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Pensions

My Lords, I too add my thanks to my noble friend for giving us a chance to debate this important topic this afternoon. I declare an interest as a trustee of two final salary schemes; I am chairman of trustees in one case. Both are now closed to new entrants. I have to say to the noble Lord, Lord Young of Norwood Green, that they have been closed not because of what the Conservative government did, but because of what the Labour Administration have done, for reasons that I shall explain in a minute. Clearly the key challenge faced by pension funding is the question of increased longevity. That can be demonstrated from my own experience. When I became chairman of one of the boards of trustees five years ago, according to the Government Actuary a man aged 65 could expect to live until he was 81.2 years old on average. Now he expects to live to 84.6 years. That is an increase of 3.4 years in life expectancy over the five years. That may be only 4.2 per cent of his total life, but it is 21 per cent of his pensionable life. Any fund offering a defined benefit linked to a final salary would face considerable challenges. That is not the Government’s fault in any way. That said, the Government’s actions in the interim have, in almost every way, made a difficult position worse. My noble friends Lord Freeman and Lord Fowler have already talked about the raid on the pension funds. I shall say no more, other than to draw the Government’s attention to Ernst & Young’s study, which suggests that income guaranteed by investments has been reduced by 18 per cent as a result of the Chancellor’s actions. Much worse than that has been the way in which the Government have been reluctant to spell out and face the realities of the situation that we face. That has damaged confidence, which is such an essential ingredient of long-term savings. Instead, the Government have fallen back on a round of consultation, interspersed or filling up the gaps while consultation takes place with what can be described only as a subtle approach to the blame game. First in line to be blamed are, of course, the employers. We now have a massive Pensions Act and an associated large regulatory burden. As I foreshadowed in my speech on the then Bill’s Second Reading, that is the death knell of final salary pension schemes. What company will want to look for and accept an open-ended obligation implicit in such a scheme? It is not only the question of longevity to which I have referred, but the powers of the Pensions Regulator as regards the level of contributions to the fund and of levies to the Pension Protection Fund itself. One of the schemes of which I am a trustee is a smallish scheme, with £25 million to £30 million under management. It is a mature scheme. Our income from our employer is £750,000 a year. We are just being told that our assessment for the annual contribution to the Pension Protection Fund may be as much as £600,000 a year. That is our entire income swallowed up, pretty much, in one fell swoop. What does a sensible trustee do when faced with that problem? From the company’s point of view, all this open-ended obligation has a deleterious impact on the value attributed to any company if it were to be bought or merge with another company. There are difficulties for trustees, for who would be a trustee in those circumstances? Not me, for one. By 15 February, I am glad to say that I shall be history on both the schemes of which I am currently a trustee. My final decision to leave has been triggered by a case where we are, as trustees, in danger of being sued by a husband and wife. No one suggests that we are not paying out the right amount of money; it is a question of to whom we pay it. Under the new regulations, the issue of marital breakdown is controversial and not entirely clear in law. Therefore, both sides are saying that we should be paying the money in different proportions for each. I am a pension fund trustee, not a matrimonial adviser. So I and others will wish to cease to be trustees. Does that matter much? Maybe it does not. But there will be professional trustees in our place. That will incur increased costs, because those people must be paid and their tendency will be to sail in the middle of the convoy. There will be no readiness to break the mould, to avoid accepting the received wisdom of the moment, and in many cases they will not be particularly knowledgeable about the individual fund for which they will be trustees. So there is much to be said for the continuation of the defined benefit fund, and I am sad that the Government have done so much to undermine confidence in it. If the employers are not at fault, the Government try to blame the actuaries; they have tried to blame the industry and there had been a tendency to blame individuals by saying that they should save more. If you increase the tax burden, savings will certainly drop. The Government may have avoided headline increases in certain taxes, but the cumulative impact of stealth tax increases has reduced the readiness of people to save. The complexity of new measures is another issue to which many noble Lords have referred, in particular the persistent refusal to be user friendly and consider flexibility in annuity retirement dates. So much for the blame game. The worst thing that the Government have done, as my noble friend said, was in their own dealings with public sector pensions. On Wednesday, 19 October, a headline in the Financial Times stated:"““Abject surrender over public sector pensions””." The article concluded:"““This surrender of a policy with an unassailable rationale is typical of Tony Blair’s government—for all his claims he wished he had been more radical with previous reforms. It will also be the death knell of public sector pensions in the longer term, since sooner or later a government will have to have the nerve to halt an increasingly costly gravy train for a minority of the workforce that is paid for by the majority””." The Government have to face up to that issue and my noble friend has done the House a great service by drawing our attention to it.