Pensions: Occupational Pensions

Lord Myners Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord Myners]

My Lords, I congratulate my noble friend Lord McFall of Alcluith on securing this opportunity for the House to revisit this important area of workplace occupational pension schemes. I declare an interest as a partner in an investment management firm and also as chairman of the Personal Accounts Delivery Authority, the predecessor to NEST.

I am a member of a defined benefit pension scheme. My wife, my children and I draw security from the fact that we have an assured income which will track inflation. My father was a fisherman and then a small shopkeeper. He had no workplace pension; he worked at sea. My teenage children will not have a defined benefit pension scheme. This is a single generational phenomenon. Perhaps it cost too much; perhaps it was not valued sufficiently by those who were members of the schemes in the early stages of their lives; and perhaps we in Parliament put too much pressure on this beast and burdened it with all manner of additional requirements. We sought to de-risk it and we sought to provide additional protections. We have destroyed something which I think we all know was a rather good development and whatever succeeds it will not be as good. I fear that that is an irreversible decision.

I congratulate my noble friend Lord McFall on his work on the Workplace Retirement Income Commission. That work focused in particular on some of the problems that arise with the successor arrangement, the defined contribution scheme. Contribution rates are simply too low to deliver the sort of benefits that people believe they will need and expect on retirement. There is a huge mismatch here which the Government constantly need to remind people about in order to encourage higher rates of contribution. Costs are also far too high. Costs are the one manageable element here. If the contribution is fixed and investment returns are outwith the control of the subscriber or the arranger of the plan, then costs is the one area where you can secure some improvement in the benefit that is acquired through contributions.

My noble friend Lord McFall also highlighted the absence of competition in the annuity market. I referred to this in a report that I produced for the Treasury in 2001. This continues to be a very serious problem, particularly for people with only modest amounts to acquire annuities. I would like to suggest to the Minister that the Debt Management Office seriously considers offering annuities. It is another form of funding. It has different features from lending, but essentially a capital sum accrues to Government and a rate of return is paid to the subscriber of that capital. Therefore, it is not unlike a gilt-edged security. The Government have no concerns about operating in the fixed-income issuance market, so why should they not also be funding themselves through annuities? At least they could examine that as a force for change and better value from the private sector.

I believe that NEST is being unreasonably hindered by its inability to act as an aggregator for small funds. That is something that the Government can do. Quite frankly, the private sector is not very interested in aggregation of small balances, so there is no obvious market for that. It is very much a seller’s market in terms of pricing. As my noble friend Lady Drake has already reminded us, NEST has clearly played a very important role in improving the governance of pension schemes and improving the pricing of the pensions product. I pay great tribute here to Tim Jones, the chief executive of NEST, and his leadership. I hope that the Government will see NEST as something that they should champion and promote as a really effective force in this area, as it is important to so many people’s lives.

My final observation relates to occupational pension schemes as owners of companies. There has been a complete failure of institutional ownership, which lies at the heart of so many of the problems that we have in the private sector, including the hot potato of bonuses, with which I see the coalition Government struggling, and which reminds me of my own days in trying to resolve that issue. There has been a dilution of ownership and a dilution of a sense of responsibility on the part of investors. NEST is seeking to correct that, but the Minister, as a former investment banker, must be very well informed on these issues. In the past, organisations such as the National Association of Pension Funds with Mr David Paterson and the Association of British Insurers with Mr Peter Montagnon have done sterling work in governance and stewardship, but their effectiveness is being diminished by the fact that the pension schemes now represent a much smaller part of the ownership of UK companies. There is a major lacuna there in the economy.

I was disappointed that the Secretary of State for Business’s Statement recently on bonuses and pay did not say a great deal about making shareholders more effective in the performance of their duties as owners. I hope that the Kay review, which is due to publish an interim report in the next few days, will, as the noble Baroness, Lady Wilcox, assured us yesterday, address the issue of shareowners as responsible owners, including putting them at the fore in an active way in choosing boards of directors and sitting on nominations committees.

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[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, I join other noble Lords in paying tribute to the noble Lord, Lord McFall, and congratulating him on securing this important debate on reinvigorating occupational pensions. I am sure that noble Lords will join me in thanking him also for the skill and diligence that he showed as chairman of the Workplace Retirement Income Commission. The report was a fascinating read. It proposed recommendations on how industry, employers and the Government can strengthen workplace retirement saving. More importantly, I am relieved to see that in most of these areas the noble Lord and I are in much the same place.

The pensions landscape, which is always fluid, will see a huge change again in 2012 with the introduction of auto-enrolment, which presents a once-in-a-lifetime opportunity to transform our savings culture. However, if we are looking to reinvigorate occupational pensions, we need to go further than this. We need to build public confidence that such pensions are value for money; increase employee engagement in retirement saving; and motivate employers to provide good pension vehicles. None of these goals is easy, and they have become a lot more difficult recently.

In the past 25 years, life expectancy at 65 has increased by six years for men and five years for women. That is great news generally, but poses serious financial questions. Saving is in sad decline. In 2010, 13 million jobs had no pension provision—an increase of 2.5 million on 1997. The noble Lord, Lord Myners, uttered a lament for the occupational pension. We have seen falling annuity rates, increased longevity and a fall in the rate of return on equities. My personal belief is that some of us in this generation had a free ride because of the discovery of equity returns in the 1950s, 1960s and 1970s. I suspect that those returns were a one-off. We also saw the abolition of payable tax credits. As a result, UK pensions are no longer the gold standard that they were.

Only one in three private sector workers is contributing to a workplace pension. Other noble Lords cited different figures but basically, if one wants a £15,000 pension, it will require £300,000 of capital outlay to fund. That brings home very starkly the challenge of getting people to invest in a pension.

[Lord Myners]

Not bankers!

[Lord Freud]

Not at the moment, but their remuneration is going down quite a bit.

First, we must change attitudes towards pensions as a whole. Many people find pensions too complex, the incentives to save unclear and the expected retirement incomes unknown. For these reasons, the state pension needs to be reformed to provide a simpler, clearer foundation to support those saving for retirement. That is what the proposals in the Green Paper A State Pension for the 21st Century outlined: a simpler, single-tier pension set above the basic level of the means test as the primary option. I can update the noble Lord, Lord McKenzie of Luton, that, should we decide to proceed, we will set out further details as part of a White Paper in accordance with the usual process.

Nevertheless, around 7 million people are not saving enough to deliver the pension income they are likely to want, or expect, in retirement. With automatic enrolment, we will start to see a behavioural change requiring all employers to enrol all eligible workers into a workplace pension scheme. I welcome the introduction of the National Employment Savings Trust as a simple, low-cost pension scheme designed to fill a gap in the market for employees on low to moderate earnings. We are already seeing NEST acting as a beacon of best practice to other providers and encouraging high standards of governance, responsible investment, effective communications and low charges. A number of noble Lords raised the issue of the shackles on NEST. We will keep that balance between competition and choice very much under review. In response to my noble friend Lord Freeman, I am pleased to report that last week the department began its communication campaign to alert individuals and employers to the reforms and to ensure that tailored information is received by those affected.

On top of this, we must restore public faith in the concept of pension saving and, behind this, pension charges are key. Individuals who perceive their charges to be high are less inclined to save, so I welcome efforts by the National Association of Pension Funds to bring the pensions industry together to improve transparency of charges information for customers and employers. My department will offer its support to ensure that real improvements are made. It is also worth bearing in mind that since departmental research places the average annual management charge in default funds at between 0.4 per cent and 0.6 per cent, with none found higher than 0.9 per cent, the case for rushing into a charge cap without due consideration carries less weight. This is especially as new entrants into the market, such as Now pensions, are offering similarly low charges. Nevertheless, I can assure noble Lords that the Government will not hesitate to deploy a cap if individuals’ pensions savings are at risk from excessive charges.

As noble Lords have pointed out, there are a lot of small pension pots. There are more than 1 million small pension pots valued at less than £2,000, and automatic enrolment will clearly increase that number further. This is a serious hazard for individuals who want to build up their pension saving. Small pots are easy to lose track of and difficult to aggregate due to the cost and complexity of transferring pension schemes. In December 2011, the Government released the consultation paper Meeting Future Workplace Pension Challenges: Improving Transfers and Dealing with Small Pots, in which potential solutions are set out to address this issue. These include radical proposals such as an automatic transfer system in which pension pots could move with the individual from job to job or be consolidated in one or more aggregator schemes.

Individuals also need to get best-value outcomes. The Government believe that individuals are likely to get the best deal by shopping around on the open market and exploring options from a range of providers before purchasing an annuity. We have been working with consumer groups, industry representatives and other government bodies to bolster the current right to the open-market option by developing a default open-market option. The Association of British Insurers is currently consulting on a new draft code of conduct which supports this aim.

One area where standards must improve is on incentivised transfer, where members of perfectly sound defined benefit schemes are being offered cash incentives to transfer out of, or modify, their existing pension arrangements. It often results in members receiving less generous arrangements and thus lower retirement incomes. We are therefore working with the Pensions Regulator and the Financial Services Authority to develop an industry-wide code of practice which will cover all forms of incentivised transfers to ensure that these practices, when appropriate, are done fairly and transparently and are communicated to the member in a balanced and easily understandable manner.

We need to make it easier for employers to provide good-quality pension provision for their workers. To help deliver this, we aim to make it easier for employers to restructure their pension arrangements without requiring the employer to pay the difference between its assets and the cost of buying out the scheme’s pensions.

The department’s private pensions legislation will also be the focus of the red tape challenge. In response to the noble Lord, Lord McKenzie, I say that this is a cross-government initiative that seeks to revoke or simplify as much legislation as possible to ease the burdens on employers and business. We will use this opportunity to look objectively at pensions policy and consider whether the legislation as it stands reflects the department’s priorities and is fit for purpose.

The Pensions Regulator has set out its principles for what a good defined contribution scheme looks like, to establish standards for design and governance of defined contribution schemes and ensure that the pensions industry is best placed to support automatic enrolment.

Looking further ahead, we need to build on the good work that the consensus of previous years has achieved. We should consider the role for government in determining scale and ask ourselves whether the high fragmentation of the UK pensions market offers good value, or whether a smaller number of larger schemes could offer lower charges and higher governance, to the advantage of members.

As defined benefit continues to wane, we must take opportunities to study alternative risk-sharing arrangements, such as systems that I might term “defined ambition”. Here the schemes aspire to a set level of benefits, rather than making a firm promise as our defined benefit schemes currently do.

We must also consider how to encourage automatically enrolled individuals to save more where they can. The minimum 8 per cent contribution should be considered as it is described—a minimum. Options such as automatic escalation, in which pension contributions increase in line with member salaries, have merit and are worthy of close examination.

I feel confident that 2012 represents a step change in how pensions in particular, and saving in general, are perceived by the public. I thank again the noble Lord, Lord McFall, and I hope noble Lords will join me in acknowledging that we have taken great strides in reinvigorating our pension system for the future.