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Pensions Bill

I declare an interest as trustee of the Pensions Advisory Service. I welcome the amendment. Whether its precise wording will finally be reflected in legislation is a different matter, but it is right that the noble Baroness should raise the issue of advice early in the Committee stage. Why? We all accept that conventional DC schemes carry a much greater risk for the employee than DB schemes in regard to investment returns, longevity and life styling, disinvestment returns, annuity rates—the noble Lord, Lord Oakeshott, has been campaigning about open markets and so on—inflation, assessment of household needs and, of course, over and beyond the investment and disinvestment risks, there is no PPF. All of this risk is laid on the employee. So it is not surprising that currently a great deal of interesting discussion is going on about hybrids, risk-sharing, career average and the later amendments on conditional indexation being run by the actuaries. But if the conventional occupational pension DC schemes are riskier than DB—which they are by far—personal accounts might be riskier still than the conventional DC scheme. There are a number of reasons for this. First, with personal accounts you are dealing with people with very low incomes. For those people— mostly women—the opportunity cost of saving is very high and issues of debt or divorce can devastate financial situations. Secondly, personal accounts are much more likely to deal with small pots because they will be used by low earners, often part time, and of course—an issue to which I shall return—the first £5,000 of income is exempt. This may mean that half of a median earning is not even covered by a pension contribution, leaving a small pot with all the risks, as the noble Baroness highlighted, of interaction with income-related benefits. Thirdly—this should be said in capital letters—there is the question of the small contribution of employers, at the de minimis level, to a personal account. The employee will pay in as much as in a conventional DC account at around 4 per cent; the employer, however, will pay in only half, at 3 per cent, compared to the DC average at the moment of 6.8 per cent, and even then, for someone on half-median earnings, on only half the income. So the employer will be contributing nearly 7 per cent on average into a DC pot on all earnings, as compared to an average of 3 per cent on only half earnings into a personal account. So the employee is taking all the risks, as in a DC scheme, but with very little of the financial cushion offered within existing DC schemes of virtually a two-to-one match by the employer of the employee’s contribution, thus making the pay-to-save worth while. That equation is very much altered in personal accounts. So we will see women workers, especially older women, who are not sure whether they should opt out; and we may see, I fear, as with the reduced married woman’s stamp in the past, more unscrupulous employers encouraging them to opt out. It is interesting that TPAS, the organisation in which I have declared an interest, was running a helpline earlier in the year for women seeking information about their pensions. Of its first 9,000 calls, 95 per cent were from women over 45. Over half wanted to buy extra contributions on the spot—a point to which I shall return—but their lack of knowledge about the basic state pension more than vindicated the noble Baroness’s concern about this. I fear we may also see the media hyping up the risk that women should be encouraged to opt out along the lines of Mr Cazalet’s remarks in the FT a few days ago, which asserted that for very many women it was better to keep their money in a teapot. That seems to me deeply implausible but as his report costs £1,600 a time, it was clearly not designed to be available to the women he claimed he was seeking to help or influence. Why do we need this amendment or a version of it? The noble Baroness rightly identified fears that older women will opt in when perhaps they would be well advised, if they had that tailored advice, to opt out. I have the opposite fear that they will opt out when they should not. The latest longitudinal research on ageing by the DWP, that the noble Lord, Lord Skelmersdale, and I were privileged to hear recently, shows that even for low-paid older women it can be, and usually is, worth saving. The DWP’s own slides gave the example of a woman of 54 on half median earnings. For a contribution of perhaps £5 a week she could get, even with a very brief contribution record, a pot for trivial commutation of over £5,000, and might therefore have a little capital on which to retire. I emphasise the words ““could”” and ““might”” rather than ““will””. Both for those who may opt in when they should opt out and for those who may opt out when they should be opting in, because the trivial commutation pot is worth having and therefore it pays to save, they will need quite specialised advice, as TPAS helpline clearly shows. They may also need advice at the disinvestment end that the noble Lord, Lord Oakeshott, highlighted. We cannot build out all the risks. We cannot necessarily foresee for individuals’ earnings, health and caring responsibilities. Who knows whether the benefits system 15 years down the line in terms of pension credits will remain as it currently is? But we know where the problems may occur for older people, particularly those who may be claiming housing benefit in retirement. For some, it might be right to opt out; for others, it may be sensible to hang on. However, the latest DWP research shows and the TPAS helpline suggest that people are in a very poor position to be able to make that judgment for themselves. Information may be enough for most, but it will not be enough for some. One at-risk group is older women and the Government must do more to ensure that they get the advice they need.