It is a pleasure to serve under your chairmanship, Mr Bone.
We now come to the issue that has captured most interest outside this place, and there are good reasons why that interest was piqued. I shall begin with the Minister’s remarks on guidance during his exhaustive run, as he described it, through the new schedule. The length of the schedule speaks to the complexity of the legislation that the Government are seeking to implement through it, and through amendment 58 and new clause 12.
If we step back for a moment, it becomes clear that, given the Government’s emphasis on guidance, they recognise the complexity and difficulty of the decisions being placed into the hands of individual savers as a result of the Budget reforms. The Government thought that deciding what to do with one’s pension pot, at age 55 and onwards, was simple and straightforward. However, the decisions that are going to have to be made are difficult and complex; the Government would not be putting so much emphasis on guidance otherwise.
The question is whether the guidance, as the Minister set it out, appears robust enough to the Committee—and, indeed, to the House and the public. That is an open question. I will go through some of the issues that emerge from the Government’s approach to guidance.
First, the retirement income market needs to be reformed; there is no doubt about that. The annuities system was not working effectively for substantial numbers of people. Members on this side of the Committee think that greater options are necessary for people at the point of retirement. What emerges very quickly is the rapidity with which the Government have undertaken these measures. The hon. Member for Amber Valley raised the issue of how confident the Government are that the levy will be raised and in place by April. The Government have set themselves an extraordinarily rapid timetable; one would not want to be awfully cynical and suggest that that timetable is linked to that of the next general election. However, the rapid timing raises questions, given the importance of getting the guidance right, which the Government insist is absolutely critical to making the reforms work for savers.
There has been confusion and a lack of clarity since the Chancellor announced the reforms in his Budget, but that is not surprising. He told the House that people would get advice, but, as everyone in Committee knows, advice and guidance are very different things. From that moment on, there has been ambiguity and a lack of clarity at times around the Government’s approach. The Minister has done a manful job of trying to sweep up some of the detritus; the day after the Budget, he was making the distinction between advice and guidance, but that speaks to a larger issue.
As the change comes very fast, there will be a multiplicity of new products emerging on the market. The Government know that. They place such emphasis on guidance because of the memory of the mis-selling scandals that surrounded the pension reforms undertaken in 1986. A lot of their rhetoric around the reforms is similar to that in 1986. The Government recognise what they missed 30 years ago and are trying to fill that gap through guidance, which is to be welcomed.
Impartial, face-to-face guidance was originally promised by the Minister post the Chancellor’s emphasis on advice, and now there are to be different options for people. The guidance will not necessarily be face to face; it could be on the phone or via the internet. That raises questions about whether multi-platform approaches are equally credible and equally likely to deliver high quality guidance. There is a question mark about that. I do not have a crystal ball, but it seems obvious that face-to-face guidance is likely to be the most substantial, although the Minister might have a different view.
When the Minister and the Chancellor introduced the reforms, the Opposition set three tests to gauge the likelihood of the reforms delivering for savers. First, how good will the guidance be and will it deliver? Secondly, there is the fairness test, about the impact that the reforms to the retirement income system have on the building up of the pension pot part of saving—to use the jargon, the linkage is between accumulation and decumulation—and particularly the potential impact on investment strategies that pension funds have to undertake.
For example, one criticism of individual defined contribution is that the pension scheme is managing an individual’s pot and does not have the scale of assets through which one can take greater risks and hedge against those risks. Managing an individual’s pot 10 years from that individual’s retirement date, the pension fund has to move that individual’s assets into low-yielding, low-risk assets, usually Government bonds, therefore reducing the pension pot that an individual might otherwise have had. One of the great claims made for collective defined contribution is that it allows the pooling of asset risk to the benefit of scheme members.
If pension schemes now have to work on the assumption that an individual is going to exit at 55, does that have an impact on the investment strategy? Will the same thing, often called “lifestyling of assets”, now happen at an individual’s pension scheme progression at the age of 45? If someone joins a pension scheme at 25, they have only 20 years of growing their assets in the most beneficial way possible, and then they have 10 years of low-risk, low-return assets. That is what we mean by the fairness test. What does all this mean for the pension pots of middle and lower-income savers? What is the connection between the fees for building up the pot and turning it into a pension income?
We added a third test, which we call the cost test. That is about trying to dig into the potential impact of these changes—the ability to cash a pension pot at 55 —on eligibility down the line for means-tested benefits. To draw on the Minister’s infamous Lamborghini comment, somebody might be in the scenario of having spent their money and then finding they did not have sufficient income to live on in retirement.
I think it is less likely that people would be imprudent in the use of their savings and more likely that they would simply outlive what they had bargained for. What do such cases mean for eligibility for means-tested benefits, and the potential extra cost to the state? Flowing from that is the issue of social care. Does being able to cash out at 55 impact the relationship with local authorities, which might insist that an individual pays for social care from that pension pot? Since the pot can now be accessed at 55, down the line it is no longer a pension in the same sense.
Those are important tests. So far the Government have struggled to meet those challenges. That might be due partly to the rapidity with which the reforms are taking place and partly to the Treasury’s not being keen to share its modelling on the behavioural impact of the reforms. In that context, I thank the Treasury for providing the memorandum that you, Mr Bone, had said would be useful following the evidence provided to the Committee by the journalist John Greenwood.
In the context of the long-term costs and benefits to the public purse, the absence of evidence from the Treasury showing how the policy had been developed makes it difficult for either side of the Committee to judge the potential risks and rewards. I want to develop the area of risks further. What did the Minister tell us in his run through of new schedule 2? First, that there is to be a multiplicity of guidance options. Online guidance will be available on the Government website and through MAS. Face-to-face guidance will be delivered by Citizens Advice, CAB Scotland and CAB Northern Ireland.