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Pensions: Personal Accounts

My Lords, the House will be grateful to the Minister for repeating the Statement, the first of three this week, this time on pensions—not three from the noble Lord, I hasten to add, but I gather that we will get another one very shortly. Now we know—or do we?—what the body to be set up under the Pensions Bill is expected to be preparing for: setting up a fallback pension scheme to be, as I understand it, ultimately provided by the private sector. However, before I get on to that, we should put the Statement into context. When the Government took over the country in 1997, we had a pensions regime that was the envy of the world. What did they do? They started by removing advance corporation tax. By so doing, they produced a double whammy for pension schemes. The net effect was to remove £5 billion each and every year from the purchasing power of pension schemes—which, as much of the schemes' investment is directly in the Stock Exchange, damaged that, too. The Minister must be as bored as I am with responding to me on this, but I will be going on and on—and, if necessary, on—until I get convincing answers. The Minister said two things to me on Thursday last when we were discussing the freeing up of the financial assistance scheme. First, he said that the Government do not recognise the £5 billion figure. In that case, I put it to him directly: what figure does he recognise? What has been the effect on the Treasury's books of removing advance corporation tax? He also said that, "““the fall in the stock market during that period””—" I assume that he meant 1997 to 2004— "““was greater than these figures—even if we accept the £5 billion, which I do not””.—[Official Report, 7/12/06; col. 1331.]" I challenge him again: will he now admit that the FTSE fell further than it would otherwise have done? Whatever the answer to those questions, I wonder whether even now we know what there is to be in next year’s pensions Bill. Noble Lords will know that, in the Budget in April, the Chancellor removed the necessity for people to take an annuity from their SIPPs at age 75 and allowed a drawdown of capital sums at various points. Lo and behold, in last week's Pre-Budget Report, he signalled the removal of that beneficial act. He is to make pensioners either take an annuity, and thereby pass their pension pot on to the insurance company that arranges that annuity, or leave it to the state via a staggering tax of 80 per cent. That does not smack of consistency, so how do we know what changes there will be between today's announcement and the Bill next year? What the Government are now doing is seeking yet again to persuade the 50-odd per cent of people who do not invest for their retirement to take a pension. They tried to do that in 2001, when they introduced stakeholder pensions, a scheme not marked by conspicuous success. I am told that only 10,000 people took them up. As a result of today’s announcement, the Government are expecting between 7.5 million and 10 million people to be attracted to the national pension scheme—quite a different order of magnitude, and I wish them well. In this Statement, there genuinely is much to agree with. However, I would not be doing my job unless I did a certain amount of cross-questioning. The national state pension scheme—or personal accounts, as the White Paper calls them—will apply to everyone in employment who earns over £5,000 a year. People will be automatically enrolled into the scheme if they are over 22 and below state pension age. There is some confusion here; I wonder whether they actually will be. The executive summary says that they will be eligible for automatic enrolment—hence my confusion. Will they be able to opt out, as the commission of the noble Lord, Lord Turner, recommended? Why have the Government chosen a £5,000 cap, rather than the £3,000 that the Turner report recommended? Even with a £5,000 cap, the Pensions Policy Institute calculates that under this reform up to 50 per cent will remain on means-testing. Is this really what the Government want to happen? Most important, many employers have pension schemes into which both they and some of their employees contribute much more than the 4 per cent and 3 per cent respectively that the Government are proposing. What is going to prevent employers from closing their existing schemes and opting for these new personal accounts, which would be so much cheaper for them? They are already closing final salary schemes in favour of defined contribution schemes at a rate of knots—a reduction of 30 per cent in 2005 alone, I am told. These proposals are likely to do damage to the pensions that already exist. The Government propose to increase the cap to £5,000. Will this not dramatically increase the scope of personal accounts? How many people put more than £5,000 into a pension? This is money that would previously have gone into the private and existing pension sector. Both these features would almost amount to nationalising occupational pensions. This cannot be what the Government either intend or want—at least, I hope not. That said, there is much to be said for what the Government are trying to achieve, which will, I am sure, provide many more employees with some savings for their retirement. However, people will want to know what to expect. Will the Government publish projections, as the private sector does, at varying levels of age, contributions, percentage growth, dates and so on? What is someone aged 23 on £12,000 a year to expect when they come to retire aged 68—that is, in 45 years’ time—after 2012 when this new scheme comes into operation? There is a glimmer of hope on page 33 of the report. I see in the second chart that someone investing £1 of their income would expect to receive—via, I assume, an annuity, although I shall double-check this with the Minister in a minute—£255 when he comes to retire. For someone on median earnings of £22,000 a year, that is a contribution of £920. If you multiply that by 2.55, you get the marvellous sum of £2,346 extra income in retirement. I cannot say that that is Earth shattering, and I am sure that noble Lords cannot, either. I welcome the Statement, but these and many other questions still have to be answered before there is any hope of reaching the consensus that both we and the Government are seeking on pensions.