- Examination of Witnesses

Pension Schemes Bill – in a Public Bill Committee at 2:41 pm on 23rd October 2014.

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John Greenwood, James Lloyd and Ian Fairweather gave evidence.

Photo of Peter Bone Peter Bone Conservative, Wellingborough 3:00 pm, 23rd October 2014

We come to our second oral evidence session of the afternoon and will now hear from a pension journalist, the director of the Strategic Society Centre and a consultant from Towers Watson. We have until four o’clock and are unlikely to be interrupted by any votes. Will the witnesses please introduce themselves for the record?

John Greenwood: My name is John Greenwood and I am the editor of Corporate Adviser magazine, which goes out to pension professionals. I am the author of the Financial Times guide to pensions and I freelance for national newspapers.

James Lloyd: I am James Lloyd, the director of an independent, non-aligned think-tank called the Strategic Society Centre, which is also a registered charity.

Ian Fairweather: I am Ian Fairweather, head of the regulatory and technical department for Towers Watson and a fellow of the Pensions Management Institute.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Thank you. Shadow Minister, would you like to start?

Q 249

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

John, you have written a number of articles about the potential implications of the decumulation reforms for taxation. Will you please elaborate on some of your concerns?

John Greenwood: The new easy access rules create a huge risk of widespread tax avoidance. If everyone over 55 takes full advantage of them, the Treasury could lose £20 billion in 2015-16—obviously, that is a massive number. That will not happen, but if even a tenth of people do, that is still a £2 billion loss. That seems to make quite a hole in the Treasury’s optimistic projection of making £3 billion of profit out of the policy over the five years of the next Parliament.

Q 250

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

In layman’s terms, what is the problem?

John Greenwood: In layman’s terms, the Government’s position is that you can take your money as cash from 55. If you are an employee, you have two options. You could be paid into your current account through salary, which is taxed at 13.8% employer national insurance on everything over about £8,000 and the employee pays national insurance of 12% on everything above that figure, and then everything is taxed above the nil rate band. Obviously, you have to be paid the minimum wage of £11,500-ish, but above that, why would you be paid through your salary when you can pay into a pension and take it all out the next day? For payments into a pension, there is no employer or employee NI at all, and only three quarters of it is subject to income tax. The Bill effectively gives everyone over 55 a £10,000 NI-free allowance—four times that in the first year, if they draw their money early.

When the penny drops, people will suddenly realise how much loss there is there. If you are on £40,000 and you maximise this—there are currently no rules to say you cannot do this—the loss to the Treasury is 62% of the revenue they would have got from that person’s employment. That is quite a chunky amount. It is clear from the Budget documents that the Treasury had not spotted this, because if you look at the documents published alongside, and the risk assessment, there was no mention of national insurance at all. They have moved with a reduced annual allowance of £10,000 for those who take benefits early, which reduces it but does not stop it altogether.

Q 251

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

You said that the Treasury had missed that, which seems quite surprising given that it is not a particularly complicated form of paying less tax. Do you know of any reason why that might have happened?

John Greenwood: Well, yes, it does seem surprising. The Office for Budget Responsibility also missed it. I think that everyone was so shocked and focused on what was going to happen that it took quite a long time for people to figure it out. As soon as it came out, pensions professionals just thought, “There is so much  tax relief on the table here—what the hell is going on?” To be fair, I did not figure it out until May, when someone pointed it out to me, because I think everyone was focusing on everything else. However, any pensions professional would have spotted it, and it is a glaring omission. Any pensions consultant worth their salt structuring a pension system would have noticed that, I would submit. I have asked the Treasury for clarification of its understanding of the level of salary sacrifice and NI avoidance, and I have not had a response.

Q 252

John Greenwood: I have made several requests. I have made about six since the summer.

Q 253

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

James and Ian, I do not know whether you want to comment on that or more widely. James, I know you have written extensively on aspects of the guidance guarantee and those reforms. Ian, do you want to make an opening statement about what you think are the key aspects of the Bill?

Ian Fairweather: From my perspective and that of my organisation, I think it is a Bill that addresses a number of issues that have been around for a while, not least trying to introduce a bit more flexibility within the system in terms of risk sharing. My organisation has been very supportive of risk-sharing schemes, and we have been an advocate with clients of certain types of risk-sharing schemes that were permitted within the framework for 10 or 15 years. We are very supportive of the Bill’s provisions in that regard.

James Lloyd: The guidance guarantee—if we take a step back and think about what it is trying to do and the context for it, the compulsory annuitisation framework for DC pensions, which stretches back to the Finance Act 1921, has been torn up at high speed and we are moving very quickly from a compulsory annuitisation framework for DC pensions to a voluntary annuitisation framework for DC pensions in the UK. If we look overseas at other countries with voluntary annuitisation frameworks, we see a whole plethora of problems, which will in no way adequately be addressed by the guidance guarantee. In that sense, I regard it as wholly inadequate, bordering on irrelevant.

More generally in terms of the Bill and its current provisions, I have to say that I do not think it is future-proofed, in the sense that there is no logical reason to think that the problems experienced by other countries with voluntary annuitisation systems will not happen to us. We are going to have these issues and problems. Does the Bill arm the Pensions Minister of the next Government or the one after that with the levers that he or she may need to address the problems? It does not, as far as I am concerned. In terms of future-proofing the Bill, there is, I think, some way to go. Notwithstanding that, I welcome everything on shared risk and CDC and so forth.

Q 254

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

What are some of those international comparisons and evidence for countries where there is voluntary annuitisation?

James Lloyd: It is difficult in an hour’s session to summarise a massive literature, which, for example, on something called the annuity puzzle stretches back to  the 1960s. In terms of outcomes, I guess I would focus on poverty, insecurity and significant consumer detriment—poor financial decision making resulting in poor outcomes for retirees. That is why I feel that the guidance guarantee is rather irrelevant. You are talking about a process of financial decision making that will start in people’s late 50s and carry on until their 90s, so the idea that a 30-minute telephone conversation at some point in their 60s will somehow lead to acceptable outcomes is pretty self-evidently nonsense.

If you look across the current retired population in the UK, there is already a major and significant policy problem there with poor financial decision making and the results that that has in people’s lives. We already have a major issue with, if you like, under-annuitisation—people who struggle along on the state pension and very little else but have high levels of savings, who could buy annuities but do not for a whole set of reasons that have been well documented in the literature on the annuity puzzle. That group, which is already an issue in policy terms, will grow significantly post the Budget reforms.

The kinds of policy measures that we need to think about are not currently in the Bill, and the guidance guarantee is not adequate either. In terms of where we need to be going, and the kinds of additions to the Bill that we might want to consider, I think you have to think in terms, quite frankly, of defaults. I know that some of the questions in the previous discussions have been about defaults, and you also have to think about mandation.

So, if we think about this journey we are going on from compulsory annuitisation to voluntary annuitisation, you can do everything you can in terms of voluntary annuitisation, such as mandating this guidance guarantee and not just leaving it up to people, but you can also think about what we can do in the default space and about where there may be the option in future to introduce certain elements of mandation into people’s retirement journey.

For example, in this Bill I would like to see the power to enable regulations to require employers and other managers of schemes to put people into a regulated default process for those who, if you like, do not choose to do anything with their retirement savings. That could take the form of a phase of draw-down followed by a phase of annuity; at this stage, it is too early to really say what that should be. The key thing is that those regulations, or those powers, need to be inserted into the Bill as levers that will exist, so that when the time comes along, which could be in about two or three years, the next Government will be able to pull those levers as they need to and as quickly as they need to.

Q 255

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

What do you think of the argument put forward on a number of occasions by the Government: that as long as individuals can fall back on a state pension of £145 or £150 a week, that is enough for them to live a decent retirement on?

James Lloyd: I would make two points. One, I welcome the single-tier state pension, or the new state pension as I think we are now meant to call it. It is a fantastic achievement of this Government. However, I have worked on ageing policy for the best part of a decade now and I am also a realist, and we gather here today on the day that the NHS has said it will need an additional £30 billion by the end of the next Parliament. It seems inevitable to  me that, as much as I might welcome the single-tier state pension, there may be a risk in future that subsequent Governments—the next Government and the one after that—may choose to put downward pressure on the value of the state pension and reintroduce a much greater component of means-testing, in order to fund some of the other costs associated with an ageing population. As much as I welcome the single-tier state pension, it is a hugely ambitious thing to assume that it will last for five, 10, 15, 20 or 25 years in the current demographic context that we have in the country.

The second point is that, yes, even if people have the single-tier or new state pension to fall back on, and they are living what will nevertheless be a fairly modest life with significant levels of savings earning a pitiful return in a current account or a savings account, I do not think that is a very good outcome or one that we should accept as policy makers. You can say in such a situation that it is up to individuals, but unfortunately it is a bigger problem than that. Many of the individuals perhaps currently rely on a state pension, but could do a lot better with high levels of savings. You might be talking about a widow in her early 80s, with severe arthritis, who does not go online or use the internet, and whose only outing from her house is a weekly visit to the supermarket by a taxi. You could say that it is her choice to sit on those savings, not spend them and live a pretty modest life as a result, but I think we have to do better.

Again, this comes down to how we can guide people at a much earlier stage, and in that context I am afraid to say that by introducing a voluntary annuitisation framework for the UK and merely adopting a 30-minute optional telephone conversation as the policy response for improving outcomes, first, it will be unacceptable and secondly, we cannot simply say that it is up to people’s choices and let people take their own responsibility for things.

Q 256

Photo of Richard Graham Richard Graham Conservative, Gloucester

It is nice not to come on last, Chairman, because otherwise we either run out of time or get into a vote. So, thank you for calling me.

James, that was all pretty gloomy: a plethora of problems with voluntary annuitisation; poverty; insecurity; death; disaster; the guidance is irrelevant; and so on. Does that suggest that you thought the previous scheme was a wonderful solution and that annuitisation was working well, that everyone was getting perfect results and that the man in Whitehall, or anyway the Strategic Society Centre, had all the answers perfectly arrayed and no change was needed?

James Lloyd: No, that is not what I said and I don’t think that is what anybody has said. When I talk to people behind closed doors, I think the consensus view within the pensions industry is, “Yes, there is a problem, but rather than fix the problem the Government have in effect created a much bigger one.” The analogy that I sometimes use with people is that if your car breaks down, the sensible thing is to try to fix it, not to get out of it and blow it up. Effectively, that is what we have done with the annuity rules in this country.

Q 257

Photo of Richard Graham Richard Graham Conservative, Gloucester

Is that really an appropriate analogy? Everyone can carry on buying the same annuities that have been bought before if they want. The car has not been blown up; it is still there, but a better car may be available.

James Lloyd: Well, they may do, but all the evidence shows that they will not. I go with the evidence of other countries, the limited financial capability that we see in the current older population and the significant detriment that people are experiencing right now to draw that off, rather than a hypothetical, optimal vision of fantastic consumer decisions and a range of products coming forward from the industry that have not yet been introduced.

Q 258

Photo of Richard Graham Richard Graham Conservative, Gloucester

On the way forward, you suggested that the guidance would be useful if it was “mandated”. You went on to talk about default options, which we discussed with the previous witnesses—I think you were here for that—and they could offer some interesting different draw-down products. Tell us a little more about how both of those could or would work: first, the mandating of guidance and, secondly, how the FCA would regulate effectively new draw-down products offered by existing providers.

James Lloyd: On the guidance issue, we have to recognise that while we can encourage as many people into an optional guidance guarantee as possible, we will get only a limited amount of take-up. Even if we adopt second and third lines of defence, the overall influence and impact that the guidance guarantee might have on people’s decisions might be extremely limited.

In some of the debate post the Budget, it seems to be assumed that, if we get the guidance guarantee right, everything else will be right and that will be the only source of information and advice that people will obtain. I think that we have to recognise that, actually, the guidance guarantee will probably have a very small influence overall in what people do. There is therefore a danger in focusing too much on it and devoting too much attention to it, certainly if it is going to be voluntary.

One way around that, if we want to be very direct and quite ambitious, will be simply to say, “Let’s mandate the guidance guarantee.” We could say to people that, since you have benefited from employer contributions and tax relief by saving into a pension, it is not too much to ask that you have half an hour on the phone with an adviser of some sort before you get access to that pension fund.

Q 259

Photo of Richard Graham Richard Graham Conservative, Gloucester

How do you make that mandatory? How do you deal with someone who does not turn up?

James Lloyd: If that is face to face or on the phone?

Q 260

Photo of Richard Graham Richard Graham Conservative, Gloucester

It does not matter. If it is mandatory but they do not do it, what is the penalty?

James Lloyd: The penalty on one level could be that they will not have access to their pension fund until 70 or 80—until it has defaulted into whatever scheme that would otherwise be happening now, if you like. That is a technical issue, but I would offer that a mandatory scheme will be far more successful than an optional scheme.

Q 261

Photo of Richard Graham Richard Graham Conservative, Gloucester

Okay. Tell us about the other aspects: draw-down and defaults.

James Lloyd: I am a non-actuary—I will confess that—so I will leave it up to actuarial colleagues to talk in more detail about the best situation of what should be a type of draw-down scheme and when.

Q 262

Photo of Richard Graham Richard Graham Conservative, Gloucester

This is a good moment to move on to Ian. Tell us a little about the client base of Towers Perrin today. Roughly how many schemes do you have in the UK?

Ian Fairweather: We have quite a diverse client base. Historically, Towers Watson came out of the merger of two large—

Ian Fairweather: That is all right—I still call it Watson Wyatt on occasion. Historically, we came from two different positions: Watson Wyatt was the largest companies in the land—roughly 50%—and Towers Perrin was more small and medium-sized companies, so we cover pretty much the whole expanse of the pensions landscape.

Q 263

Photo of Richard Graham Richard Graham Conservative, Gloucester

So you have a reasonable feel for what I think you described earlier as “interest in shared risk”, by which I assume you mean defined-ambition-type products?

Ian Fairweather: And their precursors, such as cash balance or career-average schemes.

Q 264

Photo of Richard Graham Richard Graham Conservative, Gloucester

Right, and the consultancy is supportive of them?

Ian Fairweather: Yes.

Q 265

Photo of Richard Graham Richard Graham Conservative, Gloucester

What is your understanding of the likely take-up of defined-ambition and CDCs? Are you expecting a handful of clients, or significantly more interest? Will it grow over time?

Ian Fairweather: We are very supportive of all sorts of flexibilities, as I said in my opening comment. Where we are at the moment, we have run a number of client round tables and some surveys of employers, and I think that the interest that was there for collective defined-contributions schemes waned slightly among some clients because of the Budget changes. So some clients were looking at CDC schemes as offering an opportunity to manage some of the annuity problems and then saw that those problems might not be as acute in a new environment where you no longer had to force members to take annuities. At this moment in time, it is difficult to see an appetite for people to move into these schemes immediately upon Royal Assent. I think I do subscribe to what I call the “Field of Dreams” scenario, so if you build something and if you sell its benefits, people will by and large recognise it and come round to the point of view. There is a middle ground within the UK pensions landscape where shared risk will become attractive, even if at the moment it does seem that our clients are not champing at the bit to go there.

Q 266

Photo of Richard Graham Richard Graham Conservative, Gloucester

There will be 100,000-plus companies coming into auto-enrolment at beginning of 2016; many of them will be completely new pension schemes and not many will necessary be your clients. How do you see that evolving in terms of their interest in a CDC offering that might be put together either by the National Employment Savings Trust or one of the big providers, such as Standard Life? Is that not an obvious type of offering solution for them?

Ian Fairweather: Part of the difficulty that I have is that you asked me whether I have evidence that our client base is interested. To be honest, I do not. Can I discern that there might be interest among people who are not currently our clients? Perhaps there might. You  could see a situation with a master trust on their collective defined-contribution basis, because it would eventually have the economies of scale to reap some of the benefits. At the moment, I am realistic rather than pessimistic as to what the actual demand is now, but I am naturally a bit of an optimist because if you increase flexibility and sell the benefits of a different approach to things and design it correctly, it will meet a market need and people will come to it.

Q 267

Photo of Richard Graham Richard Graham Conservative, Gloucester

And what would happen to the assets of different types of default—the people who are in the schemes, but have not yet made or are reluctant to make a decision?

Ian Fairweather: Again, I think you are possibly talking about a situation that does not really pertain at the moment, because most people who are retiring have some element of defined benefit to rely upon. Also, we have only recently moved out of an environment where you had a default retirement age at which employers would aim to move people into retirement, so there was a need for replacement income.

Looking forward a number of years, you will have a greater need for that income. It is difficult to discern that people who have a need for income would sit back and not try to access it through a pension saving vehicle, but I accept that the decisions they are making are not easy. The guidance guarantee will be helpful. We see the guidance guarantee very much as being the icing on the consumer education cake. The guidance guarantee is at or around retirement, but you need pre-retirement and personal finance education in the lead up to that.

Q 268

Photo of Richard Graham Richard Graham Conservative, Gloucester

I would like to ask one last question to John. As a journalist, it is great to have a headline saying that the Treasury will lose £20 billion from the changes to pension schemes. I am a bear of small brain, so I did not grasp all the detail as clearly as Gregg obviously has, but can you patiently run through the detail—if our Chairman is prepared to allow you—and also send the Committee a copy of the article? I just could not understand in particular why an individual would want to act in the way you were suggesting that everybody is going to act.

John Greenwood: Because they will get more money, basically. If I am your employer and I pay you £40,000, I have to pay you £11,500 due to minimum wage laws and on everything else I get taxed 13.8% national insurance. For every £10,000 I pay you, you get employee NI of £1,200.

Q 269

Photo of Richard Graham Richard Graham Conservative, Gloucester

We are talking about a salary.

John Greenwood: Yes, on salary. You also get income tax on the entire amount because it is above the no-rate band—say 20%. If I pay that £10,000 into a pension—

Q 270

Photo of Richard Graham Richard Graham Conservative, Gloucester

You say, “If I”. You discussed income and now you are talking about a defined-contribution pension into which I, as the employee, and you, as the employer, are contributing.

John Greenwood: Well, I make my employer contribution of £10,000 in lieu of your pay. I say, “I am not going to pay you this £10,000”—

Q 271

Photo of Richard Graham Richard Graham Conservative, Gloucester

Why do you do that? Normally, it is a percentage that gets paid rather than a fixed sum.

John Greenwood: No, but I change that. I decide, “You know what? I am not going to pay you 5%; I am going to pay you £10,000, which is 25% or 30% because it is more efficient.” You receive your £10,000 in there. You do not pay any national insurance on it, I do not pay any national insurance on it and you get a quarter of it tax free, and you just take it out the next day.

Q 272

John Greenwood: If you are over 55, yes. For the 5 million or so people over 55. Just people over 55 can benefit from this.

Q 273

Photo of Richard Graham Richard Graham Conservative, Gloucester

And you are anticipating that every employer in the country is going to do this and every employee over 55 is going to react?

John Greenwood: No, I am not doing that at all.

Q 274

Photo of Richard Graham Richard Graham Conservative, Gloucester

So what are the assumptions behind your magic figure?

John Greenwood: The £20 billion figure is on the basis of if everybody does it. My supposition is that even if 10% do, that is £2 billion not accounted for in the first year. My magazine had a conference where we had the top 40 heads of DC pensions from Towers Watson and all these consultancies and corporate IFAs, and I asked them, “Assuming £20 billion or so of income and NI could be lost if everyone did it, what percentage of that figure do you think will be lost in 2015-16?” Their view was, only 32% said between 0% and 10%, none said nothing and so the other 68% said more than 10%, with about 35% saying more than 20%. Most corporate pension advisers think that at least £2 billion to £5 billion will be lost in the first year.

Q 275

Photo of Peter Bone Peter Bone Conservative, Wellingborough

May I just interrupt for the convenience of the Committee to ensure we are all understanding this? In the example you are using, the salary would have been £40,000 a year. That switches to £30,000 and you, as an employer, then pay £10,000 into the pension?

John Greenwood: Yes, that is correct.

Q 276

Photo of Richard Graham Richard Graham Conservative, Gloucester

Ian, can you comment on that?

Ian Fairweather: I am not sure I can, purely because we are quite a broad church and I am not aware of a groundswell of opinion among my colleagues that this is what we are going to be advising clients. I am sorry.

Q 277

Photo of Richard Graham Richard Graham Conservative, Gloucester

Has Towers Watson produced any particular paper that has gone to all your clients saying that this is a terrific wheeze and they should jump on the bandwagon immediately?

Ian Fairweather: I am not aware of any.

John Greenwood: If I may make a point on that, it is unlikely that blue chip companies would do this because it would be perceived as a scheme and obviously, reputationally, Towers Watson clients probably would not do that. However, further down the scale, smaller companies would. A piece of research by a corporate financial adviser called Jelf employee benefits did a survey at a recent event—

Q 278

Photo of Richard Graham Richard Graham Conservative, Gloucester

Just before you finish, John, in that scenario it is a unilateral decision made by the employer who is writing to me as the employee and explaining to me that, from now on, my salary is going down from £40,000 to £30,000 and the extra £10,000 will be paid into my pension. What happens if I say, “Thank you very much indeed. That’s jolly interesting, but I am aged 35. I am not interested in you adding 10,000 quid to my pension in 20 years’ time. I need my income now.”

John Greenwood: No, you only do it for the over-55s.

Q 279

Photo of Richard Graham Richard Graham Conservative, Gloucester

And what happens if they are not interested either?

John Greenwood: Well, if they want to pay an extra £1,2000 NI and £500 income tax, then that is fine for them to do that, but I would be very surprised if they did.

Q 280

Photo of Peter Bone Peter Bone Conservative, Wellingborough

May I just go again to the example? I guess what you are suggesting is that if you are a limited company that you own and are a director of, this would be something you would look at seriously.

John Greenwood: That is right. As I was saying about that research, they had an event with 192 employers with between 50 and 2,000 employees per employer, so they were proper SMEs. To those 192 employers, and this is the Jelf employee benefits research, the question was, “Will you allow employees aged 55 plus more remuneration flexibility so that they can benefit from additional tax advantages?” The results were: yes for all employees, 35%; partially, on a case-by-case basis, 14%; no, 6%; and the rest said no.

Q 281

Photo of Richard Graham Richard Graham Conservative, Gloucester

Is it more remuneration? That is a curious choice of words.

John Greenwood: No, more remuneration flexibility. That is, pay them more pension and less salary. It already happens that when people are 64 they get paid £40,000, max out, because they know they are going to be able to claim it next year anyway—

Q 282

Photo of Richard Graham Richard Graham Conservative, Gloucester

So your argument is that if the Bill is unchanged, this could come into effect in April next year and that people could be planning ahead to make these changes?

John Greenwood: I know they are. I know several advisers who are already talking to employers about it and they are waiting to see. The Government’s position is that there is £20 billion of tax relief or tax avoidance on the table. We will watch and hope it doesn’t get taken up and we will watch out for bad behaviour. It is not clear what bad behaviour is. No one has made it clear, and that is a challenge one could make to the Government. What is bad behaviour? Some people are getting a 20% employer contribution now anyway—will they have to stop doing that?—whereas others are getting none.

Q 283

Photo of Michael McCann Michael McCann Labour, East Kilbride, Strathaven and Lesmahagow

John, may I pursue this point? A loophole exists already in relation to people making additional pension contributions to remain eligible for  child benefit. They bring their salary below a certain level, so they put more into a pension fund and can still get child benefit payments.

John Greenwood: That is right.

Q 284

Photo of Michael McCann Michael McCann Labour, East Kilbride, Strathaven and Lesmahagow

Having identified the problem, has any work been done to identify a solution that would not break the objective of giving people the flexibility about their pension resources in the way that the Government want?

John Greenwood: I speak to quite a lot of people from the industry who went to talk to the Treasury about how to solve it, and there was talk about a possible restriction. Saying that if someone takes out cash, they cannot have any more in that year or they cannot have 25% tax relief cash on future contributions would be one way of doing it. Another way would be to say, if you have drawn more than your 25% tax-free cash, you are not allowed to make any other withdrawals of that type for perhaps five years. That would stop people using it on an administrative basis year in, year out.

What was introduced was the £10,000 reduced annual allowance for anyone who does it in the first year. What that means is that there is still £20 billion on the table in year 1—obviously not all of it will go—and that falls to about £10 billion thereafter. The Treasury has admitted that the £10,000 a year reduced annual allowance for anyone who takes more than the 25% tax-free cash will impact on only 2% of the population, so it is a penalty with no teeth for 98% of the population.

Q 285

Photo of Michael McCann Michael McCann Labour, East Kilbride, Strathaven and Lesmahagow

May I clarify a point you made earlier? Did you say that you had written to the Treasury on half a dozen occasions on this matter but have not yet had a response?

John Greenwood: I have written five or six times asking it whether it had spotted this and have tried to tease out what its position is. I have asked for confirmation of whether it had made any assessment of the amount of national insurance that would be avoided. I have sent about three e-mails and made a couple of phone calls. It is definitely in someone’s in-tray, but they have not got back to me. I also asked the Office for Budget Responsibility yesterday, but have not heard back from it.

Q 286

Photo of Andrew Love Andrew Love Labour, Edmonton

There is a pension taxation Bill in the works in the Treasury. Do you have any indication that it is furiously working through the six communications that you have delivered to it about trying to close the loophole?

John Greenwood: I think that is what it was trying to do before July, when the £10,000 allowance came through. My particular assessment is that it is such a popular policy that restricting the fabulous freedom that is there is such an unpleasant possibility that it wants to avoid it if possible. My summary of what will happen is that it will sort it out after the election. I don’t think that is being fair with the electorate.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

It is unusual in a witness session for a Minister to have the chance of grilling the witnesses. It is unique for a Minister to have the chance to grill a journalist.

Q 287

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

It is worth it just for that. Thinking about your scenario, John, and your hypothetical situation, it would be true to say that the loophole you describe is potentially available this year, so we have jacked up the trivial commutation limit to £30,000. Would it be correct to say that your reasoning would apply this year and that my employer could pay me up to £30,000 into a DC pension and avoid all the NICs you have described, and then I could take it as cash tomorrow?

John Greenwood: Yes, possibly.

Q 288

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Sorry, I have just found an even bigger hole.

John Greenwood: I have not thought about that one.

Q 289

John Greenwood: Because everyone is waiting to see what April brings. Also, pension providers will have in place from April the ability to give flexible withdrawals with the click of an e-mail. People obviously have not planned it for this year, but people will make more thorough plans. The Government have also been talking about using your pension as a bank account. That is all building the idea.

Yes, it is true that it is a novel idea, yet as soon as the penny drops, financial advisers I talk to suddenly go, “Oh yeah, I hadn’t thought of that. That actually does work.” It has taken a long time for me to get this story out beyond my trade paper, apart from one story in The Daily Telegraph, but that does not mean—

Q 290

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The point I am making is that the logic of your argument is true this year. If your argument was plausible, you could save all this money this year, and it does not seem to be happening. As I recall, immediately after the Budget, people such as Paul Lewis on “Money Box”, who is often ahead of the game on all these kinds of things, were highlighting exactly the potential for cycling money around in this kind of way. There were suggestions that billions would be lost. Sure, on a blackboard it looks plausible, but in reality it does not seem to be happening and it could be happening today. Why would you wait until next April? Why would you not just fill your boots today?

John Greenwood: All I know is that my magazine’s readers are corporate financial advisers and pension consultants and they have not done it this year.

Q 291

John Greenwood: It was only about May before the whole issue became widely known and it was only July when we found out what the restrictions were going to be. It was only at the end of July that we knew that you would get a £10,000 allowance.

Q 292

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Hold on. You are talking about 2015; I am talking about 2014-15. The Chancellor announced in the March Budget that the trivial commutation limit would rise for 2014-15. Those are the rules in place today. Forget what insurance companies might do in 2015-16—people could do this thing now and they are not doing it on any significant scale. Does that not blow your hypothesis out of the water?

John Greenwood: I do not think that it does, because financial advisers and employers have been focused on April 2015.

Q 293

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Even though there is free money to be had this year.

John Greenwood: Yes.

Q 294

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I think that undermines the plausibility of your hypothesis.

John Greenwood: All I can say is that at my event last week, we had 40 of the top DC advisers there, and they were all expecting people to do it. We have got an employer—Jelf Employee Benefits—that is talking to 192 employers, and a lot of them want to do it. People are perceiving that the big change is from April, so that is when you would make your changes.

Q 295

John Greenwood: Yes, but you have got to change your human resources situation, so why do it a year early when you can do it once and for all when the new systems are in place? It is less complex to do it that way.

Q 296

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

In terms of numbers, although in theory you could do this with DB and transfer across, that is a hell of a hurdle, so we are mainly talking DC. Out of the five million people you mentioned aged over 55, how many of them are employees in DC pensions?

John Greenwood: I do not know, but I would have thought it was the majority—perhaps some 80% of them, but I do not know exactly.

Q 297

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

80%? So what is your 5 million number then? Five million people who are?

John Greenwood: Between 55 and state pension age.

Q 298

John Greenwood: Yes.

Q 299

John Greenwood: They do not have to be in a pension.

Q 300

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

But if the workplace has not got a pension, they have got to set one up to do the dodge.

John Greenwood: It could be paid into a self-invested personal pension. They can go online and do it. I hold my hand up and say that I am not a think-tank. I am not an expert on these rules, or an analyst. I have come up with these numbers. I have been to the Institute for Fiscal Studies and asked what it thinks of these numbers, and it, too, has ignored my request, on six occasions.

Q 301

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

It is just the way you ask; I do not know. As we have talked about this, you have identified that we are talking about fewer and fewer people and you have identified all sorts of barriers. You can get a big headline out of a big, scary number. The £20 billion got into the headlines.

John Greenwood: The original number was £24 billion.

Q 302

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Indeed it was. I was being gentle, but okay, £24 billion. Clearly, it is a theoretical issue. As we have said, anyone who does this once sacrifices a big slug of tax-free allowance for the rest of their life, so  there is a downside risk. There is a cost to employers and a barrier. To put it gently, is there not a risk of overstating this?

John Greenwood: I have said all along that it could be 10% of £20 billion. I think that is possible. If you have £20 billion tax relief on the table, how much of that is going to get taken up? I don’t know. I have asked my expert readers and they have come back and suggested that at least 10% will.

Q 303

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

To elaborate on that briefly and then move on to other matters, the issue surely is whether there is the chance to take a tax-preferential approach to one’s income. The history of the last 40 years would suggest where that possibility exists. Human resources and individuals are often keen to take those advantages where they can be found. I just make the point that, in so many of our discussions, the elephant in the room is the Treasury. We are asking witnesses to be commentators on Government policy when the Government are not even here to explain what the policy is. I just make that observation.

I move to the wider issue of collective defined contribution. Ian, I have asked this question of other witnesses: what is the fundamental weakness, if there is such a weakness, in individual defined contribution that a move to collective defined contribution could remedy?

Ian Fairweather: To my mind, the answer comes in the name “collective”. Rather than being an individual on your own and chartering your own course through the investment markets with a particular point in time at which you take your saving and turn it into some form of income in retirement, you are in a collective environment where there is the possibility of sharing risk across a large number of individuals, both within the accumulation phase and in what is now inevitably called the decumulation phase. It is reasonably clear that if you have a collective approach to investment and you are not investing on behalf of a particular individual—you are investing across a group of individuals—particularly if you have trustees making the investment decisions, they tend to take a longer-term view than an individual will. I think that it is well proven that most individuals tend towards risk-averse investment decisions, even when it is not in their interests to be less risk-averse. As far as I am concerned, the big benefit of collectivism is the pooling and sharing of risks across those two phases.

Q 304

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

In terms of the model of collective defined contribution that is most likely to emerge—I am asking you to gaze into a crystal ball, but there are different models—which one do you think will emerge in the short term as an offer, as a proposition?

Ian Fairweather: I do not think that I am actually close enough to be able to opine on what it might be. I am not close enough to providers to see what they are working on at the moment. I tend to be on the regulatory side, so the questions asked will be more, “What do the regulations permit and what do they preclude?” and that is the slice at which I come to it.

To go back to an earlier comment, I have not had a lot of conversations with providers or employees about this because, as I said earlier, what interest there was before the Budget has tended to fade slightly. I do not think that it has gone entirely, but that interest has been  distracted into other more pressing issues at the moment. I think that there will be a place for collective defined contribution at some stage. I would not want to put some money on when that might be, but I do not think that it will be early next year.

I think that there will be an element of employers and providers looking to see people making the first move. I am very much a person who likes to kick the tyres and open the bonnet on things—I do not live in the sky, necessarily—so it is quite difficult for me, and for some of the employers I speak to, to try to work out how something might look without being given a prompt from elsewhere. So my crystal ball is a bit cloudy at the moment.

Q 305

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Very understandable. Is there anything in the Budget changes, particularly the ability to access one’s pension pot from the age of 55, that will either hinder or encourage an appetite for CDC?

Ian Fairweather: I think that, in the long term, the increased flexibility ought to encourage. From the experience of talking to our clients, in the short term, the problems with the pre-Budget regime—well, the current regime—of annuitisation were making them more inclined towards a collective approach. The removal of compulsory annuitisation has removed, or will potentially remove, that problem and make it less pressing for them. So the tactical reason why they might have been interested in it has taken a step back, but it does not necessarily mean that the strategic reason why they might want more flexibility has gone away entirely; it is just that there is a lot going on in pensions at the moment and there is a limit to the amount of resource that employers, providers and consultants such as us can put on to things, and you tend to concentrate on the most pressing.

Q 306

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Thank you. James, would you like to add anything on that subject or more widely?

James Lloyd: Not unless you have got specific questions to lead me—not on CDC.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Does any other member of the Committee wish to ask questions of our witnesses? If not, I thank the three excellent witnesses for their very clear evidence; we do appreciate it.

Sitting suspended.