The last session was really interesting, in particular the exchange with Mr Greenwood and the point he made about that loophole. You, Minister, obviously came in and answered a number of questions, which demonstrated you are sceptical about some of the points he made. First, do you believe that HM Treasury and the Department for Work and Pensions did not think this change through properly before you made the announcement of the decision, which meant you overlooked his point about the ability of people to take money out of their salary, put it into a pension and then withdraw it immediately, and so the Treasury loses out?
Steve Webb: No. You are right to describe me as sceptical, because of course the concept of salary sacrifice—essentially this is a variation on that theme—is well-known to the Treasury. You get paid your money through a route that does not involve national insurance, everybody gains, and so this is already part of remuneration strategies. The Treasury and Her Majesty’s Revenue and Customs are well aware of that, and that is the mindset with which they look at any reform. So I do not think anything in that conversation will have come as any great shock.
What we have said is that, in these new pension freedoms, anybody who does that kind of thing suffers a penalty, and the penalty is that at the moment each year you are allowed £40,000 of tax-free allowance, but the second that you take some taxable cash after the age of 55 that £40,000 slumps to £10,000. So there is a negative consequence for people. Of course, you can do it once and get a potential benefit, but thereafter you can never put more than £10,000 into pension saving. Again, I think that John Greenwood underestimates the penalty value of that.
On that penalty value, the danger is that people will not look upon a long-term pension investment in that way and they will just think about making what they would consider to be a quick buck. Therefore, is that an issue that concerns you, or your colleagues at the Treasury, whereby if a sizeable chunk of people took advantage of this change—I would not call it a loophole, but this consequence of introducing these new rules—would that not give you a concern about how it would impact on the Treasury coffers in that particular year alone?
Steve Webb: Clearly, we keep an eye on these sorts of thing, in the sense that the £10,000 measure that I described was to try to discourage people from just cycling their money through. So there is a recognition that there is always a risk of this kind of thing. However, there are a number of barriers. For example, the employer has to have a conversation with the employee; there is probably a contract of employment that would be impacted; there may be HR and contractual implications; or you may have to set up a pension arrangement.
In a sense, my question to John Greenwood is this: you can do it this year, and we do not see it happening—I am not saying that nobody is doing it, but we do not see any evidence that it is happening on a significant scale. The first £30,000 you can take as cash in a single pot this year, so why are people not doing it? It is because there are lots of barriers. So I am not saying that it could not happen and I am not even saying that it will not happen, but we do not think that it will happen on the sort of scale that is being talked about here.
May I ask one other question from a global context, taking an overall view of this proposed change? The picture in Britain is much the same as in every other part of the world, in that we have an ageing population. In my constituency, 60% of it is East Kilbride, which is a new town created in 1947. It has more older people than perhaps any other part of Scotland, because people all arrived at the same age and they are all growing older. So we know of all these demographic problems.
We are increasing the retirement age, because more people are living a lot longer—not necessarily healthier lives, so there are impacts upon the health service, as we have mentioned, and impacts upon social services and social care. And at a time when there are these demographic time bombs that we face in a whole range of different areas, we are introducing a change in pensions that is so dramatic that it has the ultimate effect that it can encourage people to draw down cash and not think carefully about their future. We had the sports car analogy when you first announced the policy. In your heart of hearts, are you not genuinely concerned that this policy could go pretty pear-shaped if people in large numbers start making decisions that are not very wise, even after they have had the 30-minute interview with the adviser?
Steve Webb: You have raised a number of issues there. May I deal with whether it is just 30 minutes and that is it? First, before the guidance—let us call it, roll of drums, the guidance event—there will be an information-gathering process. So you ring up and say, “I want my guidance face to face,” or on the phone or whatever. You do not access it that day. We say, “Right, we will make an appointment for you,” a few weeks hence, whatever it is. Before that takes place, you gather information—your state pension rights, your other pension rights, anything that is useful to bring to the table. So you go into the conversation with a useful gathering of data. That is the first thing to say.
You then have the conversation. That is not then the end of the process. You go out of that with, potentially, a piece of paper with something summarising what has gone on and with signposts to where you can go from there. There is no sort of, “Right, you have had your conversation; you have got to make your decision.” There are websites; there are places you can go. To be honest, although there is the guidance moment, we are not going to ban people from phoning the Pensions Advisory Service once they have had a guidance conversation. There will be more that people can do. I would contrast that with the current situation with lots of people making these kinds of decisions with no guidance or help at all and getting them badly wrong.
Is it perfect, or is it the end of the journey? No. Is it a great deal better than people often have at the moment? I think, yes. My argument would be that the state can impose on people a presumption that it knows best, and it can default them into annuities. That is what we have done so far and with pretty bad outcomes. My presumption is that we are optimists, not pessimists, that we start from the assumption that it must be possible to equip consumers as far as possible to make good choices, knowing better than the Government do what their family needs are, whether they are fit or unfit, married or single. Only the individual really knows that for themselves. So, yes, some people will spend the money too fast. I am sure that will happen. That is the risk when you set people free, but we think that the benefit of setting people free to choose for themselves is better than forcing them into a one-size-fits-all model.
Steve Webb: One of the best things that I have seen since the Budget was some survey evidence in which people were asked whether they were more positive about pensions because of the Budget, and whether they were more or less likely to save. The evidence was that people said, “Actually, I am more positive about pensions now. Because it is a better product and more flexible, I am going to save more.” Funnily enough, the group who opt out of automatic enrolment most at the moment is the over-55s and one of the things that they do not like is that they have got to lock their money up. We think—I think—that the over-55s will be more likely to save in pension saving.
We get fixated by 55, but 55 is just the minimum legal age at which this is all possible, but very few people have fat DC pots at 55, so actually—state pension age will be beyond 65 in a few years’ time—lots of people will be doing this much more at 65 than at 55, when the issues are much less.
You mentioned earlier, at the beginning of your statement, that you felt that there were certain obstacles preventing people from getting their money out of the pot. Will you speak more broadly and more specifically about what those obstacles are? You alluded to them, but did not really expand.
From my understanding, it was a revolutionary change, and pensioners were able to take large amounts of money from their pension pots without needing to or being forced into the annuity market, so it was a great act of liberalisation in that way. You said that there were obstacles and that this had not actually happened. When you look on the ground, people had not been doing this to the extent that you thought.
Steve Webb: I think we may be talking at cross-purposes. In the previous evidence, we had a journalist here who was alleging that, because of these new freedoms, massive tax avoidance would be going on. I pointed out that in theory that would be true in 2014-15, but in reality it is not happening. I was not referring to the post-15 freedoms, I was referring to the fact that people were not doing this this year, because reducing someone’s pay and setting up a pension is quite a big thing to do, and there is not much evidence that people are doing it.
Steve Webb: One of the joys of setting people free is that everybody will come up with their own answer that works for them. Clearly, people will be potentially accessing sums of money that are bigger than anything they have encountered before, apart from, say, their mortgage. So as time goes by I suspect, although I am only guessing, there will be a set of people who want to take some cash up front, perhaps to pay off debts that they have accumulated or to use while they are retired and able-bodied enough to enjoy it. Some people will want to put money aside and some will want to give money to their children. I think that we will see a diverse pattern.
But of course, at the moment, not many people have very large DC pots. In the very early days, people who have just been auto-enrolled might only have a few hundred or a few thousand pounds. I would be astonished if they do not just cash them in. So, what happens in April 2016 might be very different to what happens as this matures five or 10 years down the track.
Steve, to take you up on the issue around the potential loopholes or whatever one wants to call it, I think you said in your response to Michael that you were not saying that people could not do this, and you were not even saying people would not do it. The question is: is there an analysis of what behavioural impact you expect to see in this regard? Have the Government done a behavioural analysis?
Steve Webb: Specifically in terms of what my colleagues at the Treasury have done, obviously they will need to respond, but we do not think as a Government that we are talking about a significant issue. As you heard when you asked the question in the previous evidence session—what would it take to completely close this down?—you would have to pretty radically complicate tax relief. For example, one suggestion that was mooted by the panel was that, once someone had done this thing once, you said, “Right. You cannot accrue a tax-free lump sum ever again, or you can’t make any more withdrawals for five years.” All those get very messy and very complicated, so, when you make changes, you allow people to adjust their behaviour to maximise advantage of it. Some people will do that. If we thought it was a big hit on the Exchequer, we would have to do something about that. We do not take that view, and the things you might do about it would complicate the system a great deal.
I understand that, but I am slightly unclear whether you are speaking for the Government or whether the Treasury are speaking for themselves. There seems to be some ambiguity here. The Government must have done some analysis to think that it is not a big problem. Is there any chance of us seeing that analysis?
Steve Webb: As I say, my colleagues at the Treasury prepared the fiscal forecast that the Office for Budget Responsibility signed off. It is worth saying the OBR signed off our estimates of the impact of the reforms on tax revenue. Principally, we think the big point is that a set of people would have bought an annuity and spread their income through their retirement, so we would have got the tax in little bite-sized chunks or not at all, because it might have been below the tax threshold. Some of those people will bring that money forward or take it in a lump sum, and we will get, in some cases, more tax and, in some cases, earlier tax. We think that that is the dominant thing. But when the Treasury prepared their forecast for the fiscal impact of the measure, they looked at what they thought was the whole impact of the measure.
Steve Webb: Two things made it possible. One is the state pension reforms that a previous witness, James Lloyd, was very positive about. We inherited a situation in which the state pension was well below the basic means test, which meant that if people did blow the lot on riotous living or whatever, we would be topping up their basic state pension to £30 or £40 a week of means- tested benefit, so the taxpayer was exposed. If we let people free, and we had a very low state pension below the means test, we would have to pay a lot of means- tested benefits to people who spent their money.
The new single-tier state pension that comes in in April 2016 is pitched just above the basic means test, so if people do blow the lot, then, as I once said, we can be more relaxed about that, because they would not be entitled to any pension credit. There is the residual issue of housing benefit and so on, but we are much less exposed. That is the first reason. The state pension reform enables the budget reform.
The second reason is political philosophy. Both coalition parties took the view that we wanted to be liberal rather than paternalistic. We took the view that the state does not know best; that individuals are making unique retirement choices based on their own family circumstances and what is right for them; and that the default should be that individuals know best rather than that the state knows best. The Opposition’s reaction, if I might say so, has been very split on this, because instinctively they want to control, which the coalition parties do not want to do, but they know that it is popular. You have seen that from some of the questioning, which has been along the lines of, “We don’t like this—it is uncomfortable because it is letting people free, but we realise that it is popular, so we will just criticise.”
One of our previous witnesses described the pensions revolution as blowing up the world of annuities and “Whitehall knows best” as though that was an absolute disaster. The point I was trying to make is that that which has been blown up is still available in exactly the same format, but there is now a variety of choice and options open to people, trusting people that they prefer to know what to do with their own money in precisely the way that you have described. I guess that in some ways the nightmare scenario for those of us who believe in having that greater choice is that something goes horribly wrong. I suppose equally that that would be the ideal scenario for those who prefer not to give people great choice.
Minister, what do you think the likelihood is of real issues over either inadequate guidance or possibly people being unable to make decisions based on the guidance that they are getting? What sort of risk is there that later on, people will regret the decisions that they have made and the choice they have been given and that they will wish to go back to an unsatisfactory form of annuity that enabled some to muddle through?
Steve Webb: There are a few things. First of all, there is the quality of the guidance guarantee that we will offer. The Chancellor has confirmed that the telephone-based guidance will be delivered by the Pensions Advisory Service, which I think we would all say is a respected organisation. It is already staffed by experts, and it is increasing its staffing. The face-to-face guidance will be delivered through the Citizens Advice network, which is a trusted network of front-line advisers, or in this case, guiders. Obviously, Citizens Advice has not specialised in pensions, but it probably knows best the set of people who are most vulnerable. Folk who are struggling with their money, with debt or whatever—Citizens Advice may know many of those folk already, so it seems very well placed. We are going to make sure that the website is of high quality. It will not suddenly appear on 6 April; we will try to make it available ahead of time. First, therefore, the quality of the guidance offer is crucial.
Take-up is obviously very important, and I have no doubt that we will debate as the Committee proceeds how we maximise that, and what duties we put on schemes and providers and so on. I think it would be a mistake to think that 100% take-up, or anything like it, of the guidance guarantee is the right answer. We know that the people with the biggest pots overwhelmingly will pay for independent financial advice. They can afford to do so, they will recognise the value of doing so and they may well decide that they do not want the guidance, so they will just go straight for regulated advice.
Likewise, the people at the bottom in terms of pot size will overwhelmingly, I suspect, just take the cash. We want them to take the guidance to see what options they have, but frankly if you have a few hundred or a few thousand pounds, your options are pretty limited. It would not trouble me unduly if someone with a very small pot simply took the cash, as long as they knew what they were doing in terms of taxation.
Of course, in the early days we have got lots of people who have been automatically enrolled, who then pass 55 or a retirement point, whose auto-enrolment only started a couple of years before, so they will have four, five or six years of auto-enrolment at a minimum of 1% plus 1%. We will have lots of very small pots early on, so that will make the headline percentages look low, because there will be lots of people who will just take the cash, and probably rightly so. The key is not a particular target level of guidance take-up; the key is the right people taking the guidance—the people who did not have a choice before and who do now, who have options that they did not have before and who could do significantly better with a bit of information and guidance. So we will be very much focused on the people who really need the guidance.
We heard evidence a couple of days ago about how the scheme would be rolled out. I am afraid that, as a former civil servant for 10 years and then as full-time trade union official in the civil service who negotiated with a range of Departments, agencies and non-departmental public bodies across the whole UK, I know that this country does not have a good history of Government roll-outs of computer programmes and things going well on that front. Every Government, irrespective of hue, will have the scars of being told, “This is all going to work,” and then finding that it all falls flat on its backside.
I cannot remember exactly what evidence session it was—I think it was on the first day—but we heard about the plans for roll-out and how it was all going to work. When that moment comes and people are making phone calls and trying to get things on their computer screens, do you have any fears or concerns that we will have the same problems that have plagued Governments, Olympics opening events and Commonwealth games ticketing, which was a fiasco? Have you had a chance to dwell on any of those issues?
Steve Webb: Sure. The first thing to stress is that the scheme does not depend on a big new Government IT project. The face-to-face guidance will be delivered by CAB, which do that kind of thing everyday anyway, and the Pensions Advisory Service has already set up its own system. The point that Michelle Cracknell from TPAS made is that it has a database system whereby if you ring them a second time, it connects to the first time that you spoke to them. While there is no connect from people who see a CAB adviser to TPAS, if you phone and phone and phone again, it is all linked and stored. That happens now. Although it will be taking on new staff, it does not have to set up new IT systems and it actually created its current customer relationship management system with capacity to expand. There will be a website, which we are doing now, so there is plenty of time to get that sorted. I do not think that there is a big IT challenge.
The other thing is that we envisage a soft launch, so we do not envisage a switch-on day, before which no one can get any guidance and after which everything happens. For example, in the first part of next year, we will be doing face-to-face sessions and phone calls on a small scale and will be testing things out. Suffice it to say that we have worked out that April is four weeks before May, so we are quite focused on making sure that it does not all collapse.
I have a couple more questions for the Minister, building on a previous question and thinking about his answer. He stated to the Committee that he understands that the Treasury has baked into its analysis potential tax avoidance from the changes. What does that baking-in involve? How much tax avoidance do the Government expect to take place?
Steve Webb: The figures that I have seen are the aggregate figures, so I have not seen any breakdown. In fact, I am not convinced that the figures are done in that way. The Treasury looked at the whole package and came up with a global figure for the expected impact on tax revenues. That has been ratified by the OBR. I was not involved in the specific drawing up of those figures, so my colleagues at the Treasury will deal with the further details. The figure that we have published is the Government’s best estimate of the fiscal effect of the reform.
Steve Webb: What I am saying is that when the Treasury estimates the net fiscal effect of a reform of this sort, it takes account of all the relevant factors, which include the potential for changes in behaviour. Clearly, it would be appropriate, if you want more detail on exactly what was done, to table written questions to my Treasury colleagues, because I was not involved in drawing up the figures.
Thank you. It just seems a little strange that we are talking about pensions and the issues pertaining to the Bill, of which this is one, which is why we had a witness, but we have to go elsewhere to get—
That is an issue for Mr Bone, then. Let me ask the Minister another question on the disclosure requirements. As I understand it, an individual wanting to take advantage of the new flexibilities and options will have to inform all their pension providers within 31 days and if they do not do so, some pretty heavy fines are being proposed. Is that the case and if so, do you think that that approach will stand the test of time?
Steve Webb: Again, these issues are in the Taxation of Pensions Bill, rather than in this Bill. In general terms, the point is that, as I said earlier, once you start drawing taxable cash, you cannot go on getting £40,000 a year of tax-free annual allowance, so providers need to know that information, but the legislation that provides for that is not this Bill. It is the Taxation of Pensions Bill.
I thank the hon. Gentleman for that. Is the Minister aware of whether the Treasury has done a memorandum to the Committee, and if not, whether it might do a memorandum, because perhaps, with hindsight, the usual channels might have asked for a Treasury representative to be a witness? That did not happen, so I think a memorandum would be useful to the Committee, if it were possible to arrange.
Steve Webb: I am happy to pass that request on. I was surprised that the Opposition did not ask for a Treasury Minister to give evidence, but they did not. The Treasury’s Taxation of Pensions Bill is, I believe, being debated on Second Reading next week. Far be it from me to presume, but my sense is that the scrutiny of the measures in that Bill would be appropriately done as part of that, but I am very happy to pass on the Chair’s request to my colleagues.
Thank you for that guidance, Mr Bone. It was very helpful. Does the Minister agree that once one gets beyond the technicalities, these things do pertain to the discussions that we are having? They clearly must pertain to the discussions we are having, which are about the guidance guarantee as a central part of the Budget reforms. There is an issue here about how one makes a judgment on the Government’s reforms, given that those two Bills are happening simultaneously. It would be very helpful to have that memorandum from the Treasury.
Briefly, in some of the evidence we have heard from witnesses, there have been a number of examples where one witness has said one thing and another has said something else. That is normal in terms of collective views—that is the whole point of the oral evidence. Will the Minister confirm whether he shares my view that on the evidence we have heard so far—[ Interruption . ] Bless you, Thérèse. Will the Minister confirm that there is likely to be interest out there among pension schemes for both new types of pension made available through this Bill, defined ambition and collective DC? It is not going to happen on day one. It will take time for the advisers, actuaries and schemes involved to work their ways through the mechanics of the Bill when it emerges and then make the necessary changes that trustees and others will have to sign off. However, if there was absolute resistance to the provisions being offered or a strong feeling that they needed to be offered in a different way, we would have heard either of those messages quite strongly.
My view is that, broadly, there is some interest out there and that it will be among some big schemes. Therefore, the offer is worth while, but the longer-term potential role of the CDC will probably be more in terms of auto-enrolment, NEST and the small companies that will be offering pensions in due course.
Steve Webb: On the appetite for risk sharing, I think it is fair to say that Steve Webb did not invent risk sharing. As one of our witnesses said, in the concept of a cash balance scheme, the goal is not a pension, but an amount of cash that in the old days would have been used to purchase an annuity. The member of the scheme had the risk of annuity rates and longevity and so on, but the employer had the risk in the accumulation phase, so that was a shared-risk model. Part of the point of the Bill is that we have had a kind of binary regulatory regime, for DB and DC, but in reality DB schemes are becoming more flexible.
I can think of a number of big schemes that have flexed the pension scheme age, so as longevity rises, the scheme pension age rises. We have seen cash balance and a whole raft of shared-risk models being invented and shoehorned into a regulatory regime that was never invented for that purpose. One of the beauties of the Bill is that it regularises all that and says that you have hard-promise schemes and no-promise schemes, with shared-risk ones in the middle, and then you have collective and non-collective.
It is funny, but in half the Bill we are accused of rushing, but in the other half some of our critics are saying, “There is not much demand out there.” My argument is that in a measured, thoughtful, careful and systematic way we have put the regulatory regime in place, so that as and when the demand arises—we heard from some witnesses that there are already firms interested—we will have done the work. We have consulted and we are in a calm and measured way ready to deliver. Obviously, for 2015 the focus is on the Budget freedoms, the charge cap and the governance regime—inevitably that is the focus at the moment. We envisage that our DA and so on will be available from April 2016, we hope. That is when, as the Committee knows, contracting out goes for DB, so there is a logical sequence to all this.
I do think that the demand will be there. It will come from different places. We are seeing around Europe some schemes going from individual DC to collective DC—perhaps, for example, when workers get older. So a young worker does not mind so much a bit of volatility, although NEST takes the opposite view, but you could argue that you do not mind a bit of volatility if it buys you return for a younger worker. Maybe workers move into CDC later in life or maybe you have CDC decumulation, because again you want risk pooling.
You can see lots of different ways in which the different models could feature different types of employer and so on. Very much the purpose of the legislation is to let a thousand flowers bloom and to make sure that we have thought it through carefully. I am confident—I strongly suspect—that many of these schemes will be the norm in a generation, but how quickly we get there I do not know.