Ageing: Public Services and Demographic Change Committee Report

Lord Hutton of Furness Excerpts

Thursday 17th October 2013 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, it is always a great pleasure to follow a speech from the noble Lord, Lord Mawhinney, as indeed it was for me to serve under the leadership of my noble friend Lord Filkin on the Select Committee. I am grateful to the House for giving me the opportunity to serve in that capacity.

I should start my remarks by drawing the attention of the House to the interests that I have declared in the Register of Lords’ Interests.

It will probably not be a surprise to any of your Lordships that a Select Committee of this House took the unanimous view very early on in its deliberations that the fact that Britain was becoming an ageing society did not mean the end of the world as we know it. Far from it—it is going to be a blessing, not a curse. However, one thing was very clear to all of us: that if we are to respond to the quite significant challenges that the ageing nature of our society is going to present, then we expect—and we are right to demand—vision, leadership and a coherent strategy from government. So, too, are we right to expect that from all those parties that aspire to government. Nowhere is that more obvious and clear than in the area of pensions, and that is where I want to concentrate my remarks this evening.

We tried to draw attention to two very significant problems that we face. We all know that not enough people in Britain are saving for their retirement and that those who are generally tend not to be saving enough. That led us to conclude that nearly 11 million people of working age are, on current trends, likely to be heading towards inadequate retirement incomes. That will be a significant social and economic problem for our country and we need to address it with urgency.

As my noble friend said, there are plenty of positive signs that the Government are now beginning to address this problem. The previous Government set in train the implementation of the important recommendations of the noble Lord, Lord Turner, and the present Government have taken those forward. That is to be welcomed. However, we also took the view that, in their present guise and format, defined contribution pension schemes are unlikely to be able to discharge the very heavy responsibility that we are about to place on them. In the future, millions more people will be saving not in final salary or career average defined benefit schemes but in defined contribution schemes. Of course, the one characteristic of those schemes is that there is no guaranteed level of retirement income.

We all know the history of the demise of defined benefit. We will not be able to recreate new defined benefit schemes in the UK or, for that matter, in any other developed nation. That is part of the pensions past. I hope that we can sustain defined benefit pensions in the public sector for as long as possible. We know that the millions of people who will be enrolled automatically into new workplace pension schemes will be saving in defined contribution schemes. It was the committee’s view that they are not fit for purpose; they are not going to be adequate in their current form to address the expectations that millions of people have for the level of income that they can aspire to in retirement. How we respond to that is the crucial challenge in the pensions world today. We have obsessed in this House and elsewhere about how we can prolong defined benefit schemes. That debate is concluded—we will not be able to do that in the private sector. But there has been insufficient attention until recently about the inadequacies of defined contribution schemes. I, and I am sure all members of the committee, would welcome the Government’s new focus on addressing the shortcomings in defined contribution schemes. That is the big challenge that we face.

The Government’s response to date in its defined ambition pension plans and proposals have some promise and potential, but there is a warning to the Government that I would like to give tonight—to avoid the gimmicks and expensive flummery, as well as the false promises of guarantees and other devices that have been floated. In the world of defined contributions, it is unlikely to be possible to construct anything that looks like a defined benefit-style guarantee of retirement income. That is simply not a possibility, and we should not mislead people somehow into thinking that it is possible.

What we felt was possible was that the Government could convene on a much more urgent basis the attention of the industry and employers on how the current structure of defined contribution pensions could be improved—and I think that they can. From my experience, I believe that we have to focus in future on outcomes from defined contribution schemes and work to ensure that there is greater confidence in those outcomes. That is a challenge primarily to the pensions and investment industry as to how those improvements could be brought about. I personally do not believe that there is a case for some legislative solution or some magic wand to be waved over this problem by government. That is simply not a possibility; it is not the world that we live in. But there is an urgent case for more focused action and intention, led by government, as to how the current failing platform of defined contribution could be improved for millions of people going forward. We have a special responsibility now that we have decided, as successive Parliaments, to automatically enrol people into defined contributions, as to how we can improve the way in which those schemes work for future generations. This is a pressing problem, and it is incumbent on government and others to address it as a matter of urgency. I welcome what the committee had to say about that matter.

I want to finish with a quote, not a quote from your Lordships’ Select Committee but a comment from the National Audit Office, in a report that it made in July 2013, when it said:

“Measures to encourage people to save for retirement are not being managed by Departments with enough coherence or accountability”.

Sadly, I think that that is true, but the Government have time to put that right. I hope that they pay attention to our report as well as the work of others, and begin to address with more urgency this chronic problem of how to improve the performance of defined contribution schemes. If they can do that, I hope that a beginning of a stronger coherence and consensus around pensions policy will emerge as a result.