My Lords, the Government intend that all those who stand to benefit directly from the new pensions flexibilities provided by the Taxation of Pensions Act 2014 should have access to pensions guidance, which will help to empower them to make informed decisions about their pension savings.
The amendments to Clause 47 and Schedule 3 are technical amendments to ensure that this is the case. The amendments in this group adjust the definition of pensions guidance in new Sections 333A and 137FB of the Financial Services and Markets Act 2000, to extend pensions guidance to survivors of members who have benefits to which the flexibilities will apply, rather than just to members of pension schemes. This is needed because in some circumstances pension schemes may provide benefits to survivors of members of the scheme other than insurance-based products or cash lump sums—that is, flexible benefits—without their becoming members of the scheme. I beg to move.
My Lords, a large number of government amendments have been tabled for today’s business. The impression given is of last-minute thoughts responding to last-minute contributions and suggestions. If the Government had been doing their groundwork properly, they would not have had to respond to such issues by moving the amendments.
I thank the Minister for doing his best to explain the amendment. I think he has said that these are minor and technical amendments, but can he confirm that that is so and that they do not substantively change the effect of the Bill? Quite frankly, we know what the Government are saying in these amendments. I do not think there has been time to study them very well, so we will reflect on what the Minister has said and consider it very carefully ahead of Report.
My Lords, I can absolutely confirm that these are minor and technical amendments.
Amendment 29 agreed.
Clause 47, as amended, agreed.
Moved by Lord Bradley
30: After Clause 47, insert the following new Clause—
“Guidance guarantee: annual review
(a) the number of people who have taken up the guidance;
(b) the number of people eligible to take up the guidance who did not do so;
(c) the effectiveness of the guidance in preventing instances of consumer detriment through the purchasing of inappropriate products.”
My Lords, I beg to move Amendment 30. At the start of our deliberations, it is worth reminding the Committee that at Second Reading we took two pension Bills together: the Pension Schemes Bill and the Taxation of Pensions Bill. We did so because it was recognised that the two Bills were interrelated and that the issues to be scrutinised and debated were inextricably linked between them. While there was no debate in this House on the Taxation of Pensions Bill, as it was a money Bill, it would be impossible not to refer to these interrelationships in our deliberations today on such matters as pension guarantee, guidance guarantee, product development and the financial and economic consequences of the Bills.
Furthermore, we will continue the theme that we developed on day one in Committee: since so much of the Pension Schemes Bill relies on regulation—to date such regulations have not seen the light of day—we will continue to press the Government for far more information on the regulations, to try to make as much sense as possible of how the proposals in the Bill, and the Bills, will be implemented.
Similarly, we have highlighted the speed at which this legislation is being brought to the statute book, which further hinders scrutiny not only inside Parliament but by key stakeholders. These include those who will be responsible for delivering the crucial guidance guarantee—particularly Citizens Advice and the Pensions Advisory Service—and the pensions industry and its representative bodies, who will need to respond to the effects of the policy changes, some of which come into force in barely three months’ time.
As we have made clear throughout our deliberations, the overriding objective is broadly to support the freedoms and flexibilities in the Bill and to ensure that the public have all the information they need and the guidance they seek to ensure their interests are protected, and that they receive the best outcomes for their retirement without the fear of the scandal, for example, of mis-selling, which the public encountered some years ago.
One example of what I am alluding to emerged only today with the revelation from the Government that only 45% of new pensioners will be entitled to the full new flat-rate state pension in the first five years of the system. That is 2 million people who will not get the full amount. Certainty of the amount of the new pension will be critical in the decisions people may make about how they plan their retirement income or draw down cash immediately after April. I know that the Minister will want to clarify the situation when he responds.
It is in that spirit that I move Amendment 30. At the heart of the amendment is our wish to ensure that the Bill work in the way that it is intended, and that the guidance will be both taken up and prove effective in helping people to choose the right products to fund their retirement or to make the right decisions about lump sums or other retirement income. We believe that guidance is needed but we are concerned that this House has, to date, been provided with too little information about what guidance will be offered. Additionally, will the quality of this guidance ensure that people make the right decisions for themselves and their families, now and in their later years?
I welcome the fact that more information about the guidance has been produced today and I thank the Minister for providing the Committee with it. In particular, we now have the title of the service, “Pension Wise”, and the branding, “Your Money. Your Choice”. However,I stress that at this point we are talking about guidance and not advice. We have made this point on a number of occasions during our deliberations and it is important to keep in mind the distinction between guidance and advice on which people rely.
I know it is intended that the guidance should be comprehensive—that has been elaborated on today in the announcement from the Treasury—which, to some extent, is reassuring. The assumption is part based on the discussions in the Public Bill Committee in the House of Commons, especially the interchange between the Minister for Pensions, Steve Webb, and the shadow Minister, Gregg McClymont. The Minister said in the other place:
“Guidance will discuss the pros and cons of different financial products and services”.—[Official Report, Commons, Pension Schemes Bill Committee, 4/11/14; col. 283.]
He quoted the Financial Conduct Authority, saying that,
“guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement options”.
The FCA also thinks guidance should include information on tax matters. This is clearly an important consideration. The Minister responsible in the other place went on to say that a guidance session has to be person-specific and that he was consulting for opinions, attitudes and expectations on what is needed in good guidance.
I realise that the Treasury is taking this matter forward and leads on this. Again, I further welcome the information that has been provided in the guidance guarantee today. We have to ensure that we can digest the contents of that information that I received at lunchtime today, so that we can further consider the matters within it. That may lead to further consideration of the detail on Report.
It is reassuring to know that the Minister envisages guidance sessions to be comprehensive, but it raises the question of how much it will cost and how those costs will be met. The National Association of Pension Funds estimates the cost of advice for people seeking an annuity under the current system to be £681 million—I mean £681 per session. It does not go quite as far as millions; we might get to that at some later stage. That is hardly a simple assessment but it is not such a comprehensive session, in many ways, as the far-reaching guidance envisaged by Steve Webb, the Minister, and the Financial Conduct Authority.
At £681 per session, it will cost £480 million to provide those 600,000 people retiring in 2015-16 with guidance. But how many people will, in practice, seek guidance? It is safe to assume that some will not choose to take it up, perhaps because their pension pot is too small—maybe less than £10,000, although it could be argued that this group is the very one that will need the best advice. Others will pay an independent financial adviser. The Legal & General group helpfully undertook a trial of free advice to some 9,000 people. It reports that only 2.5% took up the offer. This would cost £154,000 at £681 per session. The Chartered Insurance Institute estimates a 90% take-up. This would cost £368 million. Which do the Government think most likely to be correct? Have the Government risk-assessed this? If so, can this information be available to the Committee? I note that the Treasury has today estimated that a cost of the service at £35 million for the year 2015-16. I would therefore be grateful if the Minister would tell the Committee how this amount has been calculated.
The Minister also told the Public Bill Committee, on
The current designated partners, the Pensions Advisory Service and Citizens Advice, are very credible providers of advice and guidance generally. I am sure that Citizens
Advice will ensure that all 380 independent bureaux, which will deliver that advice, have all the necessary public liability insurance in place to protect them from claims arising from the guidance tipping into advice and then being acted on. But is it right not to regulate this market? Will others seek to enter the market with far less credible track records than these two esteemed bodies? For example, will people selling products be able to offer guidance via the designated lists in the future? Furthermore, could the Minister explain what redress people will have in practice? With 600,000 people entitled to free advice, it is inconceivable that something will not go wrong. The fact that it is guidance, not advice, could prove to be an inadequate veil to hide behind. The Minister in the other place seemed to think that few people would seek redress. However, I remain concerned, and the implications could be huge.
I turn to the specifics of our amendment on an annual review of the guidance guarantee. In spite of what has been provided today and throughout the deliberations at all the stages of the Bill, we are being asked to pass legislation here when we still have little real information on which to base full support for it. I hope the Minister can provide a great deal more detail to the Committee today, based on the information that has been provided. If necessary, as I said earlier, we can come back at a later stage for further deliberation.
I conclude with some points that I have gleaned from scrutinising the debates and evidence given in both Houses. First, the guidance is intended to be comprehensive and we welcome that. But we note the views of Rachael Badger of Citizens Advice, who told the Committee on the Taxation of Pensions Bill last year:
“Guidance sessions will be tailored to people’s circumstances. They will cover things such as tax benefits, possible social care needs, savings and debt; there will also be signposting to regulated advice if that is appropriate”.—[Official Report, Commons, Taxation of Pensions Bill Committee, 11/11/14; col. 23.]
Will the Government confirm in their response today that all those matters will be properly covered?
Secondly, I recognise that guidance will also be available online and by telephone through the Pensions Advisory Service, but will the Minister give details of the proposed 45 minute sessions that we received details of in the information today and of how the cost of the £35 million that I have already alluded to has been calculated for 2015-16? Thirdly, will the Minister allay the fears identified by, among others, the Financial Services Consumer Panel? In the evidence session to the Taxation of Pensions Bill, it said:
“We are very worried about the face-to-face guidance delivery. It is a huge challenge for CAB to get ready for April”.—[Official Report, Commons, Taxation of Pensions Bill Committee, 11/11/14; col. 12.]
The training and capacity of Citizens Advice and, of course, the Pensions Advisory Service must be in place. Can the Minister confirm that it will be—for the number of people who will be seeking that advice—perhaps before, but immediately after, the April implementation date? Fourthly, I repeat our concern that the delivery partners will not be regulated but merely monitored.
The central argument, as we know, is that we are being asked to have faith that the Government have fully appreciated all the implications of the legislation, in spite of the speed of implementation and the fact that so much relies on regulation and not primary legislation. We are being asked to take too much on trust. Not unreasonably, this amendment seeks to reassure us that the legislation will work in the way intended. It is right to ensure the quality of the guidance and that adequate funding will be available so that people can have access to the guidance that they need. Specifically, we are asking for a review to include, first, how many people are accessing the guidance that they need. Given that the estimates vary between 2.5% and 90%, this is crucial. Given that many people have limited knowledge about pensions, we need to monitor this to ensure that people know of the guidance that is available to them and where to get it, and that the service is promoted. Secondly, the review should look at why people do not take up guidance. Given that we all agree that it is necessary to offer guidance to help people make informed choices about pension pots and financial planning for their retirement, we need to be sure that they have considered guidance, and if they have elected not to take it up, it would be useful to know why. Thirdly, we need to assess the quality of that guidance and whether it is preventing people from purchasing the most appropriate products. We need to be assured that as the guidance rolls out, the first users of the service are not seen just as guinea pigs but are used to inform and change guidance that is then appropriate because of the consequences of the information provided by those first people using it.
I am sure that we all recognise the need to provide people with guidance to make our pensions products safe for future pensioners. Given the lack of detail in the Bill, I am sure the Minister will want to support this amendment so that we can have a regular review of the workings of the Bill, and in particular how the pension guidance guarantee works in practice for the benefit of the people who use it. I beg to move.
My Lords, I find myself in sympathy with the spirit of the amendment but, I am afraid to say, the detail is somewhat defective. The spirit must be right because the more information that can be available and collected accurately, the better, so that the schemes in the Bill can be improved or amended in due course.
I draw the attention of my noble friend the Minister to the comments of the chartered institute and Royal London; first, on eligibility; secondly, on take-up; and, thirdly, on effectiveness. It is not really possible within a short period of time—that is, on an annual basis—to measure accurately the results of this legislation under those three categories. I look forward to what the Minister has to say, whether in response to this amendment or in due course on Report. I very much associate myself—and, I know, some of my colleagues—with the spirit of the amendment but I think the devil is in the detail.
My Lords, I am grateful to the noble Lord, Lord Bradley, for the way in which he moved the amendment, and for setting out some of the broader issues that are covered by a number of groups. I hope the Committee will forgive me if I, too, take my introductory remarks slightly wider than the amendment itself, because I think they are both relevant to this amendment and spill across a number of groups.
First, I draw noble Lords’ attention to the publication today, which the noble Lord, Lord Bradley, referred to, of an update from the Treasury on the implementation of the pensions guidance service. It announced that the brand for the service will be Pension Wise, with the tagline, “Your money, your choice”. This branding will be used by all delivery partners and is designed to be easily recognisable. The HM Government logo will be used to support the Pension Wise brand where appropriate, to underline the credibility of the service. In answer to one of the points made by the noble Lord, Lord Bradley, potential scammers and fraudsters should be aware that the Bill introduces a new criminal offence which means that anyone passing themselves off as Pension Wise could face prosecution. I can reassure the noble Lord at this point about the way in which the guidance providers will themselves be regulated, and on the basis for the compliance.
The standards for designated guidance providers are in fact a Financial Conduct Authority instrument, so it is a legal document which it is exercising, I am sure the noble Lord will be pleased to know, under Section 333H, Standards for Giving of Pensions Guidance by Designated Guidance Providers, of the Financial Services and Markets Act 2000. It is therefore very much a statutory underpinning of all the guidance which guidance providers will have to follow. This is a detailed document to which I will refer later. Also from today, following the publication of the document, individuals have the opportunity to register their interest in early access to the service as part of the piloting activities. The publication also sets out details of how consumers can access and use the guidance, with further information on the progress and costs of implementation. I am sure that noble Lords will find this information useful.
I can assure the House that the Government are committed, in looking at the specific amendment, to a full programme of monitoring and evaluation which will look at the uptake of the guidance as well as how it is achieving its objective of informing consumer decision-making at the point of retirement. I share the noble Lord’s focus on ensuring that we maximise take-up of the guidance, and that is why the Treasury is legislating, through this Bill, to place a duty on the FCA to require pension providers to signpost people to the guidance as they approach retirement.
Last year, the FCA consulted on its proposals for delivering against this duty, and in November published a very detailed policy statement with its near final rules. Following Royal Assent, these rules will require pension providers not only to signpost individuals to the guidance service in wake-up packs issued four to six months ahead of an individual’s nominated retirement date, but to recommend to their customers that they seek guidance or advice whenever a consumer wishes to access their pension fund. That is one of the reasons the Government are announcing the Pension Wise brand now, so that the industry can get ready for these new requirements and start bringing the service to their customers’ attention as soon as possible.
I will clarify a statement I made to the House at Second Reading in response, I think, to the noble Lord, Lord McKenzie, on the issue of requirements in the round and progress towards the standardisation of the pension statements that providers will send to their customers approaching retirement. While it is not yet a formal requirement, the Government are clear that progress must be made by industry more quickly. The FCA has clarified in its near final rules that will underpin the guidance service that information about a customer’s pension pot must include, at a minimum, the current value of the pension pot, along with information on guarantees and other relevant special features. Building on this, the Treasury is working with the industry to standardise how the key information is presented. We have made it absolutely clear that the Government consider this to be a key priority. A wide range of respondents to our consultation last year on the pension freedoms made a convincing case that it is necessary to help consumers understand and engage with decisions on what to do with their pension savings. The Government welcome the recent commitment from industry trade bodies to support the development of standardised materials by the Treasury and to encourage their members to use them in communications with their customers as soon as possible.
The Government welcome the FCA’s commitment to consider making such standardisation a mandatory requirement in the wide review of its rules that will take place in the first half of this year. If the trials show that such standardisation helps consumers, I imagine that will be a very strong case for the regulator to require it. We must recognise, however, that not all individuals will seek to take up the guidance offer. It is their choice to do so. They may have other sources of help and advice, such as an independent financial adviser or advice services provided by their employer. We must ensure that consumers know that the guidance service is available and how it can help them, and encourage consumers to use the guidance as far as possible. We must, however, respect the fact that there will be consumers who will be content and equipped, for a variety of reasons, to make decisions without taking guidance. The FCA has introduced a number of safeguards to ensure that consumers are encouraged to seek guidance or, if they do not, are provided with the necessary information to support decision-making.
In summary, it is made clear that firms should not do anything to dissuade customers from getting the guidance. It has reaffirmed the expectation that firms will encourage consumers to shop around on the open market. It has introduced a new requirement that when communicating with customers about accessing their pension funds, firms are required to ask whether they have taken guidance or relevant financial advice and, if not, to encourage them to do so. It has introduced a new requirement on firms to recommend that consumers should seek guidance or advice rather than simply signposting to it. It has also confirmed that firms will be required to give a description of the tax implications of the option selected by a consumer.
Similarly, we must accept that some people may make decisions which may not result in the best outcome for them or may not seem to an outside observer to be
“rational”, even after taking advice. That is their choice and their responsibility, and their decisions will be influenced by a range of factors unique to them, but it is worth noting that the FCA has clarified that where a firm is concerned that an individual is making a decision which does not seem consistent with their circumstances, it can check this with the consumer without it being regarded as regulated financial advice.
For too long, individuals’ ability to make choices about how they use their pension in retirement has been constrained by the majority of people being forced down a single route. It is therefore hardly surprising that this has resulted in a lack of engagement in the decision-making process, consumer inertia and a market that was not working in people’s interests. What the Government are working towards now, as they introduce much welcomed freedom and choice, is genuine consumer engagement with the decision-making process. Guidance will be key to that, and the Government will closely monitor and evaluate the effectiveness of the service in supporting consumer decision-making. However, requiring a box to be ticked to confirm guidance has been received or mandating guidance goes against the grain of consumer choice and consumer responsibility.
I apologise for setting out the background in such detail, but I hope that noble Lords will forgive me. Perhaps I may turn to one or two of the specific questions asked by the noble Lord, Lord Bradley. He asked about estimates for take-up of the guidance and how we had reached the figure of £35 million. As he pointed out, the estimates for the take-up of the guidance have been very wide, ranging from 2.5% to 92%—they could not be wider. In fixing a figure of £35 million, we have made our best estimate of the resources needed to deliver the advice in the first instance. It reflects the fact that demand is necessarily difficult to predict in the first year and we accept that the figure may need to be amended in the light of experience. In the document that we have published today, we have explained that if further funding is necessary to meet the demand, the Treasury will meet that cost in the short term. The guidance is funded on a levy. The levy has been set at £35 million this year. If we find that we have to spend £40 million or whatever, the Government will meet that cost in the short term to ensure that we meet the demand and reclaim it from subsequent years’ levies. There is no great science in getting the right figure at this stage. There is no figure for take-up around which there is consensus, but we think that we have reached a sensible starting figure.
On whether we think that training is in place, obviously a big programme is needed to achieve this, but we are confident that the training we are doing is adequate. Citizens’ Advice has a very good track record of giving advice to people in a whole range of circumstances, and this is just another. All CAB and TPAS staff delivering the guidance will receive training with a view to meeting the rigorous FCA standards. They will be required to demonstrate that they have the necessary pensions knowledge and the ability to deliver a quality guidance service before they talk to the public. There will also be a programme of continuous specialised improvement that maintains and develops their technical and professional skills.
The noble Lord also referred to the story on the BBC this morning about the new state pension. We think that the story gets it completely wrong by seeming to pass off as a new feature of state pensions the need to reflect that millions of people have been contracted out into private pension schemes since SERPS started in 1978. When the new state pension starts on
This is because contributions were made to a private pension and people have either paid national insurance contributions at a lower rate, or some of the national insurance contributions they paid were used to contribute to their private pension. If we were to ignore these contacted-out pensions, whether in the old scheme or the new, people would be paid twice for the same national insurance contributions, and that would be unfair on all of today’s pensioners and on people who have never been contracted out. The fact is that when we value people’s contributions in 2016 they will get at least what they would have got for their national insurance contributions under the current system. Many will get more, with women, carers, low earners and the self-employed set to benefit the most. Under the new state pension, people will need to have only 10 qualifying years to be entitled to a state pension. From 2016, contracting out will be withdrawn and people will all pay the same percentage rate of national insurance for the same state pension.
That is some way from the specific amendment we are discussing. Returning to it, I hope that I was able, in the early part of my remarks, to convince the noble Lord that we are taking the question of monitoring and evaluation seriously and that he will feel able to withdraw the amendment.
“until the service reaches maturity, overall responsibility for service design and implementation will remain within the Treasury”.
Will the Minister expand on that and say at what stage he believes the service will reach maturity?
Page 17 says:
“Telephone and face to face guidance sessions will initially be designed as a single session per consumer, though this will be kept under review”.
Will the Minister say something more about the components of that review? What will be taken into account in determining whether that single session for consumers is adequate?
It is difficult to give a precise answer to the noble Lord’s first question, about maturity. The Treasury is, for good or ill, going to keep its mitts on this process until we are very satisfied that it is working well and is seen to be in a stable and successful state.
As for the single session, noble Lords will be aware that people will be able to access the service either online, on the phone or in person. The hope is that by giving people all the financial information that they require, by encouraging them, in the case of pension providers, and by explaining to people, before they turn up to their session, the kind of information that we are looking for, it will be possible to give adequate guidance in one session. We accept that that will not be enough for some people; they will have forgotten something or a thought will occur to them once they have left. We hope that of those cases, which we hope will be a small minority, a majority will be able to get an adequate response to a specific query by going to the website.
We accept, however, that for some people that will not be the case, and that in a minority of cases some people will need to go back, either to make a subsequent phone call or to have a subsequent meeting. However, we are working very hard to minimise that necessity—because, obviously, getting things right first time will be in everyone’s interest.
My Lords, perhaps I could follow the point that my noble friend and the noble Lord opposite have just raised in respect of the same document. Box 2.A on FCA standards requires the people delivering the service to have a range of skills, which are numbered i to viii. I shall refer to a report last week in a newspaper that prints on pink paper, in which it was trying to seek from Citizens Advice and the Pensions Advisory Service the qualities of the people that they would employ. The report in the Financial Timesthat I am quoting from says:
“Citizens Advice said details of where the”, agents and case workers,
“would be deployed throughout its … bureaux … were still being finalised. However, it conceded that consumers could be required to make a further appointment if their questions could not be answered during their … guidance sessions”.
That raises two separate issues: one is the quality and skills of the people who are delivering the guidance service, and the other is whether Citizens Advice is on side with the idea of delivering it in one go. The comment seems to suggest that its people may not have answers to the questions that are being raised by those people seeking guidance in their first interview. I wonder whether the range of flexibility on the two is at all appropriate.
My Lords, we are keen to make sure that by the time people have been through the guidance process, they are able to make the best decisions for themselves. As I say, we hope that that will be possible in the vast bulk of cases first time around.
I think that what will happen in giving guidance in this area, as happens elsewhere, is that there will be a number of very special cases, but the vast bulk of people will have the same issues as others. The CAB, which after all has to give advice on the whole benefits system, which if anything is even more complicated than the pensions system, has a proven track record of developing the skills of people, and is very good at this—while this is, of course, what the Pensions Advisory Service does.
So we are confident that there are going to be well qualified people. We are building flexibility into the system—partly by having three ways of accessing it and partly, as I say, by, in exceptional circumstances or in a minority of circumstances, allowing people to go back—and we hope we are going to make sure that at the end of the day people will all have the degree of guidance that they need, relevant to their needs, to enable them to make well informed decisions.
I thank the Minister for his comprehensive reply, particularly when he said that the Treasury would be keeping its mitts all over the service. I assume that that was meant to be reassuring.
I note that he said that he thought the BBC had got the story wrong today about flat-rate pensions, and I listened with great care to his explanation, which we will need to reflect on very carefully. It is vital that people are clear about what their pension income will be when they are making plans about their whole-pot retirement income. I hope that when I read his response, it will be clear that that information will be available to people well in advance of them taking advice from the CAB, the Pensions Advisory Service or whatever source they may choose, so that they can rely on the figures provided to them by the Pension Service.
The report out today identifies a sum of £35 million. I accept that it is impossible to be very accurate about proposed take-up, but it is still not clear to me where in the range between 2.5% and 92% the £35 million is placed. I welcome the assurance that wherever it is placed, no one will be denied access to pension advice through lack of resources for those providing it.
The Minister said that the training will be “adequate”. We are seeking an absolute assurance that it will be of the highest quality. I recognise that Citizens Advice deals with very many complex issues. It will often have specialists in its offices who deal with particular aspects and services. Depending on the volume of uptake of pension guidance, we want to ensure that everyone within Citizens Advice who is expected to provide guidance is of the highest quality—not just of adequate quality—and understands all the implications of what the Minister rightly admitted is a very complex landscape to which we are moving.
There are still a number of issues to be considered. As I said in my opening remarks, we need to reflect further on the information that has been provided by the Treasury today. With the proviso that we may continue this debate at a later stage, I beg leave to withdraw the amendment.
Amendment 30 withdrawn.
Moved by Lord Bradley
30A: After Clause 47, insert the following new Clause—
“Pensions flexibility: impact on government revenues
(1) The Chancellor of the Exchequer shall, within a period of 2 years from
(2) The information published under subsection (1) should include an assessment of the impact on—
(a) the use of salary sacrifice arrangements;
(b) income tax receipts; and
(c) national insurance contributions.”
My Lords, the two amendments in this group are intended to ensure that the effects of the pension flexibilities on the public finances and savers are adequately monitored by the Government. Their purpose is to ensure the publication and proper analysis of the information and that it is placed in the public domain to ensure transparency.
I shall speak first to Amendment 30B, which requires the Treasury to produce a review of the effects of the pension flexibilities 18 months after they are introduced. This reflects the question we need to consider around the guidance guarantee and wider issues of pensions flexibility. We support the introduction of pension freedoms and flexibilities, but we want to ensure that they are done in the right way and that consumers are adequately protected. However, the pace at which the reforms are being brought forward leaves open considerable concern about the effects of the rollout. On Report in the other place, the Minister said:
“The Bill was originally much shorter and obtaining the approval of, originally, the Government to bring it forward took place before the Budget … as we are in the final Session of a Parliament, everything has been on an accelerated timetable”.—[Hansard, Commons, 25/11/14; col. 804.]
The pace at which the wider pension flexibilities provided for in this Bill and in the Taxation of Pensions Act have also lead to concerns among a number of other interested parties about whether the Government have fully bottomed out the policy and whether the rollout will go exactly as they are planning. A recent report in the Financial Times said that a lack detail about the reforms has left the industry concerned that they were at risk of failure. The chairman of the National Association of Pension Funds said:
“There are 4.2 million savers over the age of 55 who from next April will have the right to ‘choose’ how they take their retirement savings”.
He also said that,
“this lack of detail—this lack of clarity—is severely limiting our opportunity to get things right for our members … and it’s increasing the risk of failure”.
I point this out by way of background to show that, come April, there will still be a lot of work to do in reviewing the effects of the changes. The details of this amendment enable the Government to do just that. Conveniently, they will be along the lines of the test that we have already set out for these reforms: they should be fair; there should be decent products for low and middle-income savers; and the reforms should not result in extra pressures on the public finances.
The ongoing position of annuities is one such matter that needs to be considered. For some people, annuities will remain an attractive product because of the security they provide. The Treasury have recognised that this is the case. Therefore, if the market for annuities were to suffer some major change, and perhaps products that were good value in the first place were no longer then available, that would be something for this House to consider carefully. This is why the amendment requires a review to consider that matter.
Noble Lords will also be able to see that a review would be required to conduct an analysis of the cumulative effect on the revenues of the Treasury. Our other amendment on this point is focussed on the potential effects of salary sacrifice arrangements. It is also important to consider the possible costs that the state may end up having to provide. I am not aware of any Treasury analysis of this. The Minister may well want to correct me on this and I am happy for him to do so.
Further, we still do not know how this will interact with changes to social care. In its written evidence to the Committee on the Taxation of Pensions Bill, the Association of British Insurers expressed concern that,
“a continued focus on early access at the age of 55 means that there may be barely enough in the pension pots of some savers to cover their near-term retirement income needs, let alone enough left to stretch to care costs in older age”.
We have also seen a recent report in which it is anticipated that pension withdrawals of this nature are set to rise by £6 billion above what the Government currently estimate. The charity Age UK warned last week that significant numbers of people could run out of cash in later life by withdrawing funds under the new plans unless tougher safeguards are in place.
We do not believe that the Government have conducted sufficient analysis of the potential impact on the social care landscape. We also believe that there has been a disproportionate focus on the new freedom to access pensions early, and to take money out, which was not previously possible, as I have just alluded to. That is why we are calling on the Government to publish a review setting out the distributional impact by income decile of the reforms in the Bill. It is also unclear what effect having access to flexi-access pensions will have on means-testing for social care. I am not sure that the Government have the answer to this yet, but I would be grateful if the Minister could tell us what effect an amount of money that exceeds the means test level in a flexi-access draw-down account would have on the individual’s liability. As I have already pointed out, that money may be expected to last until death, as an annuity would have, but it may be accessible in a way that capital sitting in a bank is. Will that meet the means-test criteria or not?
Just a few months from the changes coming into effect, there are clearly still a number of unanswered questions. That is why our amendment also covers a proper behavioural analysis of consumers in the light of the new freedoms and flexibility. At this point, may I also ask the Minister a question about access to funds? Is the report in the Sunday Times correct that the Minister in the other place is considering whether someone who has already taken an annuity may be able to buy themselves out of that so that they can be included in the new flexibilities and freedoms?
The other amendment in this group requires the Secretary of State to produce a report on the revenue impact of the changes contained in the Bill and the Taxation of Pensions Act. Taken together, there is the potential for the Government to lose a great deal of revenue. As a result, we want to probe the impact that this is likely to have on the figures that the Government have presented in the Budget and in subsequent reanalysis. The main issue at the core of this is so-called salary sacrifice, a potential tax effect first highlighted by John Greenwood in the Telegraph, whereby someone over 55 pays a large part of their salary into their pension pot to avoid paying national insurance and income tax. The Budget freedoms would then make it possible for them to flexibly access their money through their pension fund, saving them and their employer a potentially large amount of national insurance. Some 25% of what they access will be tax-free and the rest will be charged at their marginal rate of income tax. This does not appear to have been the Government’s intention, and steps have been taken to try to prevent this. An annual contribution allowance of £10,000 a year for anyone who is accessing pension benefit restricts the possible tax leakage but does not prevent it. The reduced £10,000 limit is activated only after the pension has been flexibly accessed for the first time. As explained by the Association of Accounting Technicians:
“In the first year, before the £40,000 allowance is lost, individuals over the age of 55 will still have the scope to save … NI on the full £40,000, provided they have the necessary earnings, less their existing pension contributions. Where an individual flushes (passes) an extra £30,000 through pension rather than drawing salary they will achieve a saving of £3,600 in employee NI, more than £1,500 in income tax and, also, £4,140 in employer NI (13.8%) in the first year. A total loss to the public purse of £9,240. The ‘Freedom and choice in pensions’ rules mean this money can be withdrawn immediately if an individual is over 55. This fact means that there will not be clear distinction between salary and pension for this age group”.
Questions remain for the Minister to answer over, first, whether that possibility was adequately taken into account before the change was announced and, secondly, whether the revisions made since then are sufficient. For instance, the Government’s revised figures that take into account the changes made since the Budget forecast a loss of £35 million in the first year, and then £25 million for years after that. However, if we are to assume that the annual allowance reduces the potential for tax leakage, why do the revisions forecast a loss? The only conclusion I can draw is that the initial figures did not take into account the potential for salary sacrifice. Can the Minister confirm that this is the case?
It may be the Government’s intention to introduce a more stringent allowance, in which case the £10,000 annual allowance was in fact a relaxation of the rules. However, that would appear to conflict with the Government’s statement that salary sacrifice was not intended to be part of the reforms. If the intent was an annual allowance of zero once the pension has been accessed, what analysis did the Government conduct that persuaded them to change it to £10,000, and can they provide it to Members of this House before Report? It is therefore an issue that needs to be kept under active review, and the Government should report to Parliament on the effect of this matter.
“It is fair and sensible for us to ask that the new clause is included in the Bill because it would ensure that the Government did not simply monitor quietly in the background, waiting for something to go wrong, but proactively looked at all these areas and then brought further information to Parliament so that we could consider how best to do things in the future and remedy any unintended consequences or loopholes”.—[Official Report, Commons, Taxation of Pensions Bill Committee, 20/11/2014; col. 123.]
That is the purpose behind our review, and I hope that the Government will accept the amendment. I beg to move.
My Lords, there has been a great deal of rhetoric surrounding this Bill. Some of the claims for the Bill may be far-fetched, but in one respect they probably are not. Many people have claimed that the reforms in the Bill constitute the biggest shake-up of our pension system for 100 years. If that is true, it is incumbent on the Government to have a clear plan—rather as my noble friend has indicated—for keeping Parliament abreast of the impact of those changes and reporting appropriately on it. None of us knows at the beginning of the extraordinary journey on which we are embarking what will happen and what will be the consequences of giving pension savers these significant new freedoms and flexibilities. It is quite likely that these are responsible people. They have been saving in workplace schemes, in some cases, for decades. Perhaps they are not going to blow their pension pots in a reckless spending spree at the end of their working lives. I tend to agree with that, but we simply do not know. Whereas giving choices is a great policy and one that I can support, it competes with another policy that has similar standing: that is, we must ensure that people approach and enter retirement with enough income to meet their lifestyle requirements.
As has been said by many others in the course of this debate and in another place, these two policies are, to some extent, competing with each other through the Bill. My noble friend’s amendment is really seeking to do one important thing, which is to ensure that there is a proper appreciation of the risks inherent in this approach to the new legislation and a willingness to keep Parliament informed of them. If we get this wrong, not only are we going to impoverish future generations of retirees, but there is, as we know, some risk that the costs of that will fall back on to the shoulders of taxpayers. Either of those two outcomes would be a terrible result of these new freedoms and flexibilities which, in principle, I strongly support.
I hope that the Minister will be able to respond positively to my noble friend’s amendment. I suspect he will say that there is something wrong with the drafting of the amendment. We have all been there before and we know how this process unfolds. If he is not prepared to accept the amendment I hope that he will at least give the House some indication of what reporting the Government are planning to embark on so that future legislators will be able to look back at the detail of this legislation and conclude at some point whether it is working or not. If it is not working, we will have to change it. If it is working, we will all celebrate one of the great reforms of the Government. However, it is clear at the moment that there is no indication, either in the Bill or elsewhere, of what plans Ministers have to keep Parliament abreast of the impact of these changes, given their significance and importance. It is necessary that we hear from the Minister today what the Government’s plans might be.
I will speak in favour of my noble friend’s amendment and address two points. The first is the point my noble friend raised about tax leakage and the risks of salary sacrifice arrangements. I draw the Minister’s attention to Clause 54, which looks at the issue of independent advice and provides, not unreasonably, that that will not be a taxable benefit. However, it precludes it from that exemption if it is the subject of a relevant salary sacrifice arrangement, which is defined in the Bill. Rather than rely on a reduction in the annual allowance as, seemingly, the protection against salary sacrifice arrangements and tax leakage, why not simply adopt the same formulation that is adopted in Clause 54 by precluding salary sacrifice arrangements being available on appropriate definitions?
My second point is to try to get a better handle on the Government’s assessment of behavioural change in the early years as a result of these flexibilities. We can do no better than to focus on the tax projections in the Red Book for March 2014 and the Green Book for the Autumn Statement because those must have been underpinned by some detailed calculations. I am not sure that we have seen that detail to date. I hope that the Minister will follow up in writing if he is not able to deal with all the detail today. How many cases of individuals taking lump sums or other drawdown arrangements rather than annuities are included in those estimates? That must have been the basis on which they were adduced. What is the additional aggregate taxable income expected each year until 2020? How many individuals are estimated to pay tax at higher rates as a result than they would under normal annuitisation? We probed this matter on Report in the Commons but did not get a reply. It would be helpful to have that detail as it would give us an understanding of the Government’s assessment of behavioural change and the number of people who will take more of their pension pots under these flexibilities than would if the annuity arrangements only had been available.
My Lords, the two amendments in this group would require the Government to publish two reviews of the impact of pensions flexibility. I start by completely agreeing with the noble Lord, Lord Hutton, that these changes are welcome freedoms and flexibilities but, like all freedoms, they bring some risks that I hope, in a variety of ways, we shall be effective at mitigating.
Noble Lords will not be desperately surprised to hear that I do not believe that these amendments are necessary. First, when considering new Clause 1 and the parts of new Clause 2 which relate to Exchequer revenues, it is important to note that in the Autumn Statement the Government published estimates of the Exchequer impact of the policy as a whole. These costings, which were certified by the independent Office for Budget Responsibility, cover all the changes made to the policy since the Budget as a result of consultation. The total impact of these decisions was set out in table 2.1 of the Autumn Statement document.
To ensure that the Government were being sufficiently transparent, the Financial Secretary to the Treasury wrote to members of the former Taxation of Pensions Bill Committee setting out these costings. I will now outline them for the benefit of the Committee. Further detail on how these costs were calculated is set out in the policy costings document published alongside the Autumn Statement. However, in the letter sent by the Financial Secretary to the Treasury to the members of the former Taxation of Pensions Bill Committee, it was also explained that the costings published as part of the Autumn Statement were based on the same central assumptions that underpinned the costings published at the Budget. Since the Budget, the Government have explored in more detail two aspects of the policy that affect this costing, which takes us to a point made by the noble Lord, Lord Bradley, about the increased cost of salary sacrifice and the increased cost of welfare as a result of the reforms. The Government have produced costings for these, which have been scrutinised by the OBR. In line with standard practice, these are accounted for as changes to the forecast and are not therefore outlined in table 2.1 of the Autumn Statement document.
Given the concern that noble Lords have expressed, it may be helpful if I detail what those figures are. The revisions to the forecast to account for salary sacrifice, which take account of further discussions and considerations since the Budget, are £35 million in 2015-16, £30 million in 2016-17, and £25 million in each of the following three years. When the forecast was revised to account for the increased cost of welfare, the figures rose from £15 million in 2016-17 to £25 million in 2018-19 and 2019-20. The Government have therefore already published the information that these two new clauses are seeking on the Exchequer impacts of various aspects of flexibility, all of which have been certified by the independent OBR. The Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts at future fiscal events and the Government of course keep tax policy under continuous review. Therefore, there is no need, in the Government’s view, for further reviews of the Exchequer impacts of the policy as the Government have already committed to keep these under review through the usual processes.
I am grateful to the Minister and thank him for his explanation of the figures. I want to be absolutely clear that my example of a person who transfers his salary into his pension pot and saves national insurance in the way that I have described has been fully taken into account in these figures.
My Lords, I believe absolutely that they have. If I am wrong in that, obviously I will write to the noble Lord; but that is the purpose of having initially produced the figures on salary sacrifice and subsequently revised them.
I turn to the other elements of the amendments. Amendment 30B also seeks to require that the Government review the distributional impact of pensions flexibility, no less than 18 months after the Bill takes effect. As set out during debate of the Taxation of Pensions Act, pensions flexibility does not have a direct consequential impact on household incomes. Distributional effects will be driven by the choices that individuals make about how and when to take their pensions. In addition, household income is not necessarily a reliable measure of pension wealth, particularly in the years immediately prior to retirement. It is possible that the impacts of this policy could be misrepresented if we were to review them only against the distribution of household income.
Additionally, Amendment 30B would require the Government to publish behavioural analysis. The costing of tax policies often involves an assessment of the behavioural impact of the measure and, in some cases, the capacity for additional tax planning and avoidance behaviour. These assumptions and methodologies are, of course, certified by the independent OBR. However, as a matter of policy, the Treasury considers that making these detailed behavioural assumptions public can have the potential to affect the behaviour they relate to, and as such can be potentially detrimental to policy-making. The policy costing note published alongside the Autumn Statement explains how the costings have been calculated. This is in line with the principles outlined in the government document Tax Policy Making: ANew Approach, which was published alongside the June Budget in 2010.
Amendment 30B would also require the Government to review any impact that pensions flexibility might have on the volume of annuity purchases. Data on the sales of annuities will continue to be available through other channels, such as the data published by trade bodies such as the ABI and publications by individual firms. Therefore we do not think that there is going to be any lack of this information being publicly available, so there is no need for a requirement in the Bill to achieve that.
My Lords, is the Minister saying that the information will be available to departments but that the Government do not wish to publish it because of the behavioural implications it may have, or is he saying that it is too soon to gather that information and therefore they will not actually do so? The problem with the second position is that this change is such that it is almost impossible to change policy direction once it is embedded because of the nature of the policy changes, which to my mind are extravagantly at risk. As a result, the Minister is denying Parliament the opportunity to make the modifications before that degree of risk is permanently embedded in public policy.
My Lords, I was saying that the Government have made an assessment of behavioural changes and they have produced figures which take those changes into account. Therefore, there has been a full assessment of the behavioural changes as best as can be done in advance of the change coming into effect. As I said, it is Treasury policy not to publish those assumptions but that work has been done. In terms of the cost to the Exchequer of this policy change, the figures were published at the time of the Budget and were subsequently revised, as I set out, at the time of the Autumn Statement.
That, my Lords, is an extremely interesting question to which I do not know the answer.
I am saying that in a whole raft of areas, no doubt under successive Governments, the Treasury has made behavioural assumptions. When I used to work in Customs and Excise, that was certainly the case when asking what would happen if the duty on whisky was put up. A whole raft of behavioural assumptions is made in policy-making and I do not think that it has been the policy to make those behavioural assumptions public. What obviously has been, and will remain, policy is to set out the impact of those behavioural changes. The noble Baroness shakes her head. Perhaps when she was a Minister behavioural assumptions were made available. My understanding is that that has not been the policy but I will go back to the Treasury and check.
I wonder whether the Minister can help me. It seems to me that there is potentially a difference with behavioural change which is incidental to the fundamental policy issue. However, here we are talking about a system where the change and the data underlying the tax issues are absolutely fundamental—it is what the whole policy change is about. Just to be clear on that, the Budget Red Book for 2014 refers to extra tax in 2015-16 of £320 million, £600 million the year after, £910 million the year after that and £1.2 billion the year after that. I think we understand that work has been done on those figures and that the Office for Budget Responsibility has accepted them as realistic. However, as I understand it, the Government are not going to tell us the basis on which those figures have been derived. They are not going to give us the opportunity to make any judgment as to whether, ultimately, we support the policy.
My Lords, I was simply saying that my understanding is that it is a long-standing convention regarding the behavioural assumptions that go into producing those figures. The only other thing I would say is that today we have seen another, very different, estimate of the costs. There is a very considerable degree of uncertainty about the figures at the moment but the Government made their best estimate at the time of the Budget and they amended it in the light of further consideration at the time of the Autumn Statement. They will obviously keep the situation under review as we see what people do rather than speculate about how the policy will work.
The noble Lord, Lord Bradley, asked about the effects of the new policy and flexible access on eligibility for means-tested benefits—in particular, social care. The policy aim is to ensure that the decisions people make in choosing between taking their pension as income and keeping more of their pension as capital and drawing it out periodically do not significantly impact on how they are assessed for social care support and how their means are assessed for social security purposes. New statutory guidance and regulations under the Care Act were published on
In respect of social security, we announced a change in the rule for people above pension credit qualifying age who claim means-tested benefits. The notional income amount applied to pension pots which have not been used to purchase an annuity will be reduced from 150% to 100% of the income from an equivalent annuity, or to the actual income taken if that is higher, in line with the rules for care and support.
The noble Lord, Lord Bradley, asked about unwinding annuities already bought. This is not government policy. It was a suggestion of my colleague Steve Webb, the Pensions Minister, in the context of future Liberal Democrat party policy. It was not a statement of government policy.
I am sure that there are other specific issues raised by noble Lords in this debate to which I have not given a full answer. I will read it again.
I promise not to delay the Committee any longer. However, I would just refer to the point about why the Government have not taken the opportunity to specifically deny the benefit of the flexibilities when there are salary sacrifice arrangements. They have done it in another small part of the Bill, so it is technically achievable. Why have they eschewed that—to allow at least some element of salary sacrifice arrangements to have the tax benefits that they are designed to?
My Lords, one thing I have not responded adequately to—and I am not sure whether what I am going to say will adequately answer the noble Lord’s point, but I will write to him if I do not—is about salary sacrifice and the question about the £10,000 allowance, which the noble Lord, Lord Bradley, and others, referred to.
The £10,000 allowance is, we think, a sensible middle way to allow the majority of people the flexibility to withdraw or contribute to their pension as they choose from age 55, while also ensuring that individuals do not use the new flexibility to avoid paying tax on their current earnings. However, there are clearly circumstances in which it will be in an individual’s best interests to gain access to part of the pension pot early—at 55 or 56—while by the time they are 60 their circumstances have changed and they can then start contributing again to a pension. We did not want to deny that entirely. Equally, as noble Lords have said, we did not want individuals recycling money out of pension pots just in order to avoid tax. It is therefore a pragmatic compromise figure which we think strikes the right balance.
I again thank the Minister for his detailed response. In relation to buying out annuities, the Minister is right—the article in the Sunday Times did state that Steve Webb was a Liberal Democrat. However, it also stated that he was the Pensions Minister. I am sure that this is part of the tensions of coalition as we head towards the general election.
I am grateful for the support for this amendment from the noble Lords, Lord Hutton and Lord McKenzie, both of whom are experts in this field and bring great value to our deliberations. I am grateful to the Minister for clarifying some of the points regarding social care, although again I suspect that there may be further devil in the detail that we may debate further this afternoon.
The Minister’s response made the most compelling case for why we need the review brought back to Parliament with all the information gathered in a coherent and digestible way. In his response to our amendment he identified various sources of information in various departments, and it would take great expertise to beaver away and gather all that information into a form that enables enlightened and informed debate, not only in this House but in Parliament generally, and—in terms of transparency—for the public to understand fully the implications of these amendments.
We need to look carefully at the way in which information is gathered, disseminated and presented to Parliament. This amendment was a very good start for the revolution that is likely to take place in pension provision and how freedoms and flexibilities are used by the public. For today, however, I beg leave to withdraw the amendment.
Amendment 30A withdrawn.
Amendment 30B not moved.