Pensions: Occupational Pensions — Question for Short Debate
Lord McKenzie of Luton (Labour)
My Lords, like all noble Lords who have spoken, I am grateful to my noble friend Lord McFall for initiating the debate and especially for his role in chairing the Workplace Retirement Income Commission. In six minutes it is impossible to do justice to its recommendations or the subject of our debate. This is an important piece of work which builds on the earlier deliberations of the Pensions Commission, although the noble Lord is right to highlight the change in circumstances in the few years since the commission reported.
Clearly, the economic environment has changed for the worst-a bleak dawn, as my noble friend called it-where real incomes have fallen, confidence in long-term savings is low and real interest rates are negative. At the same time, people continue to live longer. There is both an imperative to save and an expectation that consumers will do their bit to sustain GDP. Low interest rates have pushed up the value of liabilities of DB schemes, making funding more difficult with greater risks on employers. The noble Lord, Lord Freeman, spoke on that. For the DC environment, low interest rates have meant lower annuity rates and slower build up of capital, with the risks falling on individual savers. So it is little wonder that we have seen the number of employees in private sector workplace schemes continuing to decline, with most private sector DB schemes closed to new members and many to existing members. That is before taking account of the threats from the EU, to which my noble friend Lord Hutton referred.
The need to sustain and reinvigorate pensions is clear and the proposition to do this via occupational schemes is to be supported but we would be cautious about how employers should be engaging with employees on pensions and other savings, as this was certainly a bone of contention when auto-enrolment was planned with a distinction between giving advice and providing information. As the noble Lord's commission identified, although not a panacea, the recommendations of the Pensions Commission provided the foundation for reinvigorating occupational pensions. The components are well known, if complex, as the noble Lord, Lord Stoneham, said: a more generous state pension, flat-rating of S2P and the introduction of auto-enrolment. However, as we heard, things have moved on and we now have the coalition Government's proposals for a simpler, single-tier pension to consolidate the two components of the state pension and resources from pension credit. A higher state entitlement and the squeezing out of at least some means testing will clearly provide a platform to encourage further saving, but the proposition is not without its technical challenges. Perhaps the Minister will give us an update on the current plans. What work streams are under way to achieve this and what is the planned phasing of the introduction?
The Government are to be congratulated on sticking with auto-enrolment, although we express our disappointment at the deferred start date for smaller companies and at the fact that it will not be until 2018 that the full employer rate of 3 per cent comes into effect. A number of noble Lords identified that the 8 per cent would have to increase over time. Because the Government are raising the earnings figure, now heading north of £8,000, yet more people will miss out.
Like my noble friend Lady Drake, I urge the Minister to confirm that there will be no further delay in the implementation of auto-enrolment. It has the potential to change the occupational pension landscape, although, as my noble friend Lord Hutton said, it is too early to judge. This is linked to the success of NEST, which has the clear remit of delivering a national scheme with low charges. It has been constrained in its construct as part of the consensus that underpins the Pensions Commission's reforms. The removal in due course of the prohibition on transfers in, and of limits to annual contributions, argued for by my noble friends Lord Myners, Lord McFall and Lady Drake, will certainly be right.
A range of other technical issues would help encourage pension savings. New rules facilitating the cashing in of small pension pots-which would give special help to women-tackling short-service refunds, and changing the rules on enhanced transfer values, will all help. We will support the Government as they tackle these measures. We were promised a bonfire of regulations-from the trivial to the huge-by the Pensions Minister. Perhaps the Minister will give us a clue to what is included in the "huge" category, and how this will help to invigorate pension saving.
There is a lot in place or coming on stream that can make a difference, but we agree with my noble friend that there is much that the industry also must do to address fee levels and structures, and secure greater transparency and a more flexible annuity market. The Minister was given novel suggestion by my noble friend Lord Myners. All the measures are vital, particularly if DC schemes are to take the strain of a challenged DB regime. They are also vital if reputations are to be enhanced and confidence generated. The Workplace Retirement Income Commission stressed the need to develop products for DC schemes that mitigated the risk for individual members. This raises issues of collective DC, hybrid schemes and potentially many more, including the consolidation of a range of smaller schemes. Of course, it depends on whether the risk to be shared is the investment risk or the longevity risk. The development of such products and the complexity that they might bring sharpen the need to address the governance of DC schemes.
In conclusion, I congratulate my noble friend Lord McFall again on the work of his commission and on stimulating the debate tonight. As the report says, pension policy needs to be considered in a long-term context of 40 to 50 years-certainly longer than the routine political cycle. An independent pension commission would help sustain the changes that are needed.