It is a great pleasure to respond to this Second Reading debate. As we have heard, it has perhaps been shorter than it might have been, but none the less I thank all those who have contributed to it from the Back Benches: my hon. Friend the Member for Cities of London and Westminster (Mark Field), the hon. Member for Aberdeen South (Dame Anne Begg), who is the Chair of the Select Committee, my hon. Friend the Member for Amber Valley (Nigel Mills), the right hon. Member for Neath (Mr Hain), my hon. Friend the Member for Birmingham, Yardley (John Hemming) and my hon. Friend the Member for Fareham (Mr Hoban), who takes a very close interest in these matters. By and large it has been a thoughtful and constructive debate and the most heated areas of controversy have been when we have considered the pensions records of previous Governments.
I reiterate the points made by my hon. Friend the Member for Fareham and my right hon. Friend the Minister for Pensions about this Government’s proud record on pension reform. We have implemented the triple lock, which has meant that pensions are uprated by earnings, prices or 2.5%, whichever is highest. That means that the full rate of the basic state pension is £440 a year higher in 2014-15 than if it had been uprated by earnings since the start of this Parliament. We have introduced auto-enrolment. I acknowledge the point that has been made that the previous Government intended to introduce it in the end, but as my right hon. Friend the Minister for Pensions set out, we as a Government have taken a number of steps to make the policy workable and successful. The number of those who will benefit and who are benefiting from that is considerable. The introduction of the single-tier pension has made our state pension simpler and clearer. The single-tier pension has enabled us to go forward with some of the reforms that we are discussing today which will allow greater pension flexibility.
The debate today and the debate on the Bill has essentially focused on two areas: first, defined ambition in terms of risk sharing, and secondly, pensions flexibility —particularly, in the context of the Bill, on issues related to the guidance guarantee. Let me turn first to the case for defined ambition, which, as we have heard, is to find a middle way—greater flexibility within our pension system, which has traditionally been somewhat binary, with defined-contributions schemes and defined-benefits schemes but nothing really in between. The Bill redefines the framework to recognise explicitly the middle ground and encourage provision of shared-risk pensions where risks are shared more equitably between employers and employees. Let me respond to the various points and questions that have been raised in respect of that area.
My hon. Friend the Member for Fareham asked to what extent and how defined-ambition schemes are guaranteed. The Bill does not prescribe benefit design and that is intentional. Our consultation presented a number of ways in which that could be done and our measure is intended to encourage a variety of designs. So there is no one set answer; indeed, one could argue that that is the point. In response to my hon. Friend’s question about guarantees and the cost to the individual, it is not always the case that the member bears the cost of the guarantee. Some employers may choose to stand behind the promise. Capital requirements and scheme funding requirements already apply to pension vehicles and will continue to apply to schemes called defined ambition in respect of the promises.
A number of contributors to the debate, including the shadow Pensions Minister, asked to what extent there is an indication that there is employer interest in defined ambition. DWP research found that more than a quarter of employers are already interested in offering a pension involving greater risk sharing between members and employers. Over half of employers—52%—said that they would like to set up a scheme where the employer pays fixed contributions and where there is more certainty for the employee, such as DC plus. The response to our “Reshaping workplace pensions for future generations” consultation also demonstrated a strong desire from unions for collective models.
In terms of that demand, the DWP has had discussions with interested employers, but I am sure the House will understand that employers will want to see the detail and communicate with their work force. We do not want to pre-empt those processes, but we believe that the addition of a defined ambition of risk sharing to our pension framework is advantageous.
On inter-generational risk sharing and whether a risk transfer is desirable, we do not want to disallow all inter-generational risk sharing within schemes offering collective benefits, but we want to ensure that it is open and transparent. That is a lesson that we have learned from the way in which such schemes have operated in other jurisdictions.
On governance of collective defined-ambition schemes, we will use governance powers from the Pensions Act 2014 and make regulations using those powers. On issues around making decisions about retirement income in collectives, we want to create innovation. We do not want to constrain or prevent part of the market, and insurance firms or schemes that are not occupational schemes, from offering such scheme. Of course it would always be a fiduciary making a decision about the retirement income, but the measures in the Bill provide for requirements around the specific features of collectives.
We heard questions about collective investment strategies and the risk of an over-cautious strategy, so it is worth highlighting the example of a New Brunswick scheme that is required to operate with a 97.5% probability that base benefits will not reduce. The scheme has 40% investment in assets and 20% investment in real estate and other assets, so the probability requirement has not led to an over-cautious investment strategy.
The hon. Member for Aberdeen South cited several questions that have been raised by the Law Society of Scotland. Shared-risk schemes will cover existing and new schemes. If a scheme shares longevity risk, it will be a defined-ambition scheme. She asked about the definition of a promise made during the savings period, as well as whether a promise made at
“times before the benefit comes into payment”
relates to when the annuity is set up or the repayment is made. The intention is that a promise made at a time before the benefit comes into payment describes a promise made by a scheme during the savings phase, rather than a separate promise made at retirement. She also asked whether a third-party promise would include an arrangement whereby the promise is made by an insurer, rather than the scheme, and the answer is yes. If she wishes to raise further queries on behalf of the Law Society of Scotland, we will be happy to respond to them.
Let me turn to the freedoms that the Chancellor set out in the Budget, which will be implemented by this Bill and the pensions taxation Bill that I am sure we all look forward to debating in the not-too-distant future. Although Labour Members appeared to reserve their judgment about whether they support the policy, the tone of the contributions of Labour Front and Back Benchers suggested that they were far from enthusiastic about the reforms announced in the Budget, to put it mildly. This was not just the questioning and scrutiny that any Opposition would undertake; it seemed to me that, philosophically, the Labour party was uncomfortable with the reforms.
The shadow Pensions Minister asked whether flexibility and guidance would address inertia in the annuities market, but prior to the Budget announcements, consumers were not incentivised to shop around for annuities. They will have more options and more reasons to engage with the market as a result of greater flexibility, and access to impartial, good-quality guidance will be key to having better informed and more empowered consumers. They will be equipped to look for products that work for them, and the decumulation market, including the annuities market, will be incentivised to respond to the demands of more empowered consumers and will have the freedom to do so.
It is sometimes said that people simply will not be able to make good choices, but leaving aside concerns that that view is somewhat patronising, I argue that the existing system restricts choice at the point of retirement, and the Government do not believe that that is right. The Government recognise that with more choices at retirement, consumers’ decisions will become more complex, so we have introduced the guidance guarantee to help consumers to understand their options.
The shadow Pensions Minister referred to the apparent contradiction between auto-enrolment, which is predicated on inertia, and the Turner proposals and giving greater choice to savers. It is always right that people save and that we put in place a regime that encourages saving, but when savers reach retirement it is right that they have the opportunity to engage and have a full range of choices available to them. We believe that it is sensible to set out the detailed technical requirements in secondary legislation, which will allow time for consultation and to respond to evolving risks in the market.
The right hon. Member for Neath said that flexibility will result in people spending all their money at once, which is risky, but those people who have worked hard all their lives should be free to decide how to use their savings. At present the system allows those with the smallest and largest pension pots complete flexibility, but restricts those in the middle of the distribution who have worked hard and saved all their lives. The Government do not dictate how people spend their other money, so why should they do so for pension savings? However, we recognise that people do need support in making these decisions and that is why we are introducing the guidance guarantee.