My Lords, it has been clear to everyone following this debate about the latest tranche of pension reforms brought forward by the coalition Government that if we were to mitigate some of the obvious risks that are created by this new world of choice and flexibility at the point of retirement for people saving in DC schemes, it would be necessary to put into place something that we have now called the second line of defence.
The need for the so-called second line of defence was crystal clear quite early on. It is important that we do not treat people at the point of their retirement like children; they have saved all their lives for that point. However, the lack of a requirement to take guidance, because it is a choice or option, certainly creates a substantial risk that the benefits of the Government’s reforms—the greater freedoms—which I think most of us would welcome, could create some very unfortunate outcomes. We know from the failure of the open market option, and from previous attempts to get this right, that the real risk we need to mitigate here is that people will make the wrong decision, and in the later years of their retirement they will find that they just do not have enough money to pay their bills, and will present themselves and seek benefits. That would be a terrible outcome.
Therefore, the decision to put in place the second line of defence, which we heard recently from the FCA, is to be enormously welcomed. We do not know what this second line of defence will actually be; we do not know what will prompt them—what questions consumers will be asked by their pension provider before they take any final decisions. But at least we now have something in place that holds out the prospect that these reforms will work. There was a very real danger that if we did not put this second line of defence in place, the reforms would fail, and that the failure would live with us and haunt us for decades—people who had saved and worked hard all their lives would find themselves running out of money during their retirement. That would represent policy failure on a grand scale.
Today, therefore, we have an opportunity to make these reforms work. I suspect that means that probably we will not need a vote on my noble friend’s amendment, which, like my noble friend Lady Drake, I was very keen to support today. I hope that we would have had a majority in this House for the amendment. This prudent step is not about wrapping up these new freedoms with overly regulatory responses, and so on, but about taking the right course of action to mitigate the obvious risk of policy failure while preserving at the same time the essence of the new freedoms, which is to choose and to make personal financial decisions at the point of retirement.
So I, too, would welcome some further clarification from the Minister today about exactly how this so-called second line of defence will work. We do not know very much about it, but it has to be in place pretty quickly, and there will be lots of concerns out there about exactly what it will mean and who will effectively have the responsibility to enforce it and oversee it.
The whole world is now much more complicated for people saving in DC schemes. Previously, one had to purchase an annuity at the point of retirement. We know that that market was not working, and the Government brought forward reforms to deal with that failure. We will have to wait and see whether these reforms are going to work. It is absolutely clear from all the consumer research that people are saying that they want to have secure, reliable income in retirement so that they can pay their bills and do the other things that they want to do with their remaining years. There is an absolutely overwhelming need for people to get proper advice about what to do with their pension pots at the point of retirement. This is not one of those areas where we can shrug our shoulders and say that laissez-faire will get us through. Doing nothing will almost certainly ensure that there will be a colossal scandal in a few years’ time when people will turn round to this House, and another place, and say: “What on earth were you thinking of? What on earth were you doing?”.
We have the chance today to make these reforms succeed. By succeed, I mean that we will help people when they are approaching retirement to make the right choices about what to do with their pension pots so they can live a secure, comfortable life and not face the terrible consequence of having to turn round at some point in their retirement years and seek benefits.