Examination of Witnesses(Questions 60-76)|
6 NOVEMBER 2002
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.
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
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
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.
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
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
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
(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,
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
(Mr Sandler) No, because we are getting into the realm
of occupational pensions and that is not my territory.
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 countryit
is going negative in Japan and Switzerlandthe 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
(Mr Sandler) Not in addition, no.
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
(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 consensusone of the priorities for the Committee
in the course of this inquirythe 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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