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Pensions Bill

My Lords, pensions are designed to deal with the low-income and longevity of old age by smoothing earnings from work to retirement and locking them away. We ask people to start saving early, to save enough, to do so regularly, and not to touch their savings for 40 years with the promise that it will be worth it in the end. Yet none of this makes much sense for many women. Pensions have been a poor fit for the risks and realities they face, which is why, outside the public sector, as both of the previous speakers have said, so few low-earning women have pensions. For pensions you need to start early, for example by 30, and pay regularly, but whereas men’s earnings peak at 42, and their pension payments with it, women’s peak around 29 and then fall off. If they have children, half of them stop paying into a pension whereas men carry on. Do they pay in enough? Women are paid less, they often work part time or for small employers, they move jobs more often and they are exposed to risks that most men do not face, including lone parenthood and caring responsibilities. They therefore want savings that they can access in an emergency, not a pension that they cannot access. His income, for example, rises after divorce; hers falls. She may experience more financial pressure during her working life than at retirement, unlike him. Over the years, the basic state pension has recognised this through HRP, carers’ credits and, in particular, last year’s excellent Bill, but occupational pensions have not, because they presume a full-time attachment to the labour market. Personal accounts are designed to be an occupational pension for the low paid, especially women. There are low rates, low charges, auto-enrolment, no small-firm exemptions and there is greater portability. They are contracted in and built on the platform of the BSP and the state second pension. To what extent does the Bill rectify the shortcomings in conventional pension provision for women? To what extent is it a good fit, given women’s needs? To what extent will the Bill overcome poverty in retirement? To what extent will it encourage women to save and will saving be worth it? I apologise to the House—well, no, actually I do not—for putting up the gender filter in this way, because personal accounts very much have low-paid women in mind. Auto-enrolment should encourage the early start of payments and research suggests that up to 70 per cent of women will continue to pay in, which is good news, and it should be worth it, which is very good news. If a woman on half median earnings, say £11,000 a year, saves for 30 years—not 40 years, but 30—in a personal account, I calculate that she should have a replacement income in retirement of some 85 per cent of her earnings, which is transforming. I congratulate my noble and right honourable friends in the DWP on such an achievement. However, certain safeguards need to be in place to achieve that outcome. First, as both noble Lords on the Benches opposite have mentioned—for which I am grateful—there must be an opportunity for women to have a full basic state pension by having a right of buy-back for missing years when they have been looking after other people, children or the elderly, instead of themselves. This issue is not going away, as the noble Lord, Lord Skelmersdale, helpfully reminded the House. I hope that the Government will agree with that; if they do not, I shall again seek the support of the House on this issue. The second safeguard is that with a broken work record a woman’s ability to save may be more lumpy than that of a man. Pension sharing on divorce may bring in a small sum, or she may receive a small inheritance following caring, which has taken her out of the labour market. So we need to add a modest lifetime cap in addition to the annual cap. Will my noble friend confirm that at the very least—I pick up a point made by the noble Lord, Lord Skelmersdale—women will be able to buy back not just current years in which they might be out of the labour market, but missing past years, which would then exceed their annual contribution, as with the BSP? Given that she changes jobs more frequently and may pile up several very small pots, she should, within limits, be allowed to transfer them into her personal account. We all accept that personal accounts should draw in new money, not recycled, existing money. We need greater flexibility regarding women’s capacity to contribute. The simplicity of a single pot with smaller pots going into it as a result of her job mobility would be a great gain and very attractive. Another issue that we must explore, given that pension contributions to personal accounts, unlike WPPs, are made only on earnings above £5,000, is that a woman with two £6,000 jobs is very much worse off than a woman with one £12,000 job. I am confident that we can find a way through this issue in Committee. Thirdly—this has already been mentioned by noble Lords—we must ensure that we spring the trap of means-tested benefits. Like everyone else, I am well aware of the downside of IRBs, especially the intractable housing benefit, although I understand that there is a government working party on this. Of course, now only a quarter of pensioners are not owner-occupiers and the number is reducing. I think we all understand that, unless need is targeted, benefits will be either too limited in their effect on the individual or, in an attempt to make them adequate but universal, too expensive for the community. Men have more than twice the pension income of women. Pension credit is mostly claimed by and paid to single women—mainly elderly widows whose income has died with their husband. That is usually because his annuity is single-life, flat-rate and eroded by inflation. I know that there are technical difficulties with this but changing the rules on annuities might do more to keep widows off pension credit than changing the rules of pension credit. If not, unless and until women have their own pensions in their own right, widowhood will need the benefits and means-testing that stand between them and profound poverty. The complaints about means-testing may be erroneous in another way. In future, any woman retiring with a full earnings-linked basic state pension and a full state second pension would have an income of around £145 in today’s terms—enough to float her off pension credit entirely. Therefore, the two state pensions added together would mean that at the point of retirement her income would be above the level of pension credit and she could enjoy and keep her personal account pound for pound. Full state pensions plus personal accounts, if paid in full, equal no means-testing at retirement. A fourth way of avoiding the means-test trap is by trivial commutation, which at the moment is limited to some £16,000, or about £1,200 a year, and is fussy and fiddly to administer. I hope that the Government will consider raising it to, say, £25,000, doubling to 22 per cent the number of pensioners who are able to commute. Most pensioners live within their income but have a shortfall in capital for white goods, improved heating, the car, the roof or the walk-in bath/shower. Those things are especially necessary because, as pensioners grow frail, they need to adapt their homes if they are not to move into residential care, and that takes capital. Can we please have some joined-up thinking? After all, we can all turn capital into income if we wish but it is very difficult on a low income to turn income back into capital. I should also like to see whether we can raise, or perhaps even align with commutation, the exempt capital in pension credit—currently £6,000—and related benefits. However, that would be costly. It would require £240,000 to raise it to £15,000 and £350,000 for a £25,000 disregard for PC and related benefits, but it would spring pensioners out of means-tested benefits and into relative comfort in retirement. The next problem for women is that pension savings cannot be touched. That is fine for men; come children, divorce or frail parents, they continue to work and build a pension. Each of these life changes for women, however, may take them out of the full-time labour market, stop them saving and create a financial crisis. The product that many women say they want was proposed by the party opposite: a combined lifetime savings and pension accounts, or LISA. I have always been a fan of that. At the moment, we can put ISAs into pensions but we cannot put pensions back into ISAs. It is absurd that of the two pots of value that most people have—a house and a pension—it is easier to get money from the bricks than it is to get money from the money. LISAs were complicated and the American 401K scheme is probably far too loose, but perhaps I may suggest a way forward. On retirement, we all get 25 per cent of our pot tax-free. Subject to a de minimis—let us say that you must have £20,000 in your pension pot—and a ceiling of, say, £80,000 or £100,000 so that there would be no fancy footwork for school fees, why should you not draw down during your working life that tax-free sum, giving your pension a defined top slice of liquidity—a savings element? No tax adjustments would be necessary. We obviously want to keep personal accounts simple but today we can draw our tax-free lump sum at 50 or 55, so today it is detached from paying a pension. No principle would be breached but it might overcome that psychological hurdle that you have locked money away for 40 years, come whatever crisis. Most women would not want it or need it, but knowing that they could access between £5,000 and £25,000 according to the size of their pot for divorce, disability, debt, risk of repossession before retirement instead of only at retirement, would allow women to overcome a major hurdle to pension savings—their belief that pensions are selfish because their money is locked away for 40 years when they may need it 10 years down the road, given the huge financial riskiness of many women’s lives compared to those of men. After all, pensions should reduce financial risk. As presently structured they can, for many women, add to it. I hope that we will pursue that avenue. This all suggests that for some women the decision to opt out would be finely balanced, and I follow the noble Lord, Lord Oakeshott, who was absolutely right. As John Hills said, the calculation for any individual as to whether to opt in or opt out is really quite simple. All they need to know is their age, gender, present and future employment status and earnings, existing savings and future investment returns, existing pension rights, present and future housing tenure, future eligibility for mean-tested benefits, future assets from elderly relatives—and all these factors for their partners as well—together with an assessment of their health and that of great-aunt Ethel’s. But despite the complexity of risk, we can offer broad-brush group guidance, which is why sound financial information and advice is essential. I declare an interest as a trustee of the Pensions Advisory Service and we hope to produce a traffic-light system offering high, medium and low-risk guides to people seeking advice. We must address this issue, otherwise the Government and employers, both, face a particular risk and charge of mis-selling. I give a warm welcome to the Bill; profound gratitude to the noble Lord, Lord, Turner, for making it possible; and to the Government for making it happen. We still have issues to address, safety nets to insert and loopholes to close if women are fully and safely to gain from this Bill, but we look forward to its future progress.