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Pensions: Automatic Enrolment

My Lords, I, too, thank the noble Lord, Lord Kirkwood, for introducing this debate today. There is very little that I would disagree with within what the noble Lord, Lord Fowler, said. The crisis in occupational pensions, which certainly exists, has a deeper base, which is the issue of longevity. A quarter of all women, which I reckon is, or was, about three of us in this Chamber, will live to 95. Fifty years from now, the Lancet estimates that the median life expectancy will be more than 100 years—102—with half above it as well as half below. There are now more 65-year olds and above than there are under-16s. We all live a year for every three. It was not until about 2005-06 and the report of the noble Lord, Lord Turner, that actuaries started building that in, after five years in which many companies had been taking contribution holidays. The resulting panic of renewed employer contributions at much higher levels accentuated by FRS 1719 and the collapse of the markets since then means that when I last checked, only four of the FTSE top 100 companies still had their DB schemes open to new members. We all know that in DC schemes, the employer’s contribution is 6 per cent, rather than 16 per cent in DB schemes, so the employee gets a smaller pot, together with investment risk, disinvestment risk, inflation and longevity risks, all falling on the shoulders of people who find pensions intimidating. We end up in the DC private sector with only 40 per cent of people covered, compared to 85 per cent in the DB public sector. It is coverage and adequacy as much as pension type that divides private and public sector pensions, which is why I so welcome auto-enrolment, either into an existing pension or into a shell stakeholder—which may be the most important element of all this, where we know that if employers do not contribute, employees will not, and which will therefore have an employers’ content for the first time—and NEST. Will auto-enrolment work? Yes. When Scottish and Newcastle went from opting in to opting out, it went within a matter of months from 45 per cent contributions to 90 per cent contributions. The only people opting out were student workers. So there is huge potential. As always, I am especially concerned with the implication of auto-enrolment for the low paid, especially women. Should low-paid people be auto-rolled? Without trying to go over the arguments that some of us raised in debate on the Queen’s Speech, only if it is safe to save and only if it is attractive to save. We must make it safe and attractive. Here, I entirely support the noble Lord, Lord Fowler. Increasingly, there is all-party consensus and full industry support for a new state pension which lifts people off means-tested pension credit. As Steve Webb, who is now the Minister for Pensions, and I argue in a pamphlet, which can be found at www.soapboxcommunications.co.uk/anewstate pension.pdf, we could fund that pension by putting into one pot BSP, the state second pension capped at 2020 to give the extra headspace, and pension credit. At a stroke, there is a pension floating people off pension credit and thus making it safe to save and pay to save. Without such a platform, too many people will be at risk of mis-selling, and if we do not do it, issues such as annuitisation at 75 will be at risk. If we scrap annuitisation at 75, which I support, then, but only then, if it is underpinned by a safe new state pension, savers would no longer have to annuitise a slice of their pot to keep them off pension credit should they blow it all. A new state pension also sorts out the NEST problem, the removal of annuitisation at 75 problem and the stakeholder problem. That is not bad, and it is all for broadly the same cost as now. In order to make it attractive to save, we have to allow low-paid people, who often have no other savings, access to a slice of their pension fund, perhaps represented by the 25 per cent tax-free lump sum, otherwise women, in particular, will not save if they have to lock the money away for 40 years when they may face all sorts of financial tumult in their working lives from divorce, disability or the need for running away money. We need to find appropriate low-cost vehicles in which to save. I have great hopes for auto-enrolment and also for employers’ contributions into existing shell stakeholder pensions. For example, we know that where employers do not contribute to a shell stakeholder pension, only 13 per cent of employees contribute, but where employers contribute, something like 80 to 90 per cent of employees contribute. As a result of NEST, people who are lower paid or are working in businesses with fewer than five members of staff—the cut-off point for stakeholder pensions—will have the opportunity to come into auto-enrolment. I shall raise some detailed issues about NEST, and I hope the Minister will bear with me. I hope they will be considered in the 2017 review. NEST is targeted at the low paid, who are disproportionately women, who are probably earning between £10,000 and £20,000 a year. Given that they are low paid, to start with the NEST pots will be pretty small. I accept that you cannot ask kitchen-table employers to contribute more than 3 per cent at this stage, although would I hope that in time that would rise to at least 5 per cent. I shall put four propositions to the Minister that would make NEST work and make it safe and attractive, which are the two criteria that dominate the debate. When NEST has rolled out, employers will contribute only 3 per cent, which will be 8 per cent in total, on earnings above the LEL. That means that someone on half average earnings—£10,000 to £11,000—will get a pot built on contributions of only just over half of that—£6,000—unlike other occupational pensions, which take the whole of the earnings range into account. I believe that where an employee wishes to contribute on all her earnings, including those below the LEL, as happens in other OPs, she should be allowed and encouraged to do so, and where she does, so must the employer. To do the full range for somebody on £11,000 a year would cost the employer an additional £4.50 a week, but the employee’s pot would more than double. Paying in only above the LEL for, say, 20 years on £11,000 a year would give her a pot of around £19,000 or an extra pension of around £19 a week, on which she promptly loses 40p in the pound on pension credit, so she ends up only approximately £11 a week better off. Put in the new state pension, and she would keep that £19—as opposed to £11—in full. Allow—indeed, encourage—her to pay on all her earnings, at a cost to her of an extra £5 a week, and her pot doubles to some £35,000 and she gets £35 a week, which brings her off pension credit. She keeps every penny and has a real, decent opportunity of comfort. So she could get £11 a week, £19 a week or £35 a week. By doubling her contribution, she receives three times her pension, and by making a new state pension, she receives double her pension—a huge increase for a modest additional cost, which, as I say, is about £4.50 a week or so for the average employer. Secondly, I want NEST to offer access to that 25 per cent lump sum to encourage saving. After all, if a financial emergency hits you, it is much cheaper to borrow from yourself than from loan sharks charging 500 per cent APR down the road. Thirdly, I want NEST to raise its ceiling in due course from £3,000 a year. I know that providers of other pensions were worried at the time that money that goes to them will be diverted, but, frankly, once NEST has settled down, we should permit it. Why is it okay to have a £10,000 cap on ISAs but only a £3,000 cap on pensions—on NEST? That is nonsensical. Fourthly, NEST and other auto-enrol schemes really must help us with the problem of orphan pots. A hairdresser may have had a couple of periods of self-employment and built up a small pot of £2,000. She has £18,000 in her NEST pot on retirement, which is modest, but she cannot access that £2,000 because it is floating out there in the ether. She cannot trivially commute it into cash, because her NEST pot is above the trivial commutation limit. She cannot annuitise it because it is too small for providers to do so. She cannot import it into her NEST holding to raise it to £20,000 because of the preliminary rules that we have established and which should be reviewed. I know that there is good will in the DWP to attach it, so I hope the Minister can tell us how far it has gone with this when he replies. It would be unfair if someone in that hairdresser’s position had saved £20,000 but cannot touch 10 per cent of it because of completely arbitrary—and, if I may say so, man-made—rules. Finally, I will go slightly wider than the topic, if I dare, and say a word about public sector pensions. I accept that government will wish to review how sustainable they are in the current climate. I am a new governor of the PPI—a long-established governor of the PPI, the noble Baroness, Lady Greengross, is sitting behind me—which is researching possible options for this. One option, which I really want to float today, is for DB for earnings that attract a standard rate, and then a flip to DC on earnings at a higher rate or at another figure of, say, £35,000 a year or £30,000, so that the broadest shoulders bear the risk and those who are most in need of protection have the security of a DB slice. It is a hybrid scheme, and your Lordships are quite sensitive about hybrid schemes at the moment. I regret that I have not been able to cost the savings, but it would be fair, protect the low paid and be simple. Everyone would know what it means, and it would share risks, allow public sector employers to have a better stab at protecting and predicting future liabilities. It would also discourage the habit of late-life promotion for white men to enhance their pensions. I very much welcome today’s debate. I hope that the Minister will clearly show his support for NEST today, flag up that we will have a review in 2017, confirm that some of the issues that have been raised today and that could transform the financial outcomes for women in particular will be considered, and that he, like the noble Lord, Lord Fowler, and I, will join in the general consensus that the only way to get the low paid into pension provisions is, first, to make a new state pension safe and, secondly, to make it attractive. Ninety-five per cent of the bits are in place, and it would not take much to have a new picture on the jigsaw box. We would then have a landscape that was built on consensus and that could last us for a couple of generations.