Universal Funded Pensions

- Wednesday, 21st January 2004


12.30 pm

Mr. Peter Lilley (Hitchin and Harpenden) (Con): I beg to move,

That leave be given to bring in a Bill to require people to save for a guaranteed pension sufficient to avoid reliance on means-tested benefits.

The biggest problem facing every developed country is how to pay for pensions as people live longer and have fewer children. Britain used to be better placed than our continental neighbours to cope with that problem, because we had built up more investments to pay for our future pension liabilities than the rest of the European Union put together. Now, both our state and private pension systems are in crisis. The Government‘s ?5 billion a year pension tax, increased means-testing and the stock market fall have combined to undermine retirement provision. Company schemes are closing to new members and millions of people are simply not making remotely sufficient provision for their old age.

My Bill would introduce a universal funded second pension to replace the present, largely unfunded, state second pension. Everyone, including the self-employed, would be required to have a pension fund into which they would make payments throughout their working lives sufficient to provide an income in retirement, which, together with their basic state pension, would enable them to avoid being dependent on means-tested benefits.

I started out opposed to compulsion in the sphere of pensions, but we already compel people to contribute towards a state second pension; moreover, we compel prudent people who voluntarily save enough for their own future to pay again through tax to support the less provident who do not save enough and rely on benefits. I concluded that it would therefore be preferable to require everyone in work to contribute towards a pension at least sufficient to ensure that they would not have to depend on means-tested retirement benefits.

To enable everyone to build such a fund during their working life, they would receive a flat-rate rebate from their national insurance contributions paid into their fund sufficient to finance the standard level of pension. Just as employers underwrite the pension provided by defined benefit occupational schemes, the state would guarantee to top up each person‘s pension if for any reason their fund did not perform well enough to provide a pension at the standard level.

The result of my proposal is that everyone would own their own pension fund. Ownership brings choices and incentives. Once people have their own pension fund, they will find it far easier to put in additional savings. In Australia, the introduction of mandatory superannuation accounts led to a doubling of additional voluntary savings. The effect in this country should be even more marked. The current system of pension credit means that more than three-quarters of the population know that they will face means-testing when they retire, so they will lose 40 per cent. of every extra ?1 of pension for which they have saved. Once everyone knows that their minimum contributions to their pension fund will lift them above the means-tested level, they will have every incentive to save more than that basic minimum.

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Indeed, the pension credit, which extends the disincentive up the income scale, will become redundant.

Ownership of a pension fund will give more people more choice about when they retire. They will be free to do so once their fund is sufficient to prevent them from being dependent on state benefit. However, it will give them a double incentive to work beyond the normal state pension age, as every extra year that they work will mean that another year‘s contributions will be paid into their fund, and there will be a year‘s less pension for it to finance. There is evidence that people with defined contribution pension funds work longer, whereas groups without such provision retire earlier. Without such incentives, the Government could only meet their target of increasing to 60 per cent. the share of pensions funded by savings by raising the state pension age in line with longevity to make it compulsory for people to work longer. It is better to give people freedom while providing them with an incentive to work longer.

Requiring everyone to have their own pension fund will cut the amount of savings absorbed by the cost of administering pension funds. Over half those costs are due to the cost of acquiring customers. Requiring everyone to have their own fund would eliminate the cost of persuading them to set one up; the amount of advice required and the cost of compliance would be greatly reduced; and the remaining costs would be spread across a far larger pool of savings. My Bill would also make a significant cut in the cost of providing annuities, as I explain in my pamphlet, "Save our Pensions", which is available from the Social Market Foundation for ?15, or free at my website, www.peterlilley.co.uk.

Currently, people who contract out of the state second pension must use their fund to purchase an annuity lasting as long as they live. Insurance companies providing those annuities must provide against the risk of unlikely but conceivable increases in life expectancy, for example as a result of the invention of a golden bullet cure for cancer. If those increases in life expectancy do not occur pensioners will have paid too much for their annuities. The need to make such provision would be

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sharply reduced if the Government shouldered the risk of excessive increases in longevity at the far end of the spectrum by paying the second pension on a pay-as-you-go basis for people over 85. People‘s compulsory savings would only have to fund a fixed term pension or annuity covering the first 20 years of retirement, which would be disproportionately cheaper than an unlimited annuity.

At the same time, my Bill would help to tackle the greatest unfairness in our annuity pension system. At present, people on lower incomes, who tend to have a lower life expectancy, subsidise the better-off, who tend to live longer. My Bill would require the national insurance recording system to provide life offices with summarised information about people‘s lifetime income, similar to the information in someone‘s tax code, so that they could relate annuity rates to the life expectancy of different income groups. People in lower paid and manual jobs would get better annuities or pensions for a given amount of savings than people on higher earnings.

My Bill would not only ensure that everyone had a comfortable and dignified retirement but would bring about the largest extension of wealth ownership this country has known since the spread of home ownership. It would give more people more choice about when to retire, and more incentive to save and work longer. It would generate a massive flow of committed long-term saving and investment, would enable some of the burden of providing for an ageing population to be spread globally and, ultimately, would reduce the largest single burden on the taxpayer. I commend it to the House.

Question put and agreed to.

Bill ordered to be brought in by Mr. Peter Lilley, Mr. David Cameron, Mr. Gerald Howarth, Mr. Andrew Mitchell, Mr. John Maples, Mr. David Ruffley and Andrew Selous.

Mr. Peter Lilley accordingly presented a Bill to require people to save for a guaranteed pension sufficient to avoid reliance on means-tested benefit: And the same was read the First time; and ordered to be read a Second time on Friday 15 October, and to be printed [Bill 41].



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