My Lords, I am pleased to follow the noble Lord, Lord Stoneham, and to comment on the Government’s commitment to people who save for retirement and to create a single-tier pension. People save for their retirement through the compulsory national insurance system, through auto-enrolment into workplace pensions and through an active decision voluntarily to save more than is delivered by auto-enrolment. Achieving a sustainable and fair pension system that delivers desirable outcomes for people requires a holistic approach across both the state and the private pension system.
The Government’s single-tier pension reforms are evolutionary, in that they continue at a faster rate than reforms commenced by the previous Labour Government in 2010. They will certainly deliver a higher state pension sooner for many women and carers and those on lower incomes. That is surely to be welcomed.
The state pension will always form a greater part of the retirement income of carers, who, as a consequence of their caring responsibilities, will spend longer periods out of the labour market or participate for fewer hours. It is regrettable, therefore, that the Government continue to exclude an ever-growing number of part-time working women from the benefits of auto-enrolment into a private pension.
Pensions are very long-term, and it is important that there is a consensus across the political spectrum about the long-term intention for pension policy. Otherwise, we will simply revert to the mistakes of the past, when successive Governments over decades took incremental decisions which contributed to an increasing dependency on means-tested benefits and to the huge decline in private pension savings, which can be seen from the early 1980s.
The single-tier pension will mean winners and losers, as changes normally do. It will be important when we consider the Bill fully to understand those trade-offs and whether, for the losers, the loss is fair and proportionate. The introduction of the single-tier pension is intended to strengthen the firm foundation for private pension savings and reduce reliance on means-tested benefits. Both are desirable, but a single-tier pension does not of itself achieve those intentions, as was acknowledged by the Government in their report, The Single Tier Pension: A Simple Foundation for Savings, which states that the starting level and uprating for the single-tier pension will have significant implications for what can be asserted about gainers and losers. The state pension must hold its value against earnings over the long term if ordinary people are to have a realistic prospect of achieving a reasonable replacement income in retirement.
Increasing the state pension age in the face of increasing life expectancy is part of a sustainable pension system. Reports from the Government Actuary on trends in life expectancy will inform the Government’s view of that age, but it is less clear how much importance will be given to the report of the independent panel reviewing additional factors such as socioeconomic differences in morbidity and mortality. Those are matters of considerable significance when setting public policy. As my noble friend Lady Hollis powerfully articulated, it would be most unfair to ignore them.
As to private pensions, there are some most welcome actions proposed by the Government, such as banning consultancy charges for auto-enrolment schemes, tackling charges generally and the abolition of short service refunds. With auto-enrolment, pension policy cannot rely on caveat emptor. Auto-enrolment is predicated on the behavioural insight that, for many people, improved information will not overcome the inertia that prevents their actively choosing to save for a pension. Furthermore, the pension chosen for auto-enrolment is a decision made by the employer, not the worker. A consequence of using inertia to raise pension saving levels—that is to say, not relying on people actively to choose to save—is that ordinary savers will have even less power and influence over the operation of that market. Therefore, it is welcome to see the Government indicating a greater willingness to set minimum standards.
There are many regulators in the private pension space—the FCA, the OFT, the TPR and the DWP—and the Government may not want to change the organisational architecture, but the need for enhanced co-operation between them is essential. The FSA’s proposals to allow employers to negotiate consultancy charges with their advisers and for those to be deducted from their employees’ pension costs were clearly not in savers’ interests and did not sit well with the messages coming from the pensions regulator. In workplace pensions offered by insurance companies, there remain significant governance challenges. No single regulator or government department has responsibility for ensuring that contract-based schemes provide value for money and a high standard of governance. Too much reliance on disclosure of information will not produce those. The majority of savers will struggle to process and act on the information provided, and the overwhelming majority will not make active decisions but end up in the default fund.
I hope that the Government will be brave and use their powers under the Pensions Acts 2008 and 2011 to set up more highly specified minimum quality requirements. I accept that it is reassuring that the Government have already announced their intention to consult on the OFT findings on the working of the pensions market, to be published later this year.
Finally, defined benefit pension provision in the private sector is, for the most part, in managed decline. The new duty on the pensions regulator to minimise any adverse impact on the sustainable growth of an employer raises concerns. The setting of prudent discount rates, for example, remains a key battleground—I make no apology for using that phrase—between trustees and employers. Trustees have to give proper consideration when setting deficit recovery plans. There is real tension between the very long-term funding requirements of a defined benefit pension scheme, the importance of the employer covenant being good for the funding of that scheme for decades to come, and the five-year horizon that many companies work to when making corporate decisions. The cases of Nortel and Lehman Brothers, going through the Supreme Court at the moment, are good case studies of such tension.