6 NOVEMBER 2002
Mr Archy Kirkwood, in the Chair
Memoranda submitted by Mr Alan Pickering and Mr Ron Sandler
Examination of Witnesses
MR ALAN PICKERING, Partner, Watson Wyatt Partners and MR RON SANDLER, Chairman, Computacentre plc and Kyte Group, examined.
(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 principle 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, Archie, 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 a profession; 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.
(Mr Pickering) I have never met a retiring politician.
(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.
(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.
(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.
(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 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.
(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. 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.
(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 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 per cent 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.
(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 it does now.
(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.
(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.
(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.
(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.
(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 weight into 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.
(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.
(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 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 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.
(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.
(Mr Sandler) If the advice is regulated and therefore it comes at a very considerable cost, then it is highly unlikely that they will be able to get much of that advice. That is the current state of affairs. If you look at the cost of distribution of these products, of financial products in general, those costs of distribution have risen by about 10 per cent per annum in real terms over the last 15 years. That means roughly a trebling of costs. It is interesting to pause and say why have the costs of distribution, advice, the advice to which you refer, why have those costs gone up so markedly over the last 15 years? Have the salaries of the advisers gone up by that sort of degree? Have the costs of petrol and all of the other ancillary costs of getting people into a face to face situation gone up? The answer is no. What has gone up is the level of regulation which attaches to that process. For very sound reasons; it is governed by the references made earlier to financial scandals. The level of regulation has gone up proportionate to the perceived requirement to protect consumers against the detriment which has arisen in areas such as Equitable. But because those costs of regulation have gone up in the way that they have, it is very difficult to get regulated advice to those consumers. It is not difficult to get unregulated advice to those consumers. If one regulates the product as opposed to the process by which that product is delivered, then the economics can be very substantially transformed.
(Mr Sandler) There is a big debate as to whether one per cent is precisely the right number and that debate is unfolding and we will see ultimately where it gets to. But there is no doubt in my mind that it is firstly necessary to regulate the price of these products, because otherwise consumers would be subject to the potential detriment of excess charging. It is also equally clear to me that unless there was sufficient margin built into these products, no one is going to manufacture them and distribute them. So there clearly has to be some equilibration here where there is sufficient profit in the products, but nonetheless not excess profits that consumers are unlikely to be overcharged. Whether that number is one per cent or not, time will tell. But I am quite confident that the economics can be substantially improved through the process of regulating the product as opposed to regulating the advice process. I would say, in addition, that the availability of those products, if they are accompanied by a properly resourced campaign of awareness building, which contains within it the need to save, then I believe we can go a long way towards encouraging consumers into the net. At the moment there is a slightly disembodied campaign "You need to save more" but I cannot actually then deliver the product to you in order to give you a solution to the problem that I am now putting in front of you, I do not think that takes you anywhere. If at the same time as the new suite is introduced alongside it there is a serious concerted campaign to build awareness as to the product attributes and a degree of comfort on behalf of the consumers with what it is that they will be purchasing and, at the same time, an awareness as to the need to save in greater amounts, I believe that substantial progress can be made.
(Mr Pickering) I am not intensely critical of the fact that Stakeholders are being bought by some people who are quite well off or even bought by them on behalf of their grandchildren. If Stakeholders were just to have become a poor person's pension vehicle, then we would not have had the consumer protection that one gets from having articulate, well-heeled people subscribing to the products that are in the interests of mass society, rich and poor alike. So I would say on Stakeholders; so far, so good. For the future, however, I would say that there has to be a profit margin in running Stakeholders. Nothing wrong in making a profit from selling a financial product in the same way that there is nothing wrong in making a profit from selling a car. I think that one of the ways that we square the circle is to use the workplace as a much more effective delivery mechanism than we do at the moment. It is very difficult for employers, because of the Financial Services and Markets Act, to do anything more than designate a Stakeholder. They cannot market that Stakeholder. They cannot sell that Stakeholder to the workforce, either on their own or in concert with a properly qualified financial salesman. We need to change the law in order to give effect to public policy, by allowing employers to put a lot more weight behind the marketing of Stakeholders and to make contributions to those Stakeholders, rather than simply designate.
(Mr Pickering) I believe that there should be greater compulsion within the State sector. I have already mentioned that. I am not yet convinced that we need more compulsion in the private sector. There are too many disincentives at the moment. Let us remove those disincentives, bureaucratic barriers to easy pension accumulation. Let the Government in the Green Paper think about what sort of incentives it may want to offer employers and employees to make pension provision. At this stage, I do not think the case for increased compulsion has been made. Compelling employers alone would simply make another payroll tax and I do not know how high one can push the payroll tax before employing people becomes uneconomic. If one compels employees, do you compel all employees? If you do not compel the poor, when does someone become rich enough to be compelled? If you do not compel the young, when do they become old enough to be compelled? And above all, if one compels people to save into a money purchase pension scheme where £50 paid in becomes £40 overnight because of market movements, and that is on a good day, then that really can be seen as a stealth tax to end all stealth taxes and would bring the pension system into disrepute. I have not yet given up on voluntarism.
(Mr Pickering) I agree with Ron, my words not his. Most people need a salesman. No matter how simple you make these products, they will not sell themselves. Most people need a salesman. Most people do not, however, need a salesman who is an afficionado of inheritance tax planning. At the moment, the financial services infrastructure makes it very difficult to bring a salesman face to face with a consumer with very simple needs, without going through a very costly rigmarole of the sort of tests that one would apply if one was dealing with a more well-heeled person with more complicated needs.
(Mr Pickering) There is a lot that the Government can do and it can do it at no cost. Savings, whether it is by means of a pension or non-pension savings, is an over-regulated activity. That regulation costs money. That regulation ultimately costs the consumer money. Savings through pensions, through other forms of wealth accumulation should be made much easier, should be easier for employers to pay their part than it is at the moment. There are an awful lot of own costs associated with running a pension scheme. Many of those own costs are avoidable. Government can make a tremendous contribution by simply withdrawing to the boundary or the touch line and allowing employers and employees to get on with it, allowing market participants and their customers to get on with it. Yes, we do need regulation in a market place where there will always be an asymmetry of information between provider and consumer, but that regulation should be on the boundary. We should not assume that every employer who runs a pension scheme is going to welch on his promise. We must not assume that every commercial provider is going to indulge in mis-selling. And yet much of the regulatory system at the moment makes both of those assumptions. We all pay the price. Those who are paying the biggest price are those who are kept outside our pensions fortress because the entry fees have become too steep.
(Mr Sandler) Can I come back to that question? Can I answer your previous question, which is; is there a role for Government in overcoming the savings gap? To which my response is that there are a whole raft of recommendations in here which are directed specifically to that point. Unequivocally my answer is yes, there is a huge amount that the Government can do to assist in overcoming the savings gap, either directly through the Stakeholder suite, which is a specific proposal aimed specifically at that problem. But even if you look at the whole range of other reforms that I have proposed here, including tax simplification, including reform of with profits, including reform of the distribution process aligning the interests of consumers more directly with their advisors, including the improvements in education, they all direct, in one way or another, towards a more effective savings market in which consumers are encouraged to participate and therefore we would be making progress towards overcoming this savings gap. No, I do not think that the impact of Government should be specifically directed solely towards those at the lower end of the socio-economic spectrum. I think there are very specific needs there which have to be addressed in a very specific way, but the savings industry serves the totality of the population. The savings industry has within it areas where improvements can be made and I do not believe that those improvements should be specifically directed at one sub-segment.
(Mr Sandler) I cannot answer the question. I do not think I have a clear enough view of the totality of Alan's position on regulation. I can talk to mine very happily and that is the statement that you referred to that improvements in the regulatory process have enhanced the quality of consumer protection in this country over the last 10 or 15 years, is absolutely the case. But importantly, it has come at a cost and that cost has been loosely the disenfranchisement of the lower end of the market. So I do not think ----
(Mr Sandler) Yes. That is another expression of it, but yes. So I am not proposing rolling back the frontiers of consumer protection. Absolutely not. What I am saying is that there is an alternative way of delivering consumer protection for a particular part of the market place and that is the proposal that has already been referred to in the evidence thus far.
(Mr Sandler) Indeed.
(Mr Sandler) It is certainly true that the person who sells you a car, yes he may have certain requirements in law in terms of the way consumer law operates, but he does not have an explicit requirement to deliver something that is suitable to you and you do not have recourse against him if, in fact, the product proves to be unsuitable. Which is the way the sales of financial products currently are regulated in this country. I have no wish to prevent consumers from accessing the full suite of products that exist today through a regulated sales process. I would not wish to interfere with that at all. That is a perfectly satisfactory way of doing things for very many people in this country and it builds a degree of creativity and a degree of innovation into the way the financial industry operates and may it continue. However, the corollary of that is that there is a part of the market which does not get approached by the industry because it is not economic to serve that part of the market. If we do not do anything, then that part of the market remains unserved. So in addition to the present system, which is the regulation of the sales and advice process, my proposal is that there should be the offering, the delivery of a specific suite of very simple, plain vanilla, regulated products which come as close to being universally suitable as one can make them, in the same way that we have today a situation whereby life assurance is not sold on a regulated basis. There is no question of suitability in the sale of life assurance. In pure life assurance, the protection, there is no regulation of that process. There is no regulation of the sale of a bank deposit account. That is regarded as a universally suitable product. So if someone is sold a bank deposit account and it proves to be unsuitable, they have no recourse against the sales agent. What we can do here is create a suite of products which are, in terms of risk and return, one step up from a bank deposit, a low risk diversified product.
(Mr Sandler) I am not talking about simplification here as such. What I am talking about is regulation, regulation of the product. At the moment products are not regulated, except in extremis. There is a body of unit trust regulation.
(Mr Sandler) I am talking about a different form of regulation. I am talking about replacing sales regulation with product regulation for a particular part of the market.
(Mr Sandler) The statement is disembodied. I would need to see the context to be able to respond ----
(Mr Pickering) Let me answer the question and then either Ron can say whether he disagrees with me or you can say whether you think he disagrees with me from what we have both said. Traditionally there have been two routes through which people have accessed pensions; either through the workplace or through the market place. I think that in future increasingly market place products will be delivered through the workplace for the reasons that I gave when answering Anne Begg's question that you get the economies of scale from delivery through the workplace. But if you just look at how both workplace and market place pensions are currently regulated, you will see that hard cases make bad law. So I am arguing for both less regulation and a different sort of regulation. At the workplace the 1995 Pensions Act was a political response to the Maxwell scandal. The Maxwell scandal was dire, in the short term at least, for those directly involved. But in the wake of the Maxwell situation we were subject to a Pensions Act which assumed that every scheme was a likely Maxwell. A very prescriptive approach to running and regulating a pension scheme, to such an extent where many employers are saying; providing a pension is expensive enough in itself, suffering all the compliance bureaucracy is a cost too far, so give the people a pay rise and scrap the pension scheme. It is a law of unintended consequences. The well intentioned Pensions Act created so much red tape that I would suggest that it would make it easier for a new Maxwell rather than more difficult, because he could sneak in behind the red tape and you would not see him coming.
(Mr Pickering) That is the second ----
(Mr Pickering) The evidence suggests that the Pensions Act has contributed to a significant level of dumbing down within the pension system as people indulge in regulatory arbitrage and move away from the more heavily regulated products, ie a defined benefit employer sponsored pension scheme, and replace it with a group personal pension plan where there is regulation of a different sort, but it is regulation which does not affect the employer to the same extent. I do want to come back to the market place issue and pick up on your comment of mis-selling because the way in which the market providers of pensions are regulated assumes that every seller is going to indulge in mis-selling. So we have exchanged the risk of mis-selling for the certainty of not selling. I would remind you that although many commercial providers might have abused the personal pension market place, the grand rules for that market place were created by politicians who, back in 1988 when personal pensions were launched, said that before you could take out a personal pension you had to give up membership of your occupational pension scheme. That was absolutely barmy. What we should have said is that if you want a personal pension plan, if you can afford it, then have both. It was because politicians, tax collectors, a combination of the two, said that we are not going to allow people to have both a workplace pension and a market place pension. But society has paid that awful financial cost for mis-selling and indeed society has branded the pensions industry as being the fiefdom of the mis-seller. A lot of that goes back to regulation which prevented sellers from selling personal pensions in addition to rather than instead of workplace pensions. Another example of over-regulation producing dramatically unintended consequences.
(Mr Pickering) When I refer to professionals in our report, I refer to professionals in the round, not just sales people who should be more professional in the way they do their work, but also the actuaries and people who advise on the running of pension schemes. At the moment, because of the Pensions Act, we have a check list approach to running a pension scheme, to advising on a pension scheme. We are driving out professional ingenuity and replacing it by a tick box mentality. I do not mind tick box mentality, so long as the last box says "now engage brain". At the moment far too many professionals are being prevented from exercising their judgment because of the check list approach and pensions is not immune from that malaise.
(Mr Pickering) Yes, I would like to repeal all existing pensions legislation for which the DWP is responsible and to pilot a new kind of Pensions Act, a Pensions Act which places the emphasis on what the Government wants to achieve through legislating, not to then flesh that out with page after page of prescriptive detail of how that achievement should be brought about. There may be some scope for prescription. Perhaps when one is dealing with priorities on scheme wind up, public policy may say that we want to impose a pecking order here. We are not blindly advocating a Pensions Act which is solely based on principle, but one which is mainly based on principle. Not only that, that any subsequent attempts to legislate for private pensions must be measured against the four key principles that we mention in the report; that it is proportionate, pointed and fits in with existing legislation.
(Mr Pickering) I think, without sounding pejorative, that most consumers do not know that there is a 500 page Pensions Act. What consumers do know is that many of their employers are finding the going tough for running a pension scheme. Many commercial providers who used to knock on the front door to sell pensions are no longer doing so. If we can have a slimmed down Act of Parliament, not only will we provide focussed risk based regulation, but we will take an awful lot of cost out of the system so that a greater proportion of every pound spent on pensions is actually spent on pensions and not on red tape.
(Mr Pickering) Yes, I have said that by 2030 my own view is that there should be one universal State Pension out of which neither rich nor poor will contract out. The challenge, as ever, is to get from where we are to where we want to end up. Contracting out is enshrined in our system at the moment and we said in our report that there are two schools of thought. One which says abolish it because it is past its sell-by date, another which says that it is redeemable if the terms are made attractive. I think that as the Government prepares the Green Paper and decides on how best to allocate taxpayers' money to incentivise pension accumulation, the continuation of contracting out does need to be put under the spotlight. If the Government does nothing, then it is going to lose contracting out by default anyway because the bureaucracy is over-burdensome and the financial deal is too tight.
(Mr Pickering) I would abolish it by 2030 definitely.
(Mr Pickering) I think the case for moving quickly to a universal State Pension is compelling, but I would not wish to make a statement on contracting out alone which does not have due regard to tax incentives and other incentives. But I am unequivocally happy to say that contracting out should not remain a permanent feature of the UK pension system.
(Mr Sandler) Without being specific as to pensions for a moment, I will come onto pensions, if I may, one of the interesting pieces of work which the team who helped me on this uncovered relates to the whole question of tax incentives as a device for encouraging further savings. There is a wide body of evidence which suggests that tax incentives do not actually stimulate new savings. What they do is they redirect savings which would, in the main, otherwise have taken place towards more tax efficient vehicles. Furthermore the provision of tax incentives actually adds further cost and complexity to the system. So there is a clear negative associated with introducing tax incentives to stimulate savings and no clear evidence - in fact arguably no evidence at all - that new savings are actually stimulated, that people consume less when confronted by new tax incentives. Which led me to the message which is contained within this review, the message to Governments both now and in the future, that the driving objective of tax policy in this area, the savings area, should be on simplification and cutting through this Gordian knot of tax complexity that has been built up, rather than adding further complexity to the system by putting new tax incentives on the statute books. As far as pensions specifically is concerned, pensions is one form of saving. It is a very particular form of saving. There is no question that tax incentives, correctly applied, do drive savings away from non-pensions vehicles towards pensions vehicles. Whether that is enough or to the correct level, I am in no position to say. Roughly 50 per cent of private savings in this country are in pensions vehicles. I do not think it is for me, or indeed anyone else, to say that 50 per cent is the right number as opposed to 70 per cent or 20 per cent. We can all talk about savings inadequacy, but should that savings be in the form of pensions as opposed to in the form of some other financial vehicle, I am not sure that there is any objective answer to that question.
(Mr Pickering) We see figures that suggest that tax incentives to pension schemes cost the Exchequer or the taxpayer £14 billion a year and it is quite natural that those such as you, charged with the responsibility of guarding the public purse, want to know whether the public is getting value for money for that £14 billion. However, you have to remember that it is more tax deferral than a tax incentive. You ultimately pay tax on your pension if you draw enough to lift you above the personal retired persons allowance. It is more tax deferral than a tax incentive. But I think that tax deferral is a very important incentive to persuade people to save long term. The fact that you do not pay tax on the money until you actually have the money at your disposal to spend is perhaps the only reason why people would save through a long term pension savings vehicle rather than through a bank account or an ISA because the net effect of the ISA tax regime is not much more attractive to a basic rate taxpayer than the tax regime applicable to a pension scheme. So tax incentives, although helpful, perhaps are not helpful enough and therefore, as the Government searches for ways, in Andrew Smith's words, of aligning incentives for employers and employees to save through a pension, one may have to look slightly wider than pure tax incentives. There are examples from overseas where employers are given some incentive to remunerate the workforce partly in pension form. We have already heard discussion about Government financed baby bonds to get babies in the savings habit. One could use similar public subsidies to give a Stakeholder Pension a kick start. So I would suggest that you, as politicians, should not just look at tax incentives, contracting out rebates or other forms of incentive in watertight compartments. One has to take a holistic view as to how much of the taxpayer's hard earned money does one want to use to incentivise saving through a pension. And there are a number of ways of putting those incentives in the system; tax deferral is but one of them.
(Mr Pickering) What you must not do is compartmentalise people into basic rate taxpayers or higher rate taxpayers. There are some manual workers who have good years and bad years. There are some white collar workers who have good years and bad years. We really want to encourage them to save as much as they can when they are going through their good years. So I would not withdraw 40 per cent tax deferral. One could think about providing basic rate taxpayers with notional 40 per cent tax relief on their contributions. What one must not do is leave the employer out of this equation because all the evidence suggests that those who are better off in retirement are those who have had an employer who has played an active part in pension accumulation. We can make life easier for employers by removing some of the current needless bureaucracy. You may well want to think about providing other more tangible incentives for UK employers, like their US counterparts, to remunerate the workforce in part pension form rather than in purely cash form.
(Mr Pickering) Yes, that is one way of doing it. And indeed, one of the ways the Americans look at it is through take up. If you have take up across the income spectrum within your company, you are put at fiscal advantage vis-à-vis those of your competitors who only have take up at the top end of the income scale.
(Mr Sandler) No, I do not think I do. I think we are getting here into the realms of pensions policy specifically and that is not an area that I spent any time looking at.
(Mr Pickering) It is all part of the bigger picture that I mentioned before. It does not really matter what you call it. If my savings are boosted by a payment from someone else, then it makes that savings process more attractive. At the moment, if you take out a Stakeholder Pension, if you put in, say, £2,808 then the rest of us as taxpayers gross that up to £3,600, so it is a very visible enhancement; 2,808 in becomes 3,600 immediately when you get the tax back. Now I do not care whether you call that tax back or buy one get one free, it is actually providing a supplement to the next contribution that the consumer themselves makes.
(Mr Sandler) I do devote a section of the report specifically to that issue and come to the conclusion that there is evidence out there that matching schemes are more beneficial in terms of creating some incentive for people to save. That, by and large, when confronted by the prospect of an enhanced tax relief or some form of tax relief, most consumers do not know how to evaluate that and are not particularly motivated by that particular thought, but the concept of having a contribution towards some savings vehicle matched in monetary terms, to some degree by some third party, is something which people tend to have a positive reaction to and therefore, again, there is a message here which says that those sorts of schemes are more likely to have applicability.
(Mr Pickering) Yes. What we have not got at the moment is a proper savings hierarchy. Although the contributions that you pay into your ISA are after taxed income, you can take the proceeds out entirely tax free. In a pension scheme your contributions are tax deductible, but the output is, by and large, taxed. So the net effect is the same. In an ISA your contributions - in a technical terms it is TEE - are tax exempt exempt. Whereas in the pension scheme it is largely exempt taxed. The net effect for a 22 per cent taxpayer who has not got a capital gains tax problem is that an ISA, in purely tax terms, ignoring employer contributions to pension schemes, is very attractive because of its innate flexibility, flexibility which is not present in a pension scheme.
(Mr Pickering) Only if there is an employer contribution.
(Mr Pickering) I would differ with you on that. From a 22 per cent taxpayer's point of view, the only thing that gives the pension the head start is the fact that you can take some of the proceeds tax free at retirement. That is the only thing that gives a pension scheme a head start over an ISA, unless there is an employer contribution and when we are talking about basic rate taxpayers.
(Mr Pickering) We will do the sums afterwards.
(Mr Pickering) I do not think that the Government should do anything to encourage particular sorts of pension provision. Government should create a level playing field where employers and employees can jointly decide whether they want a defined benefit scheme or a defined contribution scheme. The Government's real concern is not with scheme design, but with the size of the contribution. Whether it is defined benefit or money purchase obviously has an impact on who bears the investment risk, but other things being equal, the same level of contribution paid into either sort of scheme should produce the same output if an identical investment strategy is pursued. There are lots of other things being equal there that are not always equal, but the Government's concern should be to make sure that employers pay hefty contributions. It is then for employers and employees to determine whether that is in the defined benefit vehicle, a money purchase vehicle or a mixture of the two. The employer underwrites a chunk of the risk up to a certain level and then the members shoulder the risk beyond that level.
(Mr Pickering) It might have a marginal effect this time round, but what it will do is allow the pendulum to swing back much more easily than would be the case if there was still this very steep difference between an employer sponsored defined benefit scheme, where the Government gets involved in minute detail with scheme design, when compared with a money purchase scheme, where the Government does not affect the employer at all in terms of scheme design. The pendulum has, in the past, swung periodically from defined benefit to money purchase and I am sure it will swing back from money purchase to defined benefit again in the future. Not necessarily a final pace gain, but a revalued clear average scheme which is a much fairer form of defined benefit scheme. So in the short term, we might make a marginal difference. In the long term, I think we will make a substantial difference if the Government accepts our recommendations in allowing scheme design to be undertaken at the workplace rather than in Parliament.
(Mr Pickering) Yes.
(Mr Pickering) Some of the problems are based on unrealistic expectations. Not all, but some people are expecting the pension system to deliver more than it was ever promising. People get this two thirds figure in their mind and yet very few people are on course for a two thirds pension. The Pensions Act has been around since 1995 and has not really stopped the flow from defined benefit to money purchase and the accompanying reduction in employer contribution. So the Pensions Act is not providing the sort of consumer protection that you are looking for. I think what will give consumers a boost in their confidence is if the three main political parties put their shoulder behind a new kind of Pensions Act, a new kind of regulator which is much more risk based rather than bureaucratic box ticking based, so that it would really root out fraud rather than spend hours chasing a scheme where the pay clerk happened to be off sick and contributions were paid in late. That is what we are doing at the moment. It is an absolute nonsense. But I think we have all then got to say to the consumer that absolute security is absolutely unaffordable. If we try and build in so many insurance premiums to protect against every adverse eventuality, we will price the activity out of existence. I know that that is not a very palatable message to give, but there are other walks of life where people happily accept that absolute security is absolutely unaffordable. Your colleague spoke earlier on about buying a two seater sports car. Now, there is no absolute security of safety when driving a two seater sports car, but people still do it. And yet, when it comes to financial services, they chase this holy grail of guarantees as if guarantees cost nothing. Guarantees cost something.
(Mr Sandler) I think the question about confidence was really posed in the context of occupational schemes and that is an area where I have no particular views to offer. If, however, the question is posed more in terms of the area that I am a bit more qualified to express views on, confidence in the retail savings industry in general, it remains my belief that the fundamental absence of confidence that does exist, and there is plenty of evidence that this is the case, arises from consumers' inability to understand the industry. It just comes across as too opaque, too difficult, to complicated, too hard to engage with, requiring too much professional support, requiring expertise that they do not have and if you add to that the odd financial scandal that has emerged in the course of the last 10 or 15 years, pensions mis-selling, Equitable, endowment mortgages, split cap trusts, the combination of all of that simply serves to erode confidence still further. If you believe my view that it is in the inability of a consumer to understand what is going on that is the principle cause of the absence of trust and confidence, that can only be overcome by creating an industry which is easier to understand, which offers more simple products and more transparent ways where the consumer can look at one product, compare it with another and make a respectable choice and where he feels his advisor is actually acting for him as opposed to really being a commission-based salesman for the product provider, which is, in the main, the reality today. So again, a lot of the recommendations here drive towards that sort of world. I do believe that it is possible to bring a very considerable degree of consumer confidence of this industry over the passage of time.
(Mr Pickering) For the avoidance of doubt on that, in our report we did say that where employers wanted to make pension scheme membership a condition of employment, they should be allowed so to do. Again, this was an option open until 1988 when the Government then said that you could not make membership of a pension scheme a condition of employment. I do not know that there are thousands of employers queuing up out there wanting to make pension scheme membership a condition of employment, but if there are ten employers who want to and the law frustrates them, then that law is an ass.
(Mr Pickering) On the first issue, what we have said in our report is that an employer who wants to make pension scheme membership a condition of employment should pay a contribution so that it is not just the employee who is being compelled to contribute their own money, there is an employer contribution of at least, say, 4 per cent to give the process a kick start. You then asked me why should any employer want to do it. Before 1988 most employers who ran pension schemes did do it. They said to people "If you want to come and work for me, then you have to join my pension scheme" and they had all sorts of motives. Some paternalistic, some hard nosed commercial ones that having got a good quality person, you wanted to try and hang onto that good quality person and one way of doing that was to give them pension rights they might find it hard to replicate somewhere else. Now, today we are probably less paternalistic as a society, but there are some employers out there who do want to make sure that none of their employees fall through the net and all take full advantage of whatever pension provision is on offer at the workplace and I would not want to frustrate those employers in that desire.
(Mr Pickering) I am not saying that in order for a scheme to be made a condition of employment it has to be a final salary. All I am saying is that there should be an employer contribution of at least 4 per cent and I think that there is already a perceptible change in the recruitment market in that people are now saying to potential recruits "If you come and work for me, there is a good pension scheme". In the past, employers never got all the burn for the buck that they deserved in running such a scheme. One of the positives flowing from increased media attention in this field is that people will increasingly value a pension that comes with the job rather than a job that comes without a pension.
(Mr Pickering) There are obviously black economy type effects which you do not need me to articulate here. There is the other danger to which you hint at the end, that if you have a compulsory minimum contribution, that then becomes the normal contribution. That can be overcome. The Australians began with a very low compulsory contribution rate and then over the years they have ratcheted that up to somewhere around 9 per cent, but I do not think in Australia that there is a lot of evidence that the majority of employers paid above the compulsory rate. So at least in the interim you run the risk of people dumbing down to the compulsory rather than remaining at their present level. But that is a marginal issue when compared with the other disadvantages of compulsion to which I referred earlier on.
(Mr Sandler) Again, the question is posed very much around employer compulsion and occupational schemes, so I sort of move out of that world and move into the world of compelling individual consumers to set money aside. I think that is a hugely complicated area. There are arguments for and against and I am certainly not in control of all of the merits of those respective arguments. I looked at the subject very briefly in the course of my work and all I would say, at this stage, is I know enough to know that you do not leap feet first into that world. There are all sorts of unanticipated consequences when you actually compel individual consumers to consume less and save more. But I would also say that there is a great deal that can be done to improve the way that this industry functions and it seems to me that it is not wholly advisable to leap straight into compulsion before all of the other avenues have been fully explored. That is not to say that they cannot be explored simultaneously, but my advice to the Government, to the FSA, to the industry is work hard to try and stimulate consumer demand through the more obvious levels rather than compel consumers to buy products where currently they are reluctant.
(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.
(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. Geoff 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 Ron, 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 advisors. 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.
(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.
(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 advisor. 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 advisor, 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 advisors, 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 Pickering) Pensions are not the only way of saving for retirement.
(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, Andrew?
(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 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.
(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.
(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 in here goes 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, 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.
(Mr Sandler) No, because we are getting into the realm of occupational pensions and that is not my territory.
(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.
(Mr Sandler) Not in addition, no.
(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.
(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 DWP 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.
(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, as I hinted 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.
(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 activating. 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.
(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.