It is a pleasure to serve under your chairmanship, Mr Bone. I entirely welcome the move to create collective pension schemes. That has to be the right way forward. The headline figure of the potential increase in pensions—the idea that someone could get a 30% higher pension than they would with an ordinary defined-contribution scheme—must make these schemes worth pursuing. I suspect that a lot of that is down to the fact that someone would not have to have their investments de-risked towards their retirement date and would not be locked into a particular day when they have to cash in their pension scheme. The scheme could take a longer-term view of the investment risk, and that has to be an attractive way forward.
I agree with the Minister that we want to let a thousand flowers bloom and see what grows up in this market. At some point, however, we have to plant some seeds in the right place if we want to see certain sorts of flower bloom. I wonder if, at some point, these schemes will come to fruition and provide the very real advantages that are often cited. There perhaps needs to be a duty for the regulator or the Department to help employers, trade unions or others to start creating these schemes so that we can get from where we are—zero people in these schemes—to having some top-quality, well managed schemes around and get those higher pension returns. Even as someone who prefers the free market, I think we perhaps ought to look at how we get over that first hurdle, get these schemes into existence and realise their great advantages. I suspect that it will be very hard for the first person to make that move.
I can see a defined-benefits scheme trying to move into a collective scheme, but at that point the employer promise is lost. I suppose that any of the pre-existing fund could be moved, because that is when the promise was pledged, so a whole collection of employees and their contributions would be moved over. I sense that we need to be very careful with employees who are going from having a pension that is promised by their employer as a certain amount to being told, “I’m moving you into a collective scheme where not only am I not guaranteeing it but your contributions could be used to fund other people’s pensions or top them up, and you may end up getting less than you paid in for.” I suspect that move would not be easy to convince people of.
There are a range of risks in how these schemes are managed and how people understand what they have. The key risk is what happens if we have to reduce pension payments. A retired person might think they have £12,000 coming in a year, but something could go wrong in the investment market or the fund, meaning that that pension then has to be cut. That has to be the right thing for these schemes because we cannot have future savers taking all the risks. Otherwise we will have no future savers left or a sort of Ponzi scheme with no one paying in and everyone trying to draw out but having no money left. That has to be the right answer, but it is a real change in risk for the UK pension market. It involves moving to a situation where what we thought was safe could be reduced overnight by quite a large amount. People need to understand that fully, because that is the risk: someone could sign up for a scheme and start to contribute when they are 25, but almost up until the point when they die their pension will be at risk. There will be no point at which they have an absolutely safe pension income, whereas now if someone buys an annuity they at least have some certainty at that point about what they will get in retirement. These schemes will not provide that.
It may be that losing that certainty is a trade-off for a better pension. I can see the advantages of mixed schemes, in which a certain level is completely safe in retirement but some of the money is not. However, we must be very careful that, before schemes are registered, we know what communications about them should look like, so that when people first start saving into the schemes they are certain that they understand the risks they are taking and the advantages. Perhaps the regulator should undertake a long consultation on those details before it gives approval to any of those schemes to start taking cash.