In noting the interesting points that the hon. Member for Amber Valley (Nigel Mills) raised, I particularly commend his colleague, the hon. Member for Cities of London and Westminster (Mark Field), for drawing to the attention of the House the fact that the average pension pot is just £17,700. That is a miserably small amount, and underlines the dire predicament that far too many pensioners face, and which the Bill does nothing significant to address.
The hon. Member for Amber Valley makes interesting points, and some valid points, about lifestyle changes as people get older, but they apply in the main to professionals and middle-class people. For a lot of working-class people who have worked in manual, low-paid service jobs for most of their lives, those choices do not exist in the same kind of way; I caution the hon. Gentleman about that.
I commend my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) for his expertise and very authoritative critique of the Bill, which I guess he will follow through in Committee.
The Government are introducing in this Bill the biggest reform to pension tax rules in nearly a century. Of course citizens, especially those with small pension pots, welcome the choice to take lump sums that may be more beneficial to them—by, for example, enabling them to pay off a mortgage or loan, or fund social care support—rather than eking out a living on what, for far too many, will be very small monthly payments. The kind of annuities that most people have are not inflation-indexed, so their value erodes every year. Most neither cover a partner nor offer protection against illness or infirmity. Most do not allow people to leave a legacy if they die young; nor do they let them benefit from good future investment returns or rising interest rates. For all those reasons, there has been widespread public frustration about the inflexibility of annuities, especially in the past few years of low interest rates and because, as people live longer, a retirement can be as long as 20 or 30 years. To buy an annuity 30 years ahead when savings could continue to accrue as investments makes less sense than previously.
So far, so good, as far as the Bill is concerned, but there are massive dangers as a result of destroying good annuities, which has been going on for a few decades and is bequeathing a real nightmare that the Government’s policies are nowhere near capable of addressing, let alone preventing. A rapidly ageing population is dumping a huge additional burden on the young, many of whom are leaving university with already massive debts thanks to the Government’s dysfunctional policies. Now they will be saddled with subsidising through their future taxes older people who are being encouraged to live for today, not to protect themselves for tomorrow. My right hon. Friend the shadow Chancellor was right to voice fears in March that widening choice away from annuities could mean individuals spending all their savings within a few years of retirement and then becoming dependent on the welfare state, at a significant cost to taxpayers. There is a serious prospect that pensioners who cash in their lump sums could be plunged into poverty, leaving future taxpayers to grapple with the consequences.
It is therefore incredibly important that pension reform is not carried out in isolation, although the Bill risks doing that, because it is one of many ways, albeit not
the only one, in which we can give peace of mind to people planning for or approaching retirement. It is imperative that reform happens in the context of a comprehensive policy for retirement and ageing in the UK, especially with regard to health and social care for the elderly, on which my right hon. Friend the shadow Health Secretary has rightly insisted that we need whole-person care in what amounts to a national care service to complement the national health service. Mainly because of their obsession with cutting public spending, the Government continue to fail abysmally to face up to this huge challenge and duck the reality that there will have to be much more significant public support to deal with this urgent social need. They continue to pass the buck to future Governments and taxpayers, and to ensure that there is a future in which infirm and frail elderly citizens and their families see their savings and inheritances disappear as they are engulfed by horrendous care costs.
Our changing demographic profile means that baby boomers—people such as me who were born between 1945 and 1965—will form the big bulge in the active ageing category. That change presents immense problems, not least in preparing for the future. Ironically, as our society gets older, pensions should increasingly become a young person’s issue, because the ratio of workers to pensioners has started to tip towards crisis levels. In the next 50 years or so, the number of people over pension age will increase by more than half, and there will be only two people working for every one person in retirement, compared with four working people for every retired person today. A hundred years ago, there were 10 working people for every one person in retirement.
I remember only too well having to confront that serious situation when I was appointed Secretary of State for Work and Pensions in 2007. The cost implications for future generations of such increasing longevity are deeply alarming. People are expected to be active for longer in retirement and need the resources to fund that. I welcomed the Government’s delivery, through the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013, of measures that I introduced through the Pensions Act 2008, but I see no sign at all that they have any intention of taking the necessary decisive action to ensure that most people get decent pensions, whether private or public. They are certainly not doing that through the Bill. The decline in private sector occupational pension provision since the late 1960s is serious and, in the face of increasing costs, employers have been abandoning their defined-benefits—that is, final-salary—schemes, whose active membership numbers have fallen from 8 million in 1967, to 5 million in the 1980s and 1990s, to fewer than 3.5 million today.
There is a chronic problem of under-saving, with perhaps as many as 7 million people not saving enough to fulfil their aspirations in retirement, and some low earners not saving at all. The Bill does not tackle the problem, meaning a chasm will grow between the income that they need and what they actually receive in retirement. There are many reasons for people not saving. Many on low incomes or with broken working patterns do not have access to a workplace scheme. Some will be put off by the complexity of pensions while others will simply live for today. Others will lack confidence in pensions. The Bill does nothing to address that.
Of those of working age, around three quarters say that they will need more than the state pension to live on, yet only around 40% of those who have not yet retired are saving into a private pension; 60% are not. We must get to the point at which saving becomes the norm and a savings culture is embedded in society in general and in the young in particular. In that respect I welcome the Government’s decision to raise the level for tax-free ISAs and premium bonds, but such initiatives deal only with the tip of an iceberg; the Bill does absolutely nothing to deal with it.
Sixteen per cent—one in six—of 20 to 24-year-olds are saving for a pension, compared with about half of those aged over 35. Less than half of moderate to low earners with incomes from £5,000 to £35,000 are saving towards a pension, compared with three quarters of those earning more than £35,000. The requirement for automatic enrolment into a qualifying pension scheme introduces for the first time a bias towards saving, which is welcome. Evidence suggests that automatic enrolment is one of the most effective ways to combat people’s tendency not to act when faced with difficult financial decisions. It also has the greatest impact among groups where participation rates are the lowest. On the other hand, nobody should pretend that most such schemes will deliver the kind of living standards in retirement that people today expect. Most will not—and the Bill does not.
The plight of those who lost their pensions because of the collapse of their occupational pension schemes was both a national scandal and a personal tragedy for all the individuals concerned. Through the Pension Protection Fund, the previous Labour Government legislated to ensure that such a scandal could not be repeated in future: it safeguards more than 10 million people in eligible defined-benefits occupational pension schemes throughout the UK. We also established a more powerful Pensions Regulator. I was able to deliver late in 2007, through the financial assistance scheme, a fair and just settlement for 140,000 people who were robbed of their occupational pensions as a result of employer insolvency before the Pension Protection Fund was created. All those affected received 80% of their expected core pension.
When Labour came to government, many women were prevented from building a state pension entitlement in their own right. Our Labour Government made significant headway, legislating for a simpler, fairer and more generous state pension system, so that about 75% of women who retired in 2010 received a full basic state pension like men. As a result, by 2025 more than 95% of men and women will retire with a full basic state pension. This Government have also made improvements, but there are still anomalies they have not resolved, especially for women today in their late 50s. The Bill does not address that and there is no sign that it will do so.
In 1997, carers were similarly mistreated by a system predicated on a 19th-century view of working lives and social relationships; millions were without access to occupational pensions; and the mis-selling of private pensions, overseen by the previous Conservative Government, was a national scandal. Meanwhile, the exceptional equity returns of the 1980s and 1990s allowed many defined-benefits schemes to ignore the rapid rise in the underlying cost of their pension promises.
That was compounded by botched policy such as the minimum funding requirement introduced by the current Leader of the House, then the Minister responsible, which failed to encourage employers to fund their pension schemes properly. In the 1980s and 1990s, many firms, despite rising liabilities, took the decision to take contributions holidays, believing that a bullish equity market would be a long-term trend. The Conservative Government believed that too—indeed, they encouraged it, as demonstrated by Nigel Lawson’s decision effectively to cap pension fund surpluses in 1986. As the Pensions Commission noted:
“The deep dip in contributions seen in the period 1988-91...almost certainly reflects the impact of this policy.”