Mr. Peter Lilley (Hitchin and Harpenden): I certainly approach stakeholder pensions not as their enemy but as someone who, as the Secretary of State for Work and Pensions pointed out, wishes them to succeed. I have always supported measures to improve the amount and extent of privately funded pension provision. I supported the concept of stakeholder pensions and I am extremely disappointed that they have been such a failure.
I am disappointed but not surprised. It was mistaken of the Secretary of State to try to suggest that I had ever given a blank cheque to the concept of stakeholder pensions. When they were introduced, I pointed out that they were at best likely to make only a modest contribution to increasing funded provision, and that they were rather more likely to undermine the existing provision.
The Government set themselves four objectives for stakeholder pensions. The first was to reduce the costs that absorbed the amount of money people put in, so that more would go into investments for their retirement. The second was to require employers to offer access to stakeholder pensions and to encourage them to make contributions to those funds for their employees. The third was to encourage those people in the target group–earning between ?10,000 and ?20,000 a year–to opt out of the state unfunded, pay-as-you-go scheme and into funded private provision, and to save more in those schemes than they do at present. Finally, the overall intention was to shift the balance of provision for pensions from 40 per cent. privately funded and 60 per cent. pay-as-you-go to the reverse: 60 per cent. funded and 40 per cent. pay-as-you-go by 2050.
There is half a century to go. All we asked of the Secretary of State was that he give some indication of how each of those four objectives was being achieved. What indication was there from the early results–the first six months–of how they were being achieved? It was sad and significant that the right hon. Gentleman did not try to address his objectives or to assess the results of the early months.
On the low-cost target, the decision to require providers of stakeholders to charge within a structure that set a maximum percentage cost related to the funds invested certainly means that, compared with the previous systems–which often included a high up-front premium absorbed in commission, and a commission charge that was not reduced relative to the amount put in–those who save limited amounts and who save only intermittently will gain. At first sight, that is an improvement. The 1 per cent. level of charge at first seems quite tight. Actually, over a lifetime‘s savings, that represents a large gain to the providers. The Australian system starts off with a slightly higher proportion of premiums absorbed in costs–1.29 per cent at present. However, that is set to fall as the system matures. It is calculated that by the time the average amount of savings for each individual in the Australian system has reached just US$30,000, the costs absorbed by the system will be just 0.5 per cent. That might not seem much of a difference, but because of the effect of compound interest, the result over a lifetime of saving can be a net pension that is up to 15 per cent. higher than if the high level of costs had been absorbed. I hope that the Secretary of State will look at that.
Another target was to require employers to give access. We have not had much mention of that today, but we know from the Association of British Insurers that, at the end of September–just a few days before the scheme became compulsory–about one third of employers were not actually meeting that requirement. A very high proportion were not giving access to their employees by the target date. It was extraordinary that the Secretary of State chose to say nothing about that. He gave no warning, or encouragement, to those who have not met their legal obligations, nor did he warn them of the hefty fines that they could face under the present rules.
Mr. Butterfill: Does my right hon. Friend agree that the situation is even more worrying, because a significant minority of employers are not even aware of their obligations?
Mr. Lilley: Indeed. A study by Axa Sun Life has shown that of those who had not put such schemes in place–we are talking here of employers with turnover of ?1 million or more–about 90 per cent. did not realise that they had to do so. That is worrying. It is sad that the Secretary of State did not use this opportunity to publicise the scheme. In due course, the law will have its way and employers will do so.
The more interesting question is how many employers will voluntarily make contributions to their employees through those funds. One hopes that some will, but studies suggest that only about 10 per cent. of employers who do not do so at present are planning to do so. That may be offset by the effect on pensions provision of the availability of stakeholder pensions, encouraging employers to wind up existing schemes and move to a less generous scheme than they had previously. Again, we heard nothing about that from the Secretary of State.
The key aim of the Secretary of State has been to encourage the target group, about which there is no doubt. The Library brief makes it clear that the target group comprises those earning between about ?10,000 and ?20,000 a year. It is hoped that they will opt out of the state scheme and save their rebates from that and, if possible, more than that. We know that, in its first six months, the scheme is sadly failing with that target group. The vast majority of the rather small number of policies sold simply represent transfers from approved personal pensions and additional voluntary contributions into stakeholders on stakeholder terms. There is no net increase in the number of people saving or of the amount of saving as a result.
We know also that the pensions providers have been focusing on people outside the target group–essentially the tax-advantaged saving of high-income earners via their wives and children, or those exploiting the concurrency rules who already have occupational pensions themselves. If their income in any one year falls below ?30,000, they can, for the next five years, put up to ?3,600 in a tax-advantaged stakeholder in addition to their occupational pension. HSBC, Norwich Union, Halifax, Legal and General, Scottish Widows and the Virgin group have all sold more pensions to those tax-advantaged groups than to the target group. The Secretary of State has not acknowledged that. If he refutes it, and if he has evidence to rebut it, let him tell us. Or is he going to try to convince his supporters on the Back Benches that the whole purpose of the operation was to provide a new tax-advantageous savings scheme for higher income groups?
The Secretary of State claimed that there was some counter-evidence that there was a boost in personal pension provision, if not strictly in stakeholder provision, over the past few months and that the figures showed that. Actually, that boost is very largely the result of people moving out of Equitable Life and similar with-profits schemes into personal pensions and similar schemes. It is misleading to suggest to the House that it is the result of the success of his scheme; it is the result of the failure of his regulation.
Mr. Boswell: Does my right hon. Friend agree that if there was to have been such an improvement, and very plausibly for the reason that he has just given us, it would be in complete distinction to the inexorable decline in the number of participants in occupational pension schemes in the past three years?
Mr. Lilley: That is absolutely correct. I have read that there are about 800,000 fewer people in occupational schemes than there were when the Conservatives left office.
The fourth objective–the overall objective of increasing the proportion of pensions provision in this country that is privately funded–is extremely desirable. This country, unlike the bulk of continental countries, has encouraged people to build up funded private provision, so we do not have to rely on a rising burden falling on the taxpayer as the population ages, in the way that most continental countries do.
We have more funded private provision for pension liabilities in this country not just than any other country in Europe, but than all the other countries in the European Community put together, because people have bothered to save and invest for the future. As the right hon. Member for Birkenhead (Mr. Field) pointed out when he was Chairman of the Select Committee on Social Security, that is a reason why we should be very cautious about merging our financial future with that of those who have not made such provision for the future.
We want to make further progress towards that objective and I am glad that the Labour party has reversed its position and now wants to build on our success, but to encourage more people to opt out of the state scheme or to save more requires either persuasion or compulsion.
Persuasion is costly. It is simply not possible, under the 1 per cent. cap, for people to devote the time and effort needed to persuade people on modest incomes to opt out of the state scheme, and still less to save more than their rebates if they do opt out. The former will therefore devote their attention only to those on high earnings, who make it profitable for them. So either the Secretary of State will have to amend that 1 per cent. cap, and perhaps allow some extra amount to be spent for advice or persuasion if people save more than the rebate when they opt out of the state scheme, or he will have to consider compulsion. There simply are no other options available to him to meet his objective.
However, it is important that we be clear in our mind as to what compulsion means with second pensions. There is already a compulsory state second pension. Everyone in the country who is in employment must put money into the state earnings-related pension scheme, soon to be the state second pension, or, if they opt out of that, put the equivalent amount of money, via a rebate, into an approved private scheme or stakeholder scheme, or company pension.
Additional compulsion, therefore, must take the form either of extending that obligation to the self-employed, which is desirable in principle but impractical in practice–even the Australians have not extended their scheme to the self-employed–or of compelling people to opt out of the state second pension and into private schemes. That was obviously the Government‘s intention when they were preparing their Green Paper. Famously–on page 123, I believe–it contains a reference to when it is compulsory to opt out of the state second pension, which they had failed to proof-read.
As I understand it, it is in due course the intention to make the state second pension a flat-rate pension, while keeping graduated rebates for those who opt out. I would be grateful if the Minister confirmed that that remains the Government‘s intention. I hope that he will explain how it can be other than mis-selling to provide people with a state second pension when they could get larger than the equivalent sum if they opted out and bought a better than equivalent pension by so doing. In such circumstances, it is both sensible and in line with the Government‘s original intentions that they compel people to opt out of the state second pension and into private funded pensions; if they do not do so, they will be guilty of mis-selling. Will the Minister tell us whether that is the Government‘s long-term intention?
The third way of introducing additional compulsion into the system would be to require employers to make a contribution–say, the 3 per cent. of income that is required to make personal pensions equivalent to stakeholder pensions in the eyes of the regulator–and to make it compulsory for all employers to pay such moneys into their employees‘ scheme. Is the Minister considering doing that? If he is, how will he differentiate such a requirement from a simple increase in tax in the eyes of employers or employees?
I make no bones about the fact that I would like there to be some way in which to require the self-employed to save more, but I cannot see how that could be practicable. It is not right at this stage to require employers to make additional contributions over and above those necessary to fund the state second pension. However, it is reasonable to consider the possibility of requiring people to opt out in due course from the state second pension and into funded pension provision–as we already allow them to do from SERPS–and thereby over time improving their position, enhancing their exposure to this country‘s growth and prosperity, and generating an increased flow of funds into industry, which will strengthen the economy and benefit us all when we retire.
It is sad that the Secretary of State has not risen to the occasion today and that he has not talked about his targets and the evidence so far. It is sad, too, that he is manifestly failing to achieve the aims and targets of which we all approve. I hope that in winding up the Minister for Pensions will do better than his colleague did in his opening speech.
Mr. Geoffrey Clifton-Brown (Cotswold): I am grateful to my right hon. Friend for giving way just before the end of his speech. Does he agree that the people who will benefit most from opting out of the state system and perhaps from being compelled to opt out of the state second pension are the youngest members of our work force? If in getting people to opt out of the state second pension we started with the youngest people–who by a compounding effect have the most to gain from having a private pension–it would be the beginnings of establishing the second, private pension as a norm.
Mr. Lilley: My hon. Friend is correct. His suggestion bears a startling similarity to the proposal I made before the 1997 general election–the basic pension plus–which I acknowledge bore a similarity to proposals in a paper that was published by my hon. Friend, which I subsequently saw. I hope that Ministers will learn as much from him and me as we have learned from each other.