My Lords, we have had an extraordinarily well-informed and interesting debate, for which I, like others, am grateful to the noble Lord, Lord Fowler. I apologise that we did not have it a month ago but, as the noble Lord, Lord Higgins, knows, I was having eye surgery at the time and could not have done it.
It is undeniable, as many noble Lords have said, that people are failing to save enough to fund their retirement. I do not disagree with the figures that have been quoted: around 3 million are currently not saving enough and a further 5 million to 10 million may not be saving as much as they would wish.
The analysis is shared by all of us, so I shall not spend much time on it. Fewer years in the labour market are being asked to support longer years out of the labour market. We enter work later because of more extended education, we leave work earlier and we live longer. As my noble friend Lord Elder said, the figure is a year or two for every decade.
Moreover—this issue has been underplayed in this debate—there has been a trend to retire early, which, incidentally, has been a trend across Europe. By state pension age, around two-thirds of men and half of women—almost 3 million people—have left the labour market. The key point—noble Lords will be aware of the statistics—is that if one wants a modest occupational pension of £100 per week, one needs to save £30 per week if one retires at 65 but one needs to save £85 per week if one retires at 55. That involves 10 years less to pay in and 10 years more to live off it. That means that one virtually has to treble one's contribution.
The Government's priority, despite the comments of the noble Lords, Lord Fowler and Lord Blackwell, who quoted parts of the Green Paper, is to encourage more people to work to 65 rather than compulsorily—as opposed to voluntarily—requiring them to work after 65; for example, until the age of 67. That is not to say that that is a closed issue; however, in view of the statistics that I have provided, that is where our priority currently lies. Too often, people have a twilight of dependency on benefits between when they leave the labour market and when they draw their retirement state pension, which means that they go into it already having depleted their savings and without having a pension build-up. That is a major problem.
The question behind tonight's debate is: why are people not saving more, and what can we do about it? One suggestion that has been offered in the discussion group meetings and consultation exercises in which I have been engaged—this point is often made by financial consumer groups—involves financial realism; that is, people cannot afford the expense. Low earners in particular—those earning less than £11,000 or £12,000 a year—cannot be expected to save into a funded scheme. It is reasonable to expect those people to rely on basic state provision and an unfunded support system. However, of those who are not contributing, one-quarter are younger than 24 and/or earning less than £10,000 a year. The problem is that if one does not start early, one does not build up.
Equally, there is a real problem for those with very low incomes of going for compulsion. That problem was raised by the noble Baroness, Lady Barker, and her colleague the noble Lord, Lord Oakeshott. Behind that, as the noble Baroness, Lady Byford, rightly said, there is the problem of the fear of debt in this country.
Women, in particular, put their part-time earnings into household expenditure hoping, too often wrongly—a matter to which I shall return—that their husbands' pensions will be theirs. So the first explanation is that they cannot afford it, and the second is—and this is a more comforting explanation—that they do not understand all that information, and that if only we gave them more all would be well.
There is a great deal of truth in that. The point about Sandler was not to seek to regulate the salesmen and saleswomen but to regulate the simplified product. That way we might be able to rebuild confidence, together with pension credit, which was like a wrap-around to allow one to enjoy more. That is true. We certainly need simplicity of products and information about them.
There are others who, although understanding the situation well enough, face conflicting demands, such as student debt, mortgages, university costs for children and possibly even care for the elderly. So they put off making pensions provision or thinking about it until their late forties or fifties. We are therefore almost asking people to be counter-intuitive; to start their pensions early and delay some of their other expenditure as late as possible in order to benefit from compounding. That of course is counter-intuitive to natural priorities.
That is reinforced by another dimension, which has been highlighted by our research, our focus-group work and from our meetings with organisations. Many people believe that it is an issue that they can put off. They are not perhaps sufficiently worried and do not have enough sense of what your Lordships have referred to today as a "pensions crisis".
People recognise that they have not put savings away in a pensions format. They see high employment—and we have the highest employment since 1977. That is before taking into account the extra that comes into households of second earners, which has increased dramatically since the 1970s. So there is a real sense of security through earning at the moment, added to low inflation, which as we know makes the value of one's savings last much longer, together with soaring house prices. It is a comfort blanket, in particular regarding people's homes.
It would be sensible, as one noble Lord mentioned, to improve products that allow safe withdrawal of income from property without trading down. The Financial Services Authority will need to explore that area.
Putting off pensions provision—and I return to a point raised by the noble Baronesses, Lady Barker and Lady Greengross, with which I rather agree—is essentially a problem for women. Psychologically, they have the mindset that his pension is theirs; that they not only have the comfort of a house but of a husband, or even—and this is a worse illusion—a property and a partner. Yet we know that one marriage in two ends in divorce. Furthermore, 60 per cent of the population think that "common law wives" exist and that they have rights. They are wrong on both counts.
That suggests that many women will enter old age without even a national insurance pension, let alone an occupational pension. How many women know the difference between the lower earnings level and the primary tax threshold? I guess that there are few. Yet, if only they knew that by working an extra one or two hours in order to get over the LEL, they would build up an independent pension, how much we could help them.
Much of this may be transitional. To a degree women carry an older mindset that they will look after children or the elderly, while also trying, but not yet succeeding, to build up an independent pension of their own.
The noble Baroness, Lady Barker, referred to the married women's stamp. Women have made at least three elections to continue with the reduced married women's stamp, as well as being exposed to several publicity campaigns, including one as late as October 2000. I refuse to accept that women are children and cannot take responsibility for documents they signed once when they married, a second time in 1977–79 and again in responding to campaigns in the 1980s.
The next reason why people may not have developed a pension is because they think it is not financially worthwhile and that the returns are not good enough. Perhaps they do not appreciate the effect both of compounding and—disturbingly—the benefit of employer contributions, let alone the tax wrap-around in which their 5 per cent may produce a 12 per cent or 15 per cent contribution that goes into the pot. They may overestimate the problems and the price of inflexibility—that they cannot get at it. Therefore, they fear not only poor returns but that they are locked into a no stop-loss situation.
Finally, and this is the biggest obstacle, there is the perception of risk. There has been mis-selling. Have the sharks now become playful dolphins? There is the risk to DB schemes, from Maxwell through to Maersk. There are problems of seeking additional contributions to DB schemes. As regards problems with DC schemes—and I agree with several noble Lords, in particular the noble Baroness, Lady Greengross—providing the money going into the pot is the same as for a DB scheme, over time it can have the advantage of portability without necessarily producing a lower return.
It will be difficult for people to build up a decent DC scheme when, as with one major food retailer—I am tempted to name and shame—both the employer and the employee put in 2 per cent. That will not produce a decent pension. I pay credit to, for example, insurance companies which put in 12 per cent and 4 per cent from the employee. That can produce a return not dissimilar to a decent DB scheme.
If those matters have contributed towards people failing to save, what is the appropriate response of government? I was particularly disappointed in your Lordships—as a junior Minister I scold former Secretaries of State, if that is not impertinent—with respect to the language directed at the Government regarding complacency. The suggestion seemed to be that they have a quiver-full of solutions with which to address the problem. I suggest a situation and ask your Lordships to think about it. If the FTSE today stood at 7,000; if therefore half the companies in the country were still taking contribution holidays—indeed a quarter were taking such holidays last year—and if therefore finance directors were not pressing for compensation to go from DB to DC schemes, and more importantly to halve their contributions in the process, and were not exposed to the rigours—and unfortunate ones at this point in time—of FRS17, would we then be talking about a crisis? I ask your Lords to what extent you would hold the Government responsible for what underpins the situation in which we now find ourselves.
The Government's response is to do as the Chancellor is doing, which is to build for the future and continuing health of the economy in terms of jobs and pensions—because my job is your pension, and your pension investment is my job. The best guarantee of a decent pension in one's 60s is a decent job in one's 20s. Every former Secretary of State in the Chamber today, every Minister and every contributor knows that. The fact that we have the lowest unemployment since 1977 and that there are 1.5 million more jobs in the economy is building up prosperity, even if we have not yet managed the trick of turning that prosperity into pension savings.
I suggest that the somewhat futile debate about ACT is not germane. I have tried, but cannot work out the hypotheticals of what if it had never happened. However, I shall make three points. It was a tax privilege that encouraged the distribution of dividends rather than their retention. Pensions are already, and continue to be, heavily tax-privileged, which is why I suspect there was so much pressure to scrap the annuity rule at 75 because it is such an attractive proposition. As my noble friend Lord Haskel said, what matters at best value added is management not tax rates.
The second point is that through the windfall tax we have reclaimed £5 billion. But it was connected at the same time to a cut in corporation tax worth £3.5 billion a year. I calculate that 10 speakers have mentioned ACT, but not one has mentioned the cut in corporation tax. Funny that. If reinstatement was such a good idea, as some noble Lords have suggested—I know that the noble Lord, Lord Fowler, would not commit himself on this point—I point out that Mr Willetts has made it clear that he has no intention of reinventing ACT, unless of course policy changes.
So what can and should the Government do? First, and I think that noble Lords will agree, they should meet the needs of those who cannot save. I agree entirely with the noble Lord, Lord MacGregor, that what needs to be provided is a floor standard for citizens of a secure basic retirement pension in order to deal with poverty today and to reduce the risk of poverty for future pensioners.
One popular proposal suggested today is to scrap pension credit, state second pension and to add it to the basic state pension. The noble Lord, Lord Northbrook, wanted to link the entire thing to earnings. At a stroke, as far as I can see, that would add something like £46 billion to public expenditure by 2030. Heaven knows what that would do to the 60:40/40:60 ratio. That is for him and his Front Bench to work out.
Basically, with such proposals they are asking the basic state pension to carry a lot of weight. That is arguable—my noble friend Lady Turner has honourably argued that for many years—but there are two key points. First, the basic state pension is a national insurance pension. It is contributory. None of your Lordships mentioned—I am sure that you know—that 51 per cent of female pensioners now do not enjoy a full NI pension in their own right, because they do not have a complete NI record, and they are the poorest.
So any increases in the basic state pension, which go to everyone, go to us, but not to her, because she does not have a basic, complete state pension. If we are not careful, such proposals will redistribute wealth upwards, as opposed to what we are trying to do, which is to target wealth downwards to the poorest. I challenge your Lordships to address the point about a basic state pension funded by national insurance.
The second point is that that preserves inequalities. We have debated that before, but if we really want to help the poor, and we can either give £1 to everyone or £5 to the poorest fifth, I know where my priorities lie.
The first role of government is to be a provider and, through the basic state pension but, above all, through the state second pension, which is heavily redistributive, and pension credit, which ensures that value is retained for small savings—and which does not presently exist, because income-related benefits cancel it out—we are meeting that task.
The second role of government is not just as provider but as enabler, to help extend savings provision, to help to deliver and to construct vehicles to deliver private contracts. How do we incentivise people to save? We must keep people in the labour market longer. I agree with your Lordships' calculations about the 7.5 per cent on the increment past 65, which is why one proposition is to increase it to 10.5 per cent and to advance that. We need to bring more marginal people into the labour market—lone parents and disabled people—and we are succeeding in that. In the Green Paper, we are consulting on whether joining an occupational pension scheme should be a compulsory option available for employers to impose on employees.
I was also intrigued that no one mentioned vesting. Let me give your Lordships an example. Ms Patel is earning £20,000 a year and putting 5 per cent into an occupational pension—£2,000 after two years. At present, without immediate vesting, the money could be taken out after one year and 364 days. Her £2,000 would be worth £1,200. With immediate vesting, it is worth £3,400. Especially for women, part-timers and those who change jobs when they are young—often quickly—immediate vesting will transform the early size of the pot, therefore compounding the possibilities.
We are also helping through tax simplification and through stakeholder pensions. I accept the point made by the noble Lord, Lord Jenkin of Rodin, but my statistics state that more than 1.25 million stakeholder pensions have been sold. That is an honourable figure; although we want more. There is a debate about capping; but I disagree with him—what is depressing that figure is not capping but the failure of employers to contribute. Where employers contribute, 85 per cent of employees take up stakeholder pensions; where they do not, only 15 per cent do. That is a more important driver in achieving a spread of stakeholders than is the 1 per cent capping charge.
If my noble friend Lord McIntosh said 1.5, that may have been a misreading of 1.15, given the latest statistics that he had at the time. If so, I apologise to the House for any slip of the tongue that may have occurred.
We again had the request about annuities at 75—I think that the noble Baroness, Lady Byford, put the case most eloquently that one should not be forced into that. Leaving aside issues of morbidity drag, about which I suspect that others know more than I do, and the risk—which I do not rate especially highly—of people blowing it all on a cruise, the real question is why people do not want to annuitise at 75. I suggest that that is because the pensions vehicle is so attractive by virtue of its tax privileges that people want to use it for devices and reasons other than merely as a secure income in old age—as an inheritance vehicle for their children.
If I want to leave money to my children, there are plenty of other ways in which I can do that. I do not have to ask the state to do it by wrapping it with the tax privileges associated with pensions. Leave it through property, building societies, bonds, or whatever one wishes, but do not unreasonably ask for the privileges of high-rate taxpayers to enfold around a pension and then have the right to leave it to one's offspring at the expense of those who have no such tax privileges.
If the first role of government is as provider and the second is as enabler, I think that we all would agree that the third is as educator, addressing the issue of information. I hope that with our combined pension forecast we shall do exactly what the noble Lord, Lord Freeman, called for. It will come as a cold blast of reality to many people when they read what they might otherwise be getting. That has already started to work: when we have tested that on a pilot basis, people begin—even if only modestly—to put extra money into their pensions. We hope to roll that out on a voluntary basis with other companies over the course of the year. We also want to develop the mass marketing of financial advice; I do not think that there is any disagreement about that.
Finally, there is the question of government as regulator addressing the issue of risk to rebuild trust and confidence in the pension system. That touches on some of the issues raised by the noble Lord, Lord Oakeshott, about the minimum funding requirement, the role of the new regulator and questions about wind-up—I welcome many of his comments about that. It also addresses the issue raised by the noble Lord, Lord Alexander of Weedon, about transfer.
I understand that schemes are usually required to provide transfer value populations on receiving a request from a member. That time limit can be extended by the Occupational Pensions Regulatory Authority in all sorts of circumstances. It has currently decided to extend it until legislation is amended. Dependent on the outcome of consultation, regulations could come into effect before June. That may not have the significance suggested by the article in the Financial Times today but, if I have any further information, I shall be happy to write to your Lordships.
Given the Government's role as provider, enabler, educator and regulator, there is one final role, which is, as I said, to help to build trust and develop partnership. That is why, as my noble friend Lord Lea said, we must all own the problem: employers, employees and the financial services industry as well the Government. We await the full responses to the Green Paper as we shape our response. I am sure that your Lordships' debate, which I thought was extraordinarily good, will help to inform that response. I thank your Lordships for that.