Before we take evidence from the next witnesses, I must say to the room that we are expecting a Division, which may be earlier than the 4 pm that we anticipated. We will take a certain amount of time, depending on whether there is more than one Division. You will have to bear with us if we all quit the room.
We will now hear oral evidence from Dr Ros Altmann and Dr Hari Mann. For the record, will the witnesses please introduce themselves to the Committee?
Good afternoon, thank you for coming. I would like to ask you both a large general question. How do you see the Bill matching your expectations for a viable reformed state pension system overall?
Dr Altmann: I think that the Pensions Bill makes an excellent start on radical reform of the state pension system, which is long overdue. It has the potential to undo some of the damage that has been done to the incentives to save for pensions by policy over the past few years.
The idea and concept of a single-tier flat-rate state pension, payable to all with a certain national insurance record, is one that in theory opens the way to say, “When you reach pension age”—whatever that will be; that is a separate discussion—“the state says that there is a minimum level of support that everybody who has contributed to the system is entitled to.” That is it: the equivalent of £144 a week in today’s money. “If you want more than that”—and most people probably will—“you need to do something about it, or that is all you are going to get.”
Then there is automatically the self-interest for people to recognise that there is a minimum level of state support as a kind of base, but whatever they want on top, if they do not save, they will not have any more. If they keep working and do some saving, they will have more. That is a message that people can relate to and understand. At the moment, because there are so many different parts to the state pensions system, and because each is so complicated, people generally do not have much of an idea, if any, what they will get from the state. So they do not know what base they are building on at all, and they cannot make a proper plan.
Dr Mann: The RSA programme is primarily on private pensions. Our opinion on the state pension and a single tier is very similar. When you look at systems where people are saving in a strong second pillar, it requires much more certainty in that first pillar. When you look at the Dutch and Danish systems in Europe, that certainty that allows people to understand what they are going to get helps them further on in an investment. A lot of people do not take much consideration of what their income is going to be at retirement age. That is primarily where we come from in terms of the state pension. We have not done much more work on that area.
Dr Altmann: If I may just add one point, which is also very important and has not always been emphasised in debate. The single-tier state pension will finally get the state out of earnings-related pensions. That is an important and fundamental point. Since 1978, we have always had an element in the state pension system of earnings-related pensions. The concept we have in Europe of replacement rates is that when you reach pension age your income should somehow be related to your earnings before you retired.
This proposal is a fundamental difference, but it is an important one. The state gives the base. Whether you earned more or less during your working life does not necessarily mean that the state has to pay you more when you are retired and no longer working, just because you were lucky enough to earn more while you were working. Indeed, if you earned significantly more while you were working, you would have had more opportunity to save in a private pension for yourself, and therefore have better chances for a better pension on your own.
Equally, that removal of an earnings-related tier, whether from employer or the state—in the past you could opt out and have the earnings-related tier from an employer—means that there is an increased need to ensure that the state pension itself does not fall behind earnings. With this flat-rate minimum, the uprating needs to keep up with earnings. When the basic state pension link to earnings was dropped in 1979, we had just introduced an earnings-related second-tier state pension, so there was some mitigation. It did not work entirely well in practice, but at least in theory there was some mitigation. We are now dropping any pretence of earnings-related state pension support, so it is important to make sure going forward that the value of that basic state pension is protected, so that pensioners do not fall behind once again.
There are significant changes in the Bill, including the new 10-year minimum for contributions and the increase to 35 years’ contributions in order to get a full STP state pension. Do you think that that will adversely affect some pensioners, and are there any particular groups that you would single out as being affected? You look as if that is a yes.
Dr Altmann: Clearly, the group that is likely to lose out is women. They are less likely than men to reach the full 10 years. Most of them are also less likely than men to reach 35 years, just because of the way their lives go. They are more likely to be in that category of people who fall out of the system altogether, perhaps because they are in two or three jobs that each pay below the national insurance minimum. Women are much more likely to be in that position than men. I know that there may be only a few tens of thousands of those women, but I am concerned that we need to try to find a way to bring them into the pension system. At the moment, those who do not work at all will be credited for the state pension, but those with three jobs that pay overall more than the national insurance minimum will not get any pension entitlement whatever.
The reason for bringing back the 10-year minimum is most likely to do with cost. There is a cost to paying smaller entitlements. If somebody has a very small contribution record, they are, I suppose, most likely to have lived in the country for a shorter period of time. That is another group: those who moved more recently to the UK. Perhaps there is less national concern about them; I do not know.
Equally, with the 35-year contribution increase, the people disadvantaged are more likely to be women, particularly older women, who perhaps have already retired thinking that they have their full 30 years and now find that they need 35 for a full record. To be fair, 30/35ths of the new single-tier state pension will still give them more than the full basic state pension, but I think there is a feeling of unfairness among older women that the goalposts keep being changed. They planned for one goalpost, and then it was moved; now they have planned for another goalpost, and it has been moved again.
Dr Altmann, I think that you accepted that it will be less unfair to women but that some women, to whom you drew attention, will still lose out. How does that compare, actuarily speaking, with the fact that on average, women live significantly longer and draw pensions for that longer period?
Dr Altmann: The issue of life expectancy obviously becomes more relevant with the single-tier pension, when the pension age will be equal for women and men and women may get the pension for longer. But the likelihood is that women will still have a lower pension income than men, and not just via a state pension entitlement that may be lower due to particular circumstances in their lives. Again, that will equalise out over time. It is important to recognise that women will generally tend to have less private pension. The figures are quite stark in that regard.
The state pension is the minimum. The life expectancy differential between men and women is decreasing, but nevertheless is still there. However, I think there does need to be an element of acceptance that state pension support for women needs to be stable and at a decent base, because women are less likely to have an opportunity to build up as much private pension as men. Of course, we also have more and more single women these days, with the increase in the divorce rate, so a lot more women reach a later age without a husband’s pension to rely on. In the past, things were very different, and I think our pension system has not always reflected that.
In light of that, what do you think of the balance that the Bill has struck in terms of protections, particularly transitional arrangements for derived or inherited rights, which again may affect women in particular?
We will continue where we left off. Dr Altmann was addressing Mr Reckless, but can Mr Reckless refresh Dr Altmann’s memory of the exact question posed? Dr Altmann has to leave at 10 minutes to 5, so if questions can be kept concise, we will get through everything.
Dr Altmann, in light of the discussions we were having about pension provisions for women—the inequalities and whether they balance out—would you assess the protections and transitional measures that are there for some of the inherited and derived rights? Does the Bill strike the right balance?
Dr Altmann: I think it is most welcome that the women who have relied on the married woman’s stamp are being protected in the transition so that they can still claim on a husband’s pension as they were always expecting to. There are a few concerns about issues relating to women, but overall I think that for younger women the position will be improved. It is the older women that one has a few concerns about. Some women, for example, in a position of divorce, will not now be able to claim on their husband’s state pension in a way that they might have expected to before. Wives of soldiers might be disadvantaged and we may need to do something about that issue.
On a broader scale, the women’s issue is something that we need to be aware of, and we need to admit that there is now a cut in bereavement benefits. Especially for widows with young children whose husbands die when the children are young, there is no doubt that the bereavement benefits are being reduced and they will lose out relative to widows who do not have children.
On the positive side, it will be better, because people will be on universal credit. There are some positives, but I think we need to be aware of exactly what the issues are. In general, it will be women, and older women as well, who might be less well served by this legislation. But, overall, I think we need this legislation.
In a way, that question and answer has anticipated much of what I was going to say. Ros, in your evidence to the Select Committee, you said that most women would be better off and that men are unaffected, even allowing for the contracted-out element. As you have said, the issue that you have identified is more to do with older women than those coming later, after 2017. What would you do differently if you were the Minister? What else could be done on that within the cost-neutral overall?
Dr Altmann: If you are talking about within the cost-neutral overall, you are introducing another element and we would need to go back and look at some of the protections given to people with contracted-out rights. A significant element of the increased cost of the White Paper relative to the Green Paper relates to the fact that we are offering more generous opportunities for state pension accrual to people who have contracted out into final salary type schemes, or other schemes, too, but in particular the final salary element. I have to leave that aside because that gets a bit too difficult, but that would be a source of extra revenue.
I would be comfortable looking at trying to include as many women as possible in the better state pension arrangements. I know that there is quite a lot of anxiety among women born in the 1952 to April 1953 period. Men born at the same time as them will have the opportunity to get on to the single tier, whereas the women will not, because their state pension age is lagging behind. Again, I understand that they will likely draw their pension for longer. They will receive an amount of pension before the men do. Perhaps we could give them a choice; perhaps we could work out a way. I know it is complicated, but the more women we can bring into this better system, in my view, the better.
If I had a clean sheet of paper, perhaps I would start with looking at giving the single tier pension to everyone over, let us say, 72 or 75, so that would include existing pensioners as well, but we have not gone down that route. Given where we are, we are definitely going to be, in my view, in a more sustainable and sensible position on state pension support, but I would like to see some transition arrangements for including women as much as possible, because they are the ones who are likely to have less than the single tier, and more men are already likely to have more, anyway. That would include more transitional protections if we could do it. I am sure the DWP would hate me, because it would be more complicated, but this is all complicated and at the end of the day I am thinking about people’s lives and women’s retirements that have got to last for many years.
Women have lost out. The older women, in particular, are the ones who have lost out through the state and private pension system so much in the past. A lot of the improvements that we have made for women will be helping the younger ones already, so that is okay; it is about those 50-something women, or even women in their late-50s.
My supplementary is to Hari. You heard what Ros said, so what do you think could be done differently if you were designing it from scratch? Do you think there is any rebalancing that could or might be done?
On this particular issue, really. Once you have a single-tier pension there is the inevitable business of winners and losers. You have the winners, who are the younger women, and potentially you have the relative losers, who are the older women.
May I take up the thread of the conversation that has just taken place? Hari, Mr Graham referred again to the incentive to save, which has been part of the discussion since Second Reading. I know the RSA has done a lot of work on private pensions and on how to ensure that those who are encouraged to save more into private pensions are saving into high-quality schemes, to which previous witnesses have referred. Do you care to comment on how we get to that situation?
Dr Mann: There are a couple of fundamental principles that you need within the scheme. One is that people need better transparency on what they are actually being charged in schemes at the moment. That is leading to a lot of uncertainty for people in terms of their outcomes. As you mentioned, we need some consensus on the quality schemes. One of the issues that people raised earlier was about the pot following the member and everything else, and it comes down to the fundamental principle of how we choose what is a good pension scheme and who should choose that. Fundamentally, our work has shown that, especially with private pension provision, people do not necessarily know and are not being told what their scheme is about, especially in terms of cost and transparency. That is not a situation that will encourage people to save, unfortunately.
If Madam Chairman is happy for me to pursue that line of inquiry, my memory is that the RSA report on this subject had some pretty striking numbers on the information disclosed by private pension providers. Could you give the Committee some of that?
Dr Mann: That is correct. We basically looked across a whole range of different providers, and we asked them whether they could tell us the full cost of their charges. Of the 23, we were not able to get a specific answer from any of them. There were some very specific questions on the AMC and the TER, and only a handful were able to tell us the differences between the two different types of charges. That straight away creates the issue of what people are actually being told.
We then looked at some of the DWP reports, and one of the key DWP reports is “Charging levels and structures in money-purchase pension schemes.” One figure from that report says that 8% of the group actually thought its charges were 5% per annum. As you will know, if you were being charged 5% per annum you would not be left with much pension at the end. I know that we are looking towards a new code from the industry in terms of transparency and charges, but, coming to your point about how we get people to save more, people will pull out from the system if they feel that their money is going on charges.
When we first published some of our work and took that to our focus groups, people were quite shocked by the level of charging that they are receiving and where that is going. There is a lot of debate that those charge levels are going down, but if people are not sure what they are being charged, we cannot be certain that those levels are the case.
Does that create an issue? Is it your view that the view abroad is that the incentive to save is important, and a flat-rate state pension is largely about encouraging that incentive to save, so we need to get the two halves of the reform right?
Dr Mann: Definitely. We need to ensure that we have that system. If you look at European examples where you have got high member investment into schemes and high contribution rates, for instance Denmark, Holland and Sweden, they have a certain level of transparency which we are just on the tip of starting to see here now. That is very important in terms of trust coming into all financial products.
There are two big issues with pensions. One is this issue about us just not knowing what they cost. A lot of people switch off from the complexity. Secondly, they are a very long-term product and a lot of people do not think in the longer term, which is the point that Dr Altmann made: when people can see their outcome, that is an important aspect for them, but we need to ensure that we are not just telling them half of the story.
Dr Altmann: The way I would express it is that the state pension reform is a necessary condition to help auto-enrolment to work. It is not a sufficient condition.
It is vital that the state pension no longer undermines private pension saving in the way that it currently does and has done for a little while, but that does not automatically mean that everybody is suddenly going to want to buy a pension. Therefore, we need to look at the other aspects of the private pension market that will help increase the attractiveness of long-term saving. That is where there is room for debate, but not necessarily in this particular Bill. Are we trying to encourage long-term saving, or are we trying to encourage people to buy one product?
Pensions are one financial product and they are the most inflexible. Because they are so inflexible, it has given an opportunity for a lot of companies to levy very high charges on them with, if you like, captive money. People are stuck in there and they have got to keep their money there.
A move towards transparency in the charging structure, and helping people to take advantage of economies of scale in a way that we have not done so far, certainly should help provide better value. Equally, on the forecasts of returns to be made by private pension saving—if you keep your money locked away for 20 or 30 years—the assumption was quite prevalent that you would definitely be able to earn about 8% annual returns consistently. I think that most of us would recognise that that was rather over-optimistic. If an equity risk premium is something like 2% to 3%, rather than 6% to 8%, a 1% to 2% annual charge takes away far more of the final pension. That is what we need to help people understand.
A 0.5% annual charge is achieved in other countries, partly because, in America for example, there is a larger pool to manage, so the economies of scale are better, but not only because of that. It would be a better target to aim at than the stakeholder 1% to 1.5% charging structure because again, if there is a 2% to 3% risk premium, you lose an awful lot of that in your charge. That means that pensions should be sold not necessarily one by one, but in groups as much as possible, as with a final salary type of scheme in which the assets are pooled and the charges per person work out much lower. Our industry is geared up right now for individual pension selling rather than conglomerates of big funds that people buy into and have lower charges from.
Are you satisfied with the proposed technical changes to workplace and occupational pension schemes, including automatic enrolment schemes, which are set out in the Bill? Do you have any specific areas of concern?
Dr Altmann: Anything we can do to make auto-enrolment easier for employers is essential. I truly fear that the auto-enrolment process is so complex that many small employers will simply not be able to cope with it. The cost of administration and compliance with the detail of the complexity will be far more difficult and onerous for them than even the contributions they will need to make. Anything we can do to simplify that would be a good thing.
I fully support the banning of short-service refunds, if that is one of the issues you are talking about. I would like to see that as soon as possible. There is clearly a conflict with the aims of auto-enrolment if you still allow people who happen to be in a trust scheme to take the money back if they are there less than two years. They will never accrue a pot if they are a frequent job changer and always in trust. I know some employers who have been attracted to set up a trust-based scheme for their auto-enrolment on the basis that they will be able to get their money back from the job-changers who move.
Dr Altmann: I am on record as having said that the move to 66 was too accelerated, and I know that many women were seriously disadvantaged by that, but we are where we are. The fact that we are now giving well over 10 years’ notice of a move to 67 is fine as far as I am concerned. That is perfectly reasonable and I think we need to look at how quickly we can accelerate increases in state pension age with a proper analysis looking at all the factors. At the moment, it feels to me as if what we have done is to say, “We all know that 65 is too young, but we need to save money and life expectancy has increased so we must go to 66 and 67.” There has not been a fundamental analysis to explain why 66 or 67 is any more reasonable than 65 or 69. I think that analysis needs to be done, and it may well suggest that we have not been bold enough in our plans for increasing the state pension age, but if that is the case, we need urgently to do that analysis and give people plenty of time to adjust.
I also welcome the concept being introduced that the state pension age does not mean that that is when you stop working altogether. It should not be automatic that there is a magic age at which you suddenly do no work. Perhaps the first few years of state pension can be a supplement to declining earnings while you are working part time in later life, depending on how much you can manage, what your health is like, what your job is like and what private savings you have made if you choose not work. Most people would probably welcome a bit of extra income. That would help us to get away from this one-size-fits-all, one magic age-type policy, which perhaps suited the past, but life has moved on. People are much healthier, they can work into later life and they have more years of it. We can help them to embrace that.
Dr Altmann: I think we need to look at that on the basis of a proper analysis. I am not comfortable picking any one number out of the air because I do not feel these numbers are meaningful. We need to look in the round at what state pension support should look like and what people’s health and abilities are like in their late 60s now. Normal societal perceptions of people in their late 60s tend not to fit the reality that people in their late 60s face. Most people are not old in the conventional sense at that age. We have had tremendous advances in health and working practices, if you are at work, for most people.
There will always be individual differences, and there will always be sections of society that age more quickly than the rest. However, on average, there is the great good news out there that we are keeping people alive longer; they live well with things they used to be disabled by into much later life. Yet somehow pensions and work are way behind.
We need to have a proper analysis of the health status, capabilities and so on of the general population. At the same time, we must combine that with a historical analysis of how we got there. We have not changed the age of 65 since Beveridge, and we know how much life has changed. However, that does not mean we have to suddenly go to 80. We need to work out what the balance is. We also need to help people embrace the idea that when you start taking your state pension it does not necessarily mean that you are not earning anything at all. It is the base, and you should expect more than that. If you haven’t done enough saving, you can keep working.
I wanted to ask Hari in particular, given your work on private pensions, about the issue of small pot transfers and stranded pots transfers, whatever their size. There has been a lot of discussion today about the merits and demerits of pot follows member versus an aggregator system. Could you set out, from the RSA programme’s point of view, your view on small pots?
Dr Mann: Our concern, just as some of your other speakers have said, is the issue of someone being moved from a good pension scheme into a bad one. I made the point earlier about people not knowing what their costs are because there is no proper transparency, and the danger of that, given what costs can lead to. We are also looking at how that might work with some of the other things that the DWP is suggesting, in particular with defined ambition, for instance, and how pot follows member might work there.
It is important that we do not jeopardise what we have the opportunity in the next year or so to do, which is to introduce changes to the pension system that might lead to a much greater level of pension overall for members. In that respect, our issue is, again, that if we are going to do this, let us make sure that we do so in a system that allows members to understand what they are being transferred into, so that people have a clear idea. Part of our research last year looked at how the information is communicated. We have an industry code, but we have not given enough time yet to see whether that code will be fit for purpose. In that respect, the question is, will people have enough information at that time to be able to decide that?
Dr Altmann: For me, there are two big issues with small pots. The first is that people who change jobs frequently end up with bits of pension all over the place and lose track of them, so they are not maximising the value or understanding what they have as a whole. The second problem is active member discounts. A lot of industry providers are not interested in managing small amounts of money and end up levying huge charges relative to the size of the pot, so that the pot itself dwindles. There are two separate issues.
“Pot follows member”, assuming that there will be a cap on auto-enrolment charges of some kind, could help with the charges issue, because then, small pots could be transferred away to active pots, where usually charges are lower. However, the case for having an aggregator can still be made quite strongly. That would mean members ending up with two pots rather than one, but the Government can say, “We are looking for providers to take on these stranded small pots—small pots belonging to people who have left jobs that have not got much in them—but you have to guarantee a certain, minimal level of charges.” If the industry itself is not willing to provide that, and some providers might, NEST would seem to be an obvious place to put the money, where there is more control on charges. That would throw down the gauntlet to the industry to say, “If you want to have aggregators, you have to do it at a decent charge.”
I complete agree with Dr Mann regarding the current lack of transparency and understanding about what really the charges are. There is a total expense ratio that is not even total expenses, and annual management charges that do not include all the charges. We need to get some clarity and consistency on how we express charging structures for pensions.
On the point of perhaps using NEST as a way to both consolidate the small pots and bring down charges because it has a clearer charging mechanism, do you anticipate, if that were to be encouraged, any reaction from the private providers who might consider that the Government were effectively enabling a monopoly position for themselves? Would that encourage the free competition that we otherwise want to see?
Dr Altmann: That is why it would be important for the Government to offer it for tender, for private providers to come in and bid—if they want to. Having more than one aggregator is ideal if the industry steps up to the plate. That is fine. If it does not, I still think that we probably need somewhere to park the money that we know can control charges.
Having said that, obviously we need to make some changes to NEST itself. First, we have to allow it to take transfers. More importantly, hopefully, we would get to the stage when NEST would have a single charging structure rather than the current up-front 1.8% fee plus a much lower annual fee. I think personally that it is important for NEST, even if it were allowed to take transfers, to reconsider the charging structure and to bring it down more to the headline type of levels that we know private providers can offer. I am not saying that anything is straightforward; I am just putting forward alternatives that would be possible to achieve. What is clearly a legitimate aim is that people should not lose track of their pension money, and should not suffer egregious charges on small pots because they are very expensive to manage, and many providers simply feel that the money is captive and they can increase the fee.
Dr Mann: We would agree. We see a stronger NEST. The point was made earlier that, over the next few years, there will be some consolidation in the pensions market. That is good in terms of bringing down costs—the economies of scale that will allow it to happen. For NEST to be the exemplar is the right thing to do. It was set up by the Government, but it has an independent board of trustees. It has its restrictions there, which—as Dr Altmann mentioned—should be lifted. Therefore, there is nothing to say that that would stifle competition. It would actually make the market better, and make the market better for members. That is ideally what we need to do in pensions. We need to ensure that our outcomes are focused around members, not profits.