Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses(Questions 60-76)



Mr Mitchell

  60. Of course it must be correct for Government to encourage in every way short of compulsion, but have you not come to the conclusion that it is not going to work and that if you want real incremental savings in this area you have got to have some form of compulsion?
  (Mr Sandler) No. I think that real incremental savings are definitely possible. What I cannot say categorically is that they will rise to that magic level when they are regarded as adequate. So there may well be, at the end of the day, a requirement to still close the gap through some form of compulsory measure. I think that that is the right question to be posing and I am pleased to see that it is now a question certainly on a much wider agenda than it was a year ago or 18 months ago when I first began this exercise, but I cannot draw a conclusion yet. I am fundamentally an optimist. I do believe that there is a lot of ground still to be covered in terms of making the products more attractive to consumers before one has to compel them to purchase those products.

Mrs Humble

  61. Following on neatly from that, I was going to ask you both lots of questions about providing consumers with appropriate information about savings products and educating, even educating children in school about the need to save for a pension, but you have covered them all. So can I just draw to your attention a comment made by Merrill Lynch in its evidence that they have suggested that the Government needed to give people a stark warning about the realities of retiring without sufficient savings. Do you think that the Government needs to do more to scare people into saving?
  (Mr Pickering) I do not know whether "scaring" is the right word. If you have a brochure for a pension scheme, do you have a picture of a Caribbean island or the workhouse? I do not really know which is most effective. I do not think by using scare tactics or crisis tactics that you achieve a rational response. I think the Government is quite right in drawing to people's attention the true nature of their State Pension entitlement. Jeff Rooker was quite refreshing as a Pensions Minister in that he wanted people to know how badly off they would be on the State Pension, rather than how well off they would be on the State Pension. As long as you get that message across in a sensitive fashion, then it can encourage people. If you frighten people, then they can just turn a blind eye to all of it. That is why I do not like these figures like £27 billion. It just makes it look as though the task is unattainable. Like Mr Sandler, I am an optimist and think that sufficiency for most people is attainable, particularly if, in addition to finding new distribution routes, we do not lose sight of the place of work as being a conduit for both savings products, pension schemes and access to sales people or advisers. So the answer to your questions that you have not asked is that do not give up on the workplace as being the environment in which to bring people face to face with a wide range of savings options. That is the more cost effective replacement for the industrial branch life office salesman who used to come round on a Friday evening.

  62. I remember him coming round to our house when I was a girl as well. Mr Sandler, do you want to comment?
  (Mr Sandler) Only in so far as, for me, the issue is not about scaring people or encouraging people. The issues are actually about giving them proper information that is reliable, that is meaningful to them and they can act upon in sensible rational ways. And pensions forecasting is a very important part of this process, not just State Pensions forecasting, but actually this joined up forecast which aligns any occupational entitlements that people have to their sense of what they can get from the State. The more we can arm people with appropriate information, the more confidence I have that people will ultimately start to make the right choices. I did make reference earlier on to the fact that there is a ton of survey work which says that people over-estimate what they are going to be getting in retirement. So I would like to dispel that over-estimation. I would like to give them much clearer facts and I think that there is work being done which will take us in that direction, but it is still some way off.

  63. Mr Sandler, may I follow up on that by asking you what comments you have had to the recommendation that was in your report that independent financial advisors should be paid up front rather than receive a commission?
  (Mr Sandler) That is not actually what I said; not that they should be paid up front. What I said is that the nature of the economic relationship should be determined between the consumer and his adviser. It can be deferred, it can be paid ad valorem, it can be paid contingent upon a sale being made. It does not have to be paid up front. The important bit is that the consumer knows, when he begins a relationship with an adviser, just what it is that he is buying in terms of advice. At the moment, we do not have a properly functioning market for advice. Most consumers do not know that they are purchasing financial advice. To the extent that they do know they are buying it, they do not know what it is costing them. They are in no position to evaluate whether or not they are receiving value for money in that provision of advice. So I want the economic relationship to exist, I still do, between consumers and their advisers, not the current state of affairs where most consumers are led to believe that advice is somehow free and they are not buying it. They have to work very hard to discover what commission their advisor is receiving and even then, it tends to be a disembodied piece of information at the end of the process where they cannot do anything with it once they learn it, to the extent they have actually worked their way through the key features document and discovered what it is. So it is a very unsatisfactory state of affairs and I think the FSA, in the last week or so, has certainly come a long way towards what it is that I am proposing and I hope that that trend continues and that we see a much better functioning market for advice in the years ahead.

Mr Mitchell

  64. Can I ask both of you the same question which, as a Committee, we were quite anxious to take your mind on. It is this; when we were calling for evidence, we asked what methods of saving, other than pensions, should play a part in the Government's forthcoming Green Paper and strategy. What I wanted to ask both of you really was this; are pensions generically the best way of saving for retirement for everyone or should they be? And do you have any comments to make on the position of the self employed in this, whose pension arrangements have attracted a lot of comment and which are quite difficult for us to disinter as a Committee. Could I ask Mr Pickering first?
  (Mr Pickering) Pensions are not the only way of saving for retirement.

  65. The best way.
  (Mr Pickering) They are the best way of producing an income stream that lasts as long as you do. That is what differentiates a pension from pure capital accumulation. So one wants to be saving through a pension scheme to provide a lifelong income. If one wants to build up a pool of accessible assets to be got at as and when, then there are more flexible, more attractive, more appropriate vehicles than a pension. The discipline of saving through a pension scheme means that the money is locked away and provides you with an income stream in retirement. Your second question?

  66. We wanted to take your advice on issues to do with the self employed.
  (Mr Pickering) Today's self employed are not the same as yesterday's. Yesterday's self employed were accountants, actuaries, lawyers. Today's self employed are many manual workers, engineering workers, building workers who have not got a business to sell at retirement in the same way as their white collar counterparts have. I think the first thing that we should do for the self employed is to bring them further into the State Pension system than they are at the moment. Particularly if, during the next 20 years or so, we get to my dream of a universal State Pension of 20 or 25 per cent of National Average Earnings, then the self employed should be involved in that to a greater extent than they have been in SERPS or the State Second Pension which the self employed are excluded from. So in looking at the needs of the self employed, I would urge you not to compartmentalise them and to realise that there are self employed people right across the industrial and professional spectrum and that there is not a one size fits all product that suits the self employed, in the same way that there is not a one size fits all product that suits the employed.

  67. Can I just ask you, because I was out of the room when you made the point, on your vision for 2030 is it a funded pension for everyone or a pension provided through the State?
  (Mr Pickering) No, I am a believer in the mixed economy approach to pension provision. I think it makes sense for State Pension promises to be financed on a pay-as-you-go basis by the taxpayer with other occupational or market place products being funded. At the moment we see the advantages of having that mixed economy because we have a fairly healthy economy where tax receipts are reasonably buoyant, so we can pay today's State Pensioners out of those tax receipts. However, the markets, the financial markets, are not quite so buoyant. Were we relying on those markets to pay pensions for everyone, State and private, we might be feeling an even bigger pinch than we are at the moment. So a mixed economy and, if I dare say it, I am not a big fan of giving politicians direct or indirect control over large pools of money. I think you would find it very difficult to keep your hands off this funded pension scheme. I think it is a problem that the Irish Government might face further down the road, because they have funded some of their State Pension liabilities, understandably they have had a decade of plenty and they have stored away some of that money, I remain to see whether that money will actually be used to pay for pensions or to pay for hospitals or whatever might be the top priority of the next decade.

  68. That is a very good point although, speaking for myself, I would rather trust in the markets to provide me with a pension than trust the promises of politicians for the future. Mr Sandler?
  (Mr Sandler) "Is a pension the best form of saving?" I think is as unanswerable a question as "Is a unit trust a better form of saving than a with-profits bond?" They are all different forms of saving. If you look at what is going on at the present time, and the data here go back to 1999, 58 per cent of retail savings in the form of pensions, the other 42 per cent being in the form of other sorts of products. Ultimately it is up to individual consumers to decide which particular set of product attributes meets their particular set of needs and then market equilibrium will be established. I do not think one form of product is better in any absolute sense than another, except perhaps when one gets into the realms of public finances. The Government may have other reasons for wishing savings to be in the form of pensions as opposed to in the form of with profits bonds, or in the form of OEICs[1], or unit trusts or any other form of savings product. Again, I have no view to offer there, but in general I am a great believer, as you, in market mechanisms and allowing consumers to make their choices on the basis of what is available to them. I would just want those choices to be informed choices, firstly, and secondly to ensure, as far as possible, that what is available to them is high quality, cost effective and delivers value for money.

  69. Do you have any advice to add to us on the self employed?
  (Mr Sandler) No, because we are getting into the realm of occupational pensions and that is not my territory.

Rob Marris

  70. The more we encourage people to save, are we creating a problem, in one sense, the law of unintended consequences, for future capital is already pretty cheap in this country—it is going negative in Japan and Switzerland—the more people save the more capital is being put in, in contra-distinction to a pay-as-you-go scheme, the more the stock market is dominated by pension funds. Is that going to be a problem in the future?
  (Mr Pickering) Which is why I am a mixed economist when it comes to funding pensions. If you are not careful, you just bid up the price of pieces of paper without creating any new capital. One can adopt a broader view and say that there are countries overseas who could make use of this capital. So one way of helping the developed world is through our savings, but what we must not do is naively expect those countries to allow us to cream off a disproportionate amount of the wealth which they create in order to give us bigger pensions than they actually have as wages. So investing some of this capital overseas will soak up some of it, but one must not look for an easy ride on the back of a worker in a third world country.

  71. Thank you. Have you got any comments, Mr Sandler?
  (Mr Sandler) Not in addition, no.

Andrew Selous

  72. I am going to address my questions to both of you, but do not feel the need to both reply if one answer has already covered all the points that you are going to make. Just on a separate point, before we get on to working longer and active ageing and so on, do either of you consider that there should be any other means of funding State Pensions? For example, raising income tax?
  (Mr Pickering) Yes. If you were being really radical and really visionary, you would not try and convince the British electorate that we have actually got a 22 per cent tax rate when we have really got a 32 per cent tax rate if you include tax and National Insurance contributions. I think that a hypothecated National Insurance Contribution Fund has outlived its usefulness and I would rather see us financing State Pensions out of general taxation. Not the least reason being that there are some quite wealthy elderly people who do not pay National Insurance Contributions and are therefore given a much easier tax ride than their younger brethren with a much lower take home pay. Now, I would not even expect a Committee as radical as you to suggest that we abolish the National Insurance Fund and amalgamate the two contributions, but I would argue that there is a very powerful intellectual logic for so doing, if not political logic for so doing.

  73. Moving on to another politically sensitive area, it was suggested in the media, before the launch of your report, Mr Pickering, that you were going to come out with recommending an increase of the age at which the State Pension was paid to 70 years. Would you both agree with those who submitted evidence to this inquiry that an increase in pension age is both inevitable and right, given increased health outcomes? And would either of you have comments on what particular age you might have in mind?
  (Mr Pickering) The reason why people expected my report to contain those sentiments was that I expressed those sentiments back in 1997 when I said I felt that it was nonsense to have a State Pension age of 65 now when Lloyd George, back in 1908, had a State Pension age of 70 when few people reached age 60; not a very generous State Pension system that very few people benefited from. State Pension age really should have more to do with expected date of death than actual date of retirement. The reason why my report did not mention State Pension age is that our recommendations were about the private pension legislation for which the Department for Work and Pensions is responsible. I very briefly repeat what I said earlier in that I think it is sensible to say to the electorate that once we have equalised female pension ages at 65 in 2020, that we then carry on through the 2020s phasing an increase for both sexes up to age 70. So that the State's definition of old would be 70. That would not be the universal retirement age. Some people would want to retire and be able to retire earlier. Some people would want to work on longer. Retirement should not be a cliff edge experience. You should mix and match work and retirement, pay and pension. This is not a charter for white collar people alone, as I said in my opening remarks. One should not assume that once a plumber, always a plumber. Provided that we have lifelong access to learning, there is no reason why people should not be re-trained, re-directed in later life to continue making a useful economic contribution beyond the age that most people do at the moment. What a 60 year old today needs is not a pension, it is a job. What one has to emphasise is that I am not saying that today's 60 year olds should have to wait until 70 to get their State Pension. This is an increase which will be phased in during the 2020s and will only affect people who are currently in their 40s or below.

  74. Do you think that final salary schemes need to be redesigned to discourage early retirement and reward people working past the age of 65?
  (Mr Pickering) Some of the difficulties inherent within the final salary system are the result of outdated tax rules, not necessarily the fault of scheme design. But as I said earlier on when talking about the pendulum swinging back from money purchase to defined benefits, I am a big fan of the revalued career average approach to defined benefit pensions so that you take some of the emphasis off your final pay. I think that a revalue clear average approach provides a much easier mechanism for phasing out of full-time work, through part-time work, into eventual full-time retirement. It is a much more conducive vehicle to allow that than a final pay plan which was predicated on the basis that you worked flat out one week and laid flat out the next week. Life should not be like that.


  75. I would like you both to consider just doing short concluding statements. I would value your advice about what you think can be done now. Where do we go from here? Mr Pickering started at the beginning by saying that trying to get some political consensus is important and I certainly personally believe that to be true, but some of your ideas that you have been expounding and expanding on this morning are quite radical and that makes it harder to get political consensus. To an extent, if you go to make consensus—one of the priorities for the Committee in the course of this inquiry—the temptation is to stay in the margins. How do you get round that? Have you got any advice for us on how we might do this?
  (Mr Pickering) I do not underestimate the political challenge that people like you face because there are not votes in sorting out, modernising the private pension system. There are probably more votes to be lost from doing something than doing nothing. So there will inevitably be some short-term pain, even if that short-term pain can flow through eventually to long-term gain. The real fear on the part of any incumbent Government is that they suffer the pain and someone else gets the gain, which is why I would suggest that you go for cross-party consensus. This point in our history is one where, I would suggest, you are more likely to get cross-party agreement on a radical solution than in any other decade because the electorate are telling you to do something. The electorate knows that people are living longer. The electorate really knows that because we are living longer we have to change the way we work, change the way we pension ourselves. I believe that if the politicians give a lead, and a joint lead, then there are people in the private sector, employers, unionists, employers' unions and unionists, no doubt, but unions and professional people who will stand up and say "Yes, if society wants big pensions, society has got to pay big contributions" and through simplification and returning the regulator to the boundary, we will make sure that a large proportion of each pound paid in is used to the contributor's benefit, not to the benefit of the manufacturer of red tape. The other point that I would make, and it is one that I have made before to you, is that when dealing with the issue of pensions, do not forget the working dimension and the active ageing. Increased longevity is good news. Never has such a good news story being given such a bad press. But the way in which we come to terms with good news cannot be found purely in the pension system. It has to affect the way we organise our working lives. Lifelong learning should give access to lifelong earning and lifelong earning will make sure that our pension system delivers a realistic benefit to a greater proportion of your electors than the present system is doing.
  (Mr Sandler) I certainly would not presume to give advice to a group of politicians about how to manage a political process. I tread more cautiously. I am acutely aware that when one deals with the subject of pensions, which indeed is your remit, you are in very emotive territory and you are dealing with very complicated and difficult interactions between public provision and private provision and between the workplace and individual provision outside of the workplace. Trying to square all of those circles, I think, is ferociously complicated and frankly I do not envy you your task and frankly I was delighted that it was not my task when I did the work that I did. But if you look a little sideways, without in any way wishing to minimise the importance of sorting out the pensions arena, if you just look at savings more broadly, I do contend that there is a great deal that can be done to encourage more effective operation of savings markets and savings attitudes in this country, which does not necessarily touch upon or disturb some of the core pensions issues but creates an environment in which a very wide body of people are likely to be more willing and more able to engage in the savings process and perhaps, in the process, diffuse some of the difficulties of sorting out that which specifically relates to pensions. I have sought to put forward some ideas, I am sure there are a raft of others, but I am absolutely persuaded that we can make savings an altogether more agreeable activity in this country than it has been hitherto.

  76. I am struck that you are both so optimistic. I do not know why you are not both tearing your hair out more. That is very interesting. Of course, the other thing is that you both make it sound very seductively simply and straightforward, which I am sure it is not.
  (Mr Pickering) It is.

  Chairman: Famous last words. Those are all our questions. I just really thank you both very much indeed. It was a very compelling and thought provoking session that we have had. It has started our inquiry on a very positive note and we are grateful to you both for coming. Thank you very much indeed. The Committee stands suspended.

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