My Lords, as another of the immigrants identified by my noble friend Lord Patten, I commend the report of the Select Committee on Financial Exclusion under the sterling chairmanship of the noble Baroness, Lady Tyler.
I am pleased that the Government have decided to accept some of the excellent recommendations—they have appointed a new Minister for Financial Inclusion, and I congratulate them on measures included in the Financial Guidance and Claims Bill. I echo the words of the noble Lord, Lord McKenzie, who explained the importance of the amendments added by this House, and I also say what a pleasure it was to work with the DWP Ministers and noble Lords on all sides of the House to improve protection for vulnerable or highly indebted citizens. I look forward to further possible additions in the other place, such as on cold calling and perhaps a duty of care. With the worrying rise in household indebtedness, it is more important than ever to help the public understand financial management and also to improve the financial resilience of the population. Debt worries can have negative implications for workplace performance and productivity, and financial worries can damage or exacerbate existing issues with mental health.
It is estimated that 17.5 million working hours a year are lost as workers take time off due to financial stress. As we head towards a period where interest rates are likely to rise from current exceptionally low levels, and where the economy may be unsettled by Brexit uncertainties, action is urgent. I hope we will see a consumer-focused approach to improving this financial resilience. In this connection, I also hope that we will see more initiatives that use workplace payroll to help people merge their debts and reduce the interest rate payable, as well as allowing them a more secure repayment programme. I declare an interest as an adviser to a social enterprise helping workers in many large organisations to reduce their debt interest costs and manage them more efficiently.
I certainly agree that it is welcome that banks should promote basic bank accounts, but I remain concerned about the important issues highlighted by my noble friend Lord Northbrook and about continuing bank branch closures. The loss of local branches particularly disadvantages those who are disabled or elderly, if they cannot manage telephone or online banking. I am pleased they will be able to use post offices, but we need to monitor this situation carefully to ensure that vulnerable individuals are not excluded as banks continue to pursue cost-cutting agendas.
On the topic of older people, too often their needs are overlooked by mainstream financial services providers. I welcome the Financial Conduct Authority’s work on vulnerable consumers and developing a strategy for the ageing population. However, I hope this strategy will urgently include helping people to prepare for later-life care. There is no prefunding or financial planning for future long-term care needs at national, local or individual level, and no incentives to help families to save for care costs. Financial exclusion in later life will be badly affected by the failure to prepare for potential care needs. The inadequacies of the current social care system are well documented.
There are many aspects to this debate and the excellent Select Committee report, many of which have been thoroughly covered by other noble Lords, so I have chosen to highlight some that are relevant specifically to financial exclusion in connection with pensions. As auto-enrolment extends pension coverage to millions more workers across the country, it is vital to improve the understanding of and engagement with workplace pensions and other financial matters. I hope the Government will consider making workplace financial education a key component of the auto-enrolment programme so that all workers are better equipped to look after their finances. I realise the new financial guidance body may have some input here. However, I believe we may be missing an opportunity to improve financial education and inclusion while millions of workers are being nudged into pension saving. The opportunity is there for the taking.
In connection with auto-enrolment, there is an important issue that I must once again raise in your Lordships’ House, and hope that other noble Lords may join me in pressing for urgent action. This relates to the lowest-paid workers who are being automatically enrolled in, or opting to join, workplace schemes. Most workers do not understand pensions; indeed, many of the smallest employers setting up pension schemes for their staff also know little about the subject. This has resulted in a major injustice that has so far been all but ignored by the Government, regulators and the pensions industry. Low earners, mostly women, are losing money because of a particular type of pensions administration arrangement called net pay. All workers earning over £11,500 who are basic rate taxpayers pay £8 of their earnings and automatically receive £10 into their pension, as the scheme adds the extra £2 for them. This is the 25% bonus that results from basic rate tax relief. However, any worker earning below £11,500 in a net-pay scheme cannot get the £2 that they are entitled to under pensions law; they have to pay a full £10 for every £10 going into their pension. If their employer uses a scheme with a different administration system called relief at source, these low earners only have to pay £8 to get the £10 in their pension. In other words, with these net-pay schemes the lowest earners are forced to pay 25% more for their pensions—a classic example of financial exclusion where the poor pay more.
I have asked numerous Written Parliamentary Questions and raised this issue in several debates in this House, yet Ministers seem unwilling to address this injustice. Employers often know nothing about the issue; the workers themselves probably have no idea and, even if they did, there is nothing they could do about it as the employer chooses their scheme; and the pension providers do not normally warn the employer or the worker that their scheme is not suitable for those earning less than £11,500. Providers are not obliged to pay the low earners—mostly female—this extra money, although a couple have decided to do so. The Treasury has refused to allow schemes to reclaim the money on behalf of the low earners. Even the new master trust assurance framework, supposedly the regulator’s endorsement of a high-quality master trust, can operate a net-pay system and take on low-paid workers without having to compensate them for this lost money. This would not happen if people understood pensions or if providers were required to explain things clearly. However, the current regulatory oversight is compounding problems for low earners, failing to protect them and thus leaving them financially excluded. This is a classic example of how the complexity of our system and a lack of consumer focus is causing financial exclusion, and will mean that the lowest earners have less disposable income for their general spending. The duty of care highlighted by my noble friends Lord Holmes and Lord Shinkwin extends to the Government and the regulators, not just providers.
The noble Viscount, Lord Brookeborough, eloquently explained the importance of financial education in schools, but there is an equally important issue that is often overlooked. The FCA has a duty to ensure that people understand financial products, and the new financial guidance body will also have a remit to include this. However, we must not assume that just giving people information and disclosure will improve financial inclusion. Indeed, I argue that the current financial services industry approach is almost guaranteed to exclude most consumers even if they understand finance because the reams of paperwork that they receive, full of jargon and impenetrable terms, written in language that may as well be Latin or Ancient Greek, is impossible for almost all ordinary people to understand. Even my friends with PhDs in scientific subjects are utterly baffled by pensions literature.
The regulatory approach designed to protect consumers is not working well enough. Just assuming that sending people disclosure and information about products and the choices they have will improve consumer outcomes is sadly misguided. Some of the problems stem from a lack of financial education in schools, and I am delighted that the Government intend to tackle this. However, most people in this country are beyond school age now and they need to know how to plan their finances. Whether in connection with managing debt, avoiding high-cost credit or making long-term investment decisions, the Government and the regulators must act now.
Improving financial inclusion will require urgent action across many areas. Helping vulnerable individuals, those with illnesses such as cancer and the wider population is an urgent task. I hope our new Minister for Financial Inclusion can make meaningful and timely improvements, perhaps even in the Financial Guidance and Claims Bill as it goes through the other place, as many other noble Lords have requested.