, he emphasised that about 60 per cent of the £8 billion or so the Government expect to go into personal accounts will be new savings. Where is that money coming from? How robust is that figure? Will it come from low-paid women? Will it come from employers with fewer than five employees? Who is paying? Who gains? Who loses?

Secondly, is it worth saving? Without going as far as the mis-selling point, there are some complicated interactions between the basic state pension, the state second pension, trivial commutation limits and pension credits which are not explored in any of the reports that I can identify. The PPI report and other research shows that someone who is older, poorer, in rented accommodation or with high debt levels will need very careful advice on whether they should stay in or stay out. I am not yet sure that we will have that generic, if not regulated, advice in place to ensure that there is no risk of inappropriate judgments and actions.

Thirdly, what will the pots be worth? The noble Lord, Lord Oakeshott, is right; we need to consider a man on median earnings, a woman on median earnings and on half earnings to see what, when turned into an annuity or possibly into a commuted pot, those sums will be worth.

Finally, what happens to people who are possibly above the UEL at £33,000 to £35,000 in a company where there is a shell stakeholder and nobody takes part? Will the employer have to make his stakeholder scheme at least as good as a personal account to produce an opt out, or will a personal account run alongside it?

I hope that my noble friend will be able to answer these questions. We need to see how much advance there will be, who will gain and the degree of robustness of some of the assumptions behind the report before we can give it the wholehearted endorsement that we want to give it.

My Lords, I am grateful to my noble friend. She takes a great interest in pension issues and I was interested in her comments about stakeholder pensions. It is worth making the point that for all the pejorative comments about stakeholder pensions, the fact that 3 million have been sold and £2.7 billion has been invested is a basis on which to go forward. My noble friend asked about the make-up of the 10 million people who are not in occupational pensions. I have some figures and hope that we can follow up with more. It is hoped that personal accounts might apply to between 2.2 million and 3.4 million women.

On the impact of SMEs and personal accounts, we reckon that of those 10 million people, around 5 million are covered by SMEs employing up to 50 people and another 1.5 million are covered by employers employing up to 250 staff. A very significant proportion of the people we wish to embrace within personal accounts are employed in small businesses. That is what makes it so important to ensure that small businesses are embraced within this system. I accept my noble friend’s point about very careful advice being available and refer her to my reply to the noble Lord, Lord Oakeshott.

I have one pot; for the median earner who earns around £23,000 per annum, starting at the age of 22 or 23 and saving until state pension age, the projection I have is of a pension pot worth around £60,000 to £70,000. That reflects a 15 per cent replacement rate which, together with the basic state pension and second state pension, would come to the 45 per cent replacement rate which the Turner report recommended.

My noble friend asked whether the scheme she referred to would be exempt under the legislation we are bringing forward. It could be exempt, but there would be two conditions—employees would have to be auto-enrolled and the employer contribution would have to be at least 3 per cent.

My Lords, I welcome the Statement as the culmination of a most intricate process, led initially by Adair Turner, and the diplomacy of Her Majesty’s Government in talking to all the parties concerned. I have to point out to the noble Lords, Lord Skelmersdale and Lord Oakeshott, that a wide area of industry and commerce, including the CBI and the TUC, has welcomed this approach. I regret the rather carping tone towards what has been a consensus development and the idea that somehow the insurance companies are miffed. That shows a lack of statesmanship on their part.

I turn to a question that was hinted at, if not stated, by the noble Lord, Lord Skelmersdale, concerning the term “opt-out”. As I understand it, there is no opt-out, in that sense, in the White Paper. Of course there would be considerable worries on the part of workers, many millions of whom rely on the automaticity of enrolment, if there were a bribe along the lines of what applies, for example, to the working time directive: “If you work here, you are expected to opt out”. I am looking for an assurance from my noble friend that that philosophy is not contained in the White Paper and that there are safeguards to ensure that employers will not be able to put unfair pressure on employees to give up their new rights.

My Lords, I hope I can respond positively to my noble friend. Where a good occupational pension scheme is already in place, it will be possible for the employer to be exempt from the personal accounts because employees will be auto-enrolled into the firm’s own scheme. We want to ensure that the process by which scheme exemption can be given will be as straightforward and non-over-regulated as possible but with the guarantee that at the very least it will be equal to, if not, as one would hope with many schemes, better than what is available through personal accounts.

We have enjoyed many constructive discussions with employers about the principles behind personal accounts. I can assure my noble friend that if employees are auto-enrolled into the personal accounts the employer has no option but to pay the 3 per cent contribution within the broad £5,000 to £33,000 band. Clearly there has to be some regulation to ensure that employers are compliant, and we want it to be in three stages. The first is a light-touch principle; it is right to assume that most employers will do the right thing. Secondly, we must ensure that education and advice are available to companies to make sure they know what is the right thing. Thirdly, there will have to be a backstop: a mechanism to ensure that where there is non-compliance, we are enabled to take decisive action against those companies. The details of that will be consulted on, but I hope I can satisfy my noble friend on the broad principle of how that will operate.