Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses(Questions 1-19)




  1. Can I open the first evidence session of the Committee's Future of UK Pensions inquiry. We are delighted this morning to be joined by Alan Pickering and Ron Sandler, both very distinguished men in their own right in the industry and both, of course, authors of seminal works at the invitation of the Government. We are delighted that they are able to join us at the beginning of our inquiry. I wonder, gentlemen, if you would make a short introductory statement? We have got some questions that we would like to address to you, but if you could just make some opening remarks?
  (Mr Pickering) Chairman, just two points I would like to make really. First of all, when you told me that you were going to set up this inquiry, I thought "Oh no, not another inquiry, not more delay", but when I read your press statement and saw that your principal aim was to try and build consensus, then my reaction was "All power to the elbow of you and your Committee" because pensions cries out for cross-party consensus. The time horizons here are so great that if people are to commit savings now for future use, they have to do so with confidence that the next Government will not dig up the infrastructure. I think we have a once in a generation opportunity now to build all party consensus with Andrew Smith, David Willetts and Steve Webb, all of whom, I think, could actually be transformed from being mere party politicians into veritable statesmen. David Willetts has said to me that he will not oppose, in opposition, things which he would propose were he in Government. I think both he and Steve Webb have said to Andrew Smith that if he wants to talk about consensus, then they are willing to respond. You cannot take politics out of pensions or pensions out politics because they are both involved with the distribution of scarce resources between conflicting priorities, but we can, at least, try and take the pensions infrastructure out of politics and I would hope that you and your Committee will play your part in saying to the Front Bench spokesmen that consensus—not consensus at all costs, obviously the Government has to be sensitive to the proposals which it puts forward, but I would coin a phrase from Lord Nelson when he said that the boldest policies were the safest policies. Now, if the Government is bold and radical, then I would hope that the other party political spokesmen will line up behind them and say "Yes, we will agree on the infrastructure", infrastructure in which people can have confidence. Another point that I would make, if I can, Chairman, is that you are not just a Pensions Select Committee, but you are the Work and Pensions Select Committee and I think that it is very important that you look at those two words as you undertake your report. We cannot modernise the pension system without modernising the world of work. Learning should be a lifelong experience. Learning should not be undertaken at the beginning of our lives and then forgotten about. The longer we learn, the more we can earn. The more we can earn, then the greater is the chance that we will be able to save enough to make sure that we can enjoy retirement rather than simply endure old age. There are many barriers at the moment to the employment of older people. We need to dismantle those barriers if we are to have a sensible pension system. I am not suggesting that people should carry on doing their 30 or 40 year job for 40 or 50 years, but if we refer to two professions: take plumbers and teachers. There comes a time when the physical demands of plumbing become too great. There comes a time when the stress of being a teacher becomes too great. My vision is that we will have a skills exchange in that those teachers who are fed up of teaching children can teach plumbers. And they can teach plumbers to teach and those plumbers can then teach teachers to be plumbers, so that those who have spent most of their life using their brawn can, in later years, use their brain and vice versa. I would hope that, in formulating your report, you will stress the importance not just of modernising the world of pensions, but modernising the world of work because that is the best way of diffusing the so-called demographic time bomb.

  2. I am very tempted to ask you what you think a retiring politician could do, but I will not.
  (Mr Pickering) I have never met a retiring politician.

  3. Thank you. Ron Sandler?
  (Mr Sandler) Chairman, I do not have a particular point to make at this stage, other than I am acquainted obviously with the terms of reference of this inquiry. It is clear to me that you are addressing some fairly important issues and I am delighted to be here to assist your inquiry in any way that I can.

  4. That is helpful. I totally agree. I am struck, reading the submissions, and you obviously had a wealth of material suggested to your own inquiries, but they were both quite finely focussed. I am struck by the extent to which the private sector, if you like, is in a silo that is almost distinct and separate, almost a separate box from the kind of State provision, basic State Pension expertise and the interface between the two silos seems to be very watertight. If we are to get the kind of holistic solution which has got, hopefully, some chance of consensus, is there anything that either of the two of you can suggest to try and get a bit more osmosis across the interface between the skills and expertise, on the one side, compared to the other? Because it seems to me, if you do not get the two systems working more coherently together, then the chances of getting a structure that will survive the test of time will be less. Do you have any thoughts on that? It is just a thought that struck me quite forcibly reading the submissions that we have got.
  (Mr Pickering) If I can kick off on that one. My remit was to make recommendations about how the DWP private pension legislation can be modernised, simplified and made more cost effective. That is why our report was focussed on private pensions rather than State Pensions. We did deal, however, with the interface between the public and private pension arena and because the public system is quite complicated, basic State Pension, SERPS, State Second Pension. There is a limit to how much impact one can have by only simplifying the private part of that particular public/private partnership. So you should not take it as read that because the report only dealt with private pensions that there are two watertight skill sets. Those who have views on private pensions have equally well developed views on State pensions. If you want mine, it is that by, say, 2030 the State should be promising a universal State Pension to everyone who is old and not necessarily retired or poor, that that State pension, by 2030, should be somewhere between 20 and 25 per cent of national average earnings and that between 2020 and 2030 we will gradually increase the age at which people qualify for that State pension; 65 at 2020, 70 by 2030. So you will be telling today's 40 odd year olds that yes there will be a universal State Pension because we have this consensus, but there will be an opportunity for you individually, collectively to build on that universal State pension. So it truly will pay to save. And although the two systems will run in tandem, it is sensible to keep them separate. Politicians can say when someone is old enough to qualify for the State old age pension, but when I choose to retire is nothing to do with you, it is a personal decision for me on my own or for me in concert with my employer. As ever, however, the challenge is transporting us from where we are now to where I think we could build a universal consensus around what the landscape should look like in 2030.

  5. Mr Sandler, your report was quite technically focussed. Can I tempt you to think more of the big picture?
  (Mr Sandler) You can certainly tempt me, whether I am capable of doing so at this point we will find out. It is worth perhaps reminding the Committee of the remit of my work, which was not pensions per se, it was looking at the savings industry and how that industry works and trying to arrive at a view as to whether that industry is delivering effective outcomes for the retail consumer. Clearly, I did not look at pensions policy and I certainly did not look at public pensions provision. What I would say, and those of you who have read my review would know, is that there are number of flaws, I believe, in the way that private industry operates in the delivery of savings in general to the retail consumer. I have put forward a number of recommendations which I believe will have the impact of improving the effectiveness of the retail savings industry as a provider of savings products. Clearly, there is a strong interface between the private provision and public provision, but I do not believe that I am qualified to comment on how that interface should operate.

  6. You did not do any cost benefit analysis in your work. Was that because you were not invited to do so or were not encouraged to do so? Do you know if anybody is going to do a cost benefit analysis on some of the recommendations that you are suggesting?
  (Mr Sandler) I am certainly aware that to the extent that my recommendations require the FSA to move them forward, for the FSA to move forward there is a requirement in the Statute that some form of cost benefit analysis is undertaken. So in respect of the with profits recommendations or in respect of the Stakeholder recommendations, clearly the FSA is obligated to perform such analysis. I think my job was to set up the vision against which the FSA could begin to move forward, in the expectation and understanding that the FSA would, in due course, when the proposals were being fine tuned, do the necessary cost benefit analysis.

  7. Can I ask you both two very brief questions and ask for shortish answers because they are philosophical questions and we could go on for a long while. There is a lot of talk about crisis. This word "crisis" keeps coming up in all these press reports. From your length of experience in the industry, is the use of the word "crisis" justified or do you have any thoughts about?
  (Mr Pickering) If there is a systemic pensions crisis, it is a crisis of expectation in that people are expecting the pension system to deliver more than it can. People do not yet appreciate that big pensions require big contributions. Obviously, those who are close to retirement who are affected by the knock on effect of a 30 or 40 per cent fall in stock market values, they are themselves facing a personal individual crisis. But I do not think that the British pension system is in a terminal decline type crisis. There are, however, unrealistic expectations out there and we need to make sure that people appreciate that you only get out of a pension system what you or someone else puts in. There's nothing technical about that.
  (Mr Sandler) If I can respond by addressing the word "crisis" to savings in general rather than pensions specifically because that, clearly, is the only way that I am qualified to offer an opinion. Crisis is clearly a subjective term and we all may mean different things. Is there scope for considerable improvement in the way the savings industry operates; both in terms of the effectiveness of the industry and in terms of its ability to generate demand for its products? In other words, encourage people to save more. I would contend that the answer to that question is yes, there is very considerable scope for that sort of improvement. Is it a crisis? I will leave others to judge, but I know that there are many ways in which we can move very considerably forward in terms of an industry which delivers better value products to consumers who understand it better and therefore are more willing to engage with it.

  8. Thank you. Finally from me, can you say a word about your view of the savings gap that everyone is now talking about? Again, very briefly, if I could ask you to do that. Is there a savings gap? Some people contradict the notion and think that it is not a useful concept. Do you have any thoughts to help us with on that question?
  (Mr Sandler) In my judgment, there is a savings gap. There is a very real level of inadequate savings in this country. It is a problem which is most acute amongst the less affluent. Here I am not referring to those who clearly do not have the wherewithal to save, but I am referring to that group of consumers who have the means to save more than they presently are saving. They are defining the consumption/savings balance skewed too much towards consumption. Part of the problem is the absence of confidence in the sector to deliver value for money. Part of the problem, and I think the core of the problem, is simply the economic fundamentals that the costs of delivering products to the low end saver have become such that that saver is effectively disenfranchised. Persuasion to save requires, in the main, a face-to-face process. It requires some agent to encourage that consumer over the threshold. That has a cost attached to it, particularly associated with the regulation of that process. We have in this country, in my judgment, a situation where the lower end of the market is effectively removed from the savings process because it is not economic for the industry to serve them. If you are to change that, the economics have to be re-engineered.
  (Mr Pickering) Just very briefly, a much used word today is that of "empowerment". There is nothing more empowering than having some money in a bank account. I think that we should make it easier for people at lower ends on the income spectrum to have access to bank accounts and the savings that then flow through from being able to run one's finances through a bank account rather than just through one's back pocket. I fight shy, however, of trying to quantify the savings gap at the collective national level. It grabs headlines if one says it is 27 billion or 28 billion. A lot of these big number figures are not only frightening, but they are predicated on nothing changing. It is like saying that by 2020 X per cent of the population will be over pension age. That is only if pension age stays the same as it is now. So yes, there is a shortfall in people's savings habits. I would not wish to put a figure on that shortfall however.

  Chairman: Thank you. Before I open questioning to my colleagues, I just note that by its nature an inquiry of this kind requires us all on this side of the Committee to make sure that we are clear that we register any potential or rather additional interests that we may think we have for the advantage of the inquiry to put it on the record. Just if colleagues think about that carefully. I now turn to Mr Andrew Dismore.

Mr Dismore

  9. Thank you, Chairman. Following on from that, I have got to declare interest as a victim of Equitable Life, which I am sure a lot of other people in the room are probably as well. I would like to start with Mr Pickering and the point that you made earlier on about the current system being complicated and your vision of a universal pension further down the track. Looking at the interface between the State and private, a lot of people have commented that the State Pension is inadequate, other people have commented that it is too complicated. But the Government would come back and say "Well, there is only so much money we can afford to put into the pension provision and our objective is to concentrate the help on the people who need it most" which is when income guarantee comes in and now Pension Credit. Inevitably, if you are going to try and help the people who need it most, it is going to create complications, is it not?
  (Mr Pickering) I am not one of those who criticises either the MIG or Pension Credit, but I see them as being merely transitional. We should not build a pension system on the premise that MIG and Pension Credit, in their present form, are going to be here for the next 20 or 30 years. They create their own complexity. They create their own wasteful bureaucracy. As I said before, transitioning is always the difficult task, but in order to transition effectively one needs a vision of where you want to end up. And I want to end up, as I said before, with a universal, non-funded, non-means tested single State Pension of between 20 and 25 per cent of National Average Earnings. If that means that by happenstance some well off people get more State Pension than they would under a means tested system, then we have a very acceptable form of means testing called tax. If people are drawing good incomes in retirement, then they should be taxed on those good incomes in retirement.

  10. Have you costed what it would take in terms of extra tax to meet that objective of 20 to 25 per cent?
  (Mr Pickering) There are a number of estimates in the public domain, some produced by the IPPR, some produced by the Pension Policy Institute. I however would argue that it is impossible, at this stage, to cost accurately the financial repercussions in 2030 of my vision of 2030. A lot depends on whether we get the working part of the "Work and Pensions equation" working more effectively than it is now. If by simply increasing the State Pension age we lengthen the period when people claim unemployment or sick pay, then we have not achieved very much. I go back to my earlier point that learning and earning should progress much higher up the age spectrum than they do now.

  11. But if you are asking us now to start taking the decisions that are going to create your vision in 20 or 30 years time, for a Government we really have to know, as best we can, what the projections are going to be for policy in 20 or 30 years time, because there is no point in us starting to take the decisions along the lines you have been suggesting just now if in 20 years time we find that, having taken all those decisions and the difficulties that come with that, we still cannot afford what you are proposing, as a nation. And to try to fund the level you are talking about, even based on today's figures, would be potentially very expensive if you are talking about a universal State Pension for everybody at 20 to 25 per cent of Average Earnings and presumably linked to Average Earnings for inflation after that as well.
  (Mr Pickering) There are not only the statistics in the public domain to which I have referred. The Government Actuaries Department is skilled at making these sort of projections. But all I would counsel you against is the pursuit of spurious accuracy because you cannot get absolute accuracy as to what the circumstances will be in 2030. What I would say to you is that it matters little whether our pension incomes in 2030 come via the public purse or via the market place. They will ultimately be a drain on the wealth which the next generation of workers are creating. There seems to be a myth that by funding pension promises one makes the delivery of that pension promise easier than if it is paid for out of taxation. Funding instils a discipline that one might not get from a pay as you go system, but ultimately whether our pensioners in 2030 are well off or not will depend on the economic efficiency of Britain in 2030.

  12. I certainly understand you cannot make absolute projections, but there is also a sort of policy argument which comes back and which is thrown at us by pensioners all the time, particularly in the context of Pension Credit, and that is one of the reasons why Pension Credit is coming in, which is the pensioners who say "Well, I have saved all my life. I have paid my National Insurance contributions all my life. The chap down the road has been swinging the lead all his life and he has got exactly the same as what I have. That is not fair". If you end up with the system you are proposing, how would you deal with that argument?
  (Mr Pickering) I repeat, I am not criticising the MIG or Pension Credit in this decade. It is an understandable reaction to the historic development of pensions in the UK. What I am suggesting is that we face reality and provide a universal pension in 2030 which brings people, as of right as citizens, up to the minimum income guarantee level. Beyond that, it really will pay to save, not pay to save in a clawback way, but pay to save in a genuine way. If people save a lot—and I repeat that you should tax them in retirement—we should make it as easy and attractive as we can now to encourage people to save and then those who have over-egged the pudding will be in the fortunate position to pay tax to help support those who, for whatever reason, have not. I would make the final point that no matter what system we have in Britain, we are not going to allow old people to starve in the street. So you are always going to have the jealousy between the thrifty and the profligate. I would argue, however, that if we have a more rational approach to our pension system, that animosity is much more marginalised than it would be if we were not to take some bold steps.

  13. Perhaps I can turn to Mr Sandler now and following on one of the things that you developed, Mr Pickering, that is the question of the complexity of the State Pension system, which you mentioned and other people have raised with us. Do you think that that is a significant factor in creating the current savings gap and if the confusion that we are talking about was reduced, would that have the counter-effect of encouraging more people to save?
  (Mr Sandler) Again, the question needs to be thought of both in terms of pensions and savings more broadly. If the underlying question is; is the complexity that is built into our saving process and savings system, be that for the form pension savings or other forms of savings, I would say that yes, complexity is a very considerable cause of consumer confusion and, as a result, apathy towards the savings process. We have an industry where the incentives which drive behaviour within that industry tend to promote rather than dispel complexity. The sorts of counter-balancing forces are largely absent in this industry and we have arrived at the state that we have today whereby the world is extremely complicated, extremely confusing and, as a result, very daunting for the average saver. I do believe that if we are able to find ways to encourage a simpler more straightforward savings process in which consumers feel more in control or better able to make comparisons of one provider to another, one product with another, we will ultimately achieve a greater willingness for consumers to come forward and save in ways that ultimately are to their benefit.

  14. Yes, I can understand your argument about transparency, but that does not actually create any more money. Do you think there is sufficient money floating around that people would wish to save if that transparency was there?
  (Mr Sandler) To a degree, yes. I cannot quantify that, but there is no question that if you compare savings rates in this country with elsewhere, or you look at savings rates in the absolute and look at what has been happening to savings over time, you are seeing a trend in favour of consumption as opposed to savings. Clearly savings can only take place at the expense of some other use of those assets, in this case consumption. To what extent people are willing to give up elements of that which they presently consume is an individual judgment, but taken collectively there is clearly the opportunity in this country to enhance levels of savings.

  15. You mentioned earlier on that some of the other reasons why people might not be saving, and obviously one is that they do not have the money, that you made in the first place, and the other was the lack of confidence, particularly after Equitable Life that I said earlier on I am a victim of. But is there not also a case to say that people still think that the Government is going to look after them in retirement, even though recent experience and all the campaigns from the pensioners are arguing to the contrary? And is it not also the case that a lot of people see other investments—and sometimes they have no choice about those other investments, such as paying for houses and the higher house prices we certainly have in London and the South East—as an alternative form of investment, one which, in fact, probably produces much better results than investment through a pension scheme, so that when they come to retire they can sell up their semi-detached, in my constituency, and make a significant amount of money to retire somewhere warm and agreeable?
  (Mr Sandler) All of those things are true. There are a whole range of contributing factors to what let us loosely describe as inadequate savings levels in this country. Please do not ignore the economic side of things. The point that I made earlier that actually there is a large body of consumers in this country for whom it is uneconomic for the industry to actually target. So that is one contributing cause. Clearly there are expectations, most of them rather poorly grounded, in terms of what the State will provide, which will also have an impact on people's willingness to make a personal provision. It is also true, if one looks at the consumer research, that people firstly over-estimate what the State will provide, they under-estimate what it takes to deliver a well-resourced retirement and they under-estimate the amount they have to put away in order to achieve the level that is necessary to create an adequate level of retirement provision. So there are all sorts of absences of knowledge there which collectively add up to people not really addressing the savings problem adequately. Add to that the scandals that you have alluded to, which clearly have, to a degree, although I cannot quantify that degree, but to a degree eroded confidence in the savings industry. There is the general opacity of the whole savings process and the complexity of trying to distinguish between one choice and another. All of that, I think, adds up to the situation that we have today. I would not wish to try and take each of those factors and ascribe a weighting to them. I will simply acknowledge that they all contribute to inadequate levels of savings and it is possible, therefore, to make improvements in any one of a number of areas.

  16. The last question from me. The position of younger people and trying to encourage younger people to start saving earlier; is there any sort of magic formula that will do that? Do you think the existence of means tested benefits is a disincentive to younger people to save now or is it something that they simply do not think about?
  (Mr Pickering) There is an awful lot of tosh spoken about the disincentive effect on young people of means testing pensions. People do not, in their twenties, think "Well, if I save I am not going to get any benefit from it". We do, however, need to get young people into the savings habit much earlier. Not through fancy segments in the National Curriculum. I am showing my age now, but on my first day of school I took three shillings to school. 2/6D was for my dinner and sixpence was to open a Yorkshire Penny Bank account. So from the very first day I went to school, I was aware that saving money was something that was culturally acceptable and it did empower me because I could buy things through saving that I could not buy if I had not saved. So yes, we want to get young people into the savings habit. I am not so blinkered a pensions person to say that young people should necessarily start saving for their pension in their teens or even in their twenties. There are other savings needs that are more attractive, more tangible for them. But having got into the savings habit in those early decades, it will come easier for them to start paying realistic pension contributions in their thirties, forties and fifties and even later.

Ms Buck

  17. How times have changed. My eight year old is asking me for a credit card.
  (Mr Sandler) I am in no position to comment about the impact of means testing on the attitudes of younger people. That is not something that I have looked at or have any experience of. What my review did look at, however, was standards of financial literacy in this country and it drew the conclusion that there is, as in many areas, considerable scope for improvement. One of the things which I was surprised to see is the low level of resource which is currently applied towards building standards of financial literacy, consumer education in financial matters. It is something which is a statutory requirement of the FSA. At least "a requirement to promote understanding of the financial system" I think are the words which are actually written into the Act. The FSA does indeed recognise that it has that responsibility, but at present the resources available to that particular effort are modest in the extreme, partly because the FSA itself is resource constrained and the resources for education have to compete with the resources available for consumer protection and the other elements of the FSA's remit. I have made a recommendation, which sits within the document, that we really need to embark upon a much more ambitious and much more focussed process of consumer education, not just within schools, but beyond, to try and build a much greater level of literacy and, as a result, confidence in the financial system amongst consumers. This is not a short term panacea, but a long term, well thought through, properly planned process which has clear objectives for which the FSA is held properly accountable. I think it is something which would ultimately be of great benefit.

Mr Dismore

  18. I am not sure how much the school teachers would thank you for trying to introduce more into the National Curriculum. It is bad enough just trying to get decent study in maths in primary schools, I think. Just following on from that though, the point I put to you also was the other forms of saving issue and maybe people are not as illiterate as some would suggest on the economics of it because, from what I have seen, it certainly seems as though investment in property, certainly in London and the South East, has for a long time, even with the ups and downs of the market, provided a far better return than investment in even the managed pension funds.
  (Mr Sandler) I do not think the equation is quite as simple as that. I think that to make a statement such as that and make it a statement of truth in perpetuity, I would be very cautious of. I think there are certain periods of time in which certain types of asset prove to be better investments than other forms of asset, but I think that, in general, there is quite a body of evidence which talks of the requirement for a balanced portfolio of assets if they are to deliver the right outcomes over an entire lifetime of savings. Therefore I do not think it is adequate to say that we have a thriving property market at present and therefore we can ignore inculcating within the population a sense of the need to save. Nor and at the same time can we ignore any efforts to encourage the industry to become more efficient and effective in providing savings products. I do not think the two—one denies the other.
  (Mr Pickering) Diversification is the key. One should not lead a whole generation of baby boomers to believe that they can solve all their problems by selling their property in the South East of England. Chances are they will all be selling at the same time and that will have a depressing effect.
  (Mr Sandler) I would also be very nervous about encouraging an attitude in which we ask of our younger people to purchase a financial asset on a highly leveraged basis, an asset which can go up as well as down. We would never suggest that they take on vast amounts of debt to buy FTSE futures. The notion that somehow taking on vast amounts of debt to buy an asset which far exceeds in magnitude the annual level of income of the individual is an inherently risky thing to do. It may not seem so in the present environment when property prices have been doing what they have been doing, but I would put it to you that over a longer horizon we can offer a slightly more rational and balanced approach to savings for our coming generations.

Miss Begg

  19. Mr Sandler, one of the key recommendations that you made in your report was the establishment of a suite of Stakeholder products, including a pension. I wonder if you can give us your assessment of how successful you think the current Stakeholder Pension has been in achieving its aims?
  (Mr Sandler) I do not think that the success has been marked in terms of the take up within what I believe was the original target market group for Stakeholder Pensions. There are, in my judgment, good reasons for that and they relate to this issue of economics that I raised earlier in this discussion. It is not economic to approach a less affluent individual and seek to sell a Stakeholder Pension with all of the requirements of the selling process and the regulatory paraphernalia which accompanies that sales process. What Stakeholder Pensions have, however, been very successful in doing is introducing a level of price competition into the industry and injecting a much greater focus than hitherto on the requirement to be efficient in the manufacture and distribution of those products. So it is a kind of a mixed score card. I would also point out, however, that in my recommendation (since you started the question with reference to my recommendations) I used the term "stakeholder" to characterise a generic suite of products which are substantively different from existing Stakeholder Pensions. They are different in the sense that what I am proposing and what I believe the Government is enthusiastically pursuing, although time will tell whether that belief is well founded, is a suite of products which are regulated and regulated quite tightly across a number of dimensions, including the investment profile of those products; something, for example, which Stakeholder Pensions is not subject to. By regulating the product, it is possible to create a degree of safety within those products to allow them to be sold outside of the regulated sales and advice regime. And that is my solution to the re-engineering of the economics to allow a suite of products to be made available to people who presently are not being served by the savings industry.

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