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Pensions Bill debate

18th October 2011

Harriett Baldwin proposes a new clause which requires pension providers to inform members at the point when they come to convert their pension pot into retirement income that they can shop around for the best product .

Harriett Baldwin: I should like to discuss auto-enrolment in general, and new clause 1 in particular. The new clause has been tabled in my name and those of my colleagues on the Work and Pensions Select Committee and several other hon. Friends. This part of the Bill enjoys much greater cross-party consensus than the matters that we were discussing earlier.

Auto-enrolment will improve the pensions landscape in this country for ever. For the first time, millions of ordinary workers will be brought into personal pensions. Between 3 million and 4 million women will begin pension savings, and a total of 10 million pension savers could be created by the massive nudge that they will get from this part of the Bill.

For a typical worker on an average income, the expectation is that, from the age of 22 until their retirement at, say, 67, there is much more likely to be a persistency of saving. For example, a woman earning £25,000 who is saving 5% of her income would save £100 a month. Her employer would make up a similar amount and, with tax breaks over her working lifetime and reasonable investment growth, that regular savings habit could create a pot worth some £200,000 in today’s money. Pessimists have said that that would provide an income of only about 45% of that person’s earnings in retirement, but I say that that is 45% more than they would have had without this enormous nudge. I welcome this step, which I believe will, in the fullness of time, reduce the number of my constituents who as pensioners really worry about making ends meet.

8.45 pm

Albert Einstein described compound interest as the eighth wonder of the world, but sadly too many Britons have learned only about the negative effects of compound interest on their credit cards. However, with auto-enrolment in pension savings, many more will learn of the plus side for their personal balance-sheets.

New clause 1 was tabled because many of us are concerned about the point at which individuals retire and convert their pot of money into their retirement income. According to the Minister earlier, about 60% of people with such a retirement pot do not move to another provider at the time they take their retirement income. Just as auto-enrolment is designed to nudge a person out of inertia about their pensions savings, so new clause 1 would give a person a great big nudge to prevent them from failing to shop around for a better retirement income.

Dame Anne Begg: Does the hon. Lady accept that there might also be a nudge to the pension providers? If they know that they will not automatically get the business from those who have saved with them throughout the lifetime of their pension savings scheme and that that group of people is likely to shop around, those pension providers might improve the annuity on offer to individuals.

Harriett Baldwin: That is an excellent point, and I hope we all fervently agree that competition in this area would be an excellent improvement. Locking in your retirement income is the second most important financial decision that you will ever make. I apologise; I do not mean you, Madam Deputy Speaker, but an individual.

Unlike buying a house, however, it is a completely irreversible decision—one that will last for the rest of the individual’s life.

The different rates offered by different providers could mean one’s retirement income being as much as 20% lower if one does not shop around. If we are unlucky enough to suffer from high blood pressure, diabetes, a heart condition, kidney failure, certain types of cancer, multiple sclerosis or chronic asthma or if we smoke, the one bright side is that a 40% higher retirement income could be achieved by shopping around. People who have enjoyed good health in their career but been in a hazardous occupation such as mining might find someone who will offer them a better retirement income. The right hon. Member for Croydon North (Malcolm Wicks), who is no longer in his place, knows that this does not apply to the state pension, but for the pensions we are talking about that involve the insurance market, those factors do apply. My fellow Select Committee members and I thus feel strongly about the value of this particular approach.

Kate Green: I am pleased to welcome the hon. Lady’s new clause. Does she agree that many people are reluctant or even in denial when it comes to facing decisions about their pensions and that there is a real opportunity here to spread a good news message about both the value of saving and making positive decisions about how to invest the product of that saving, thus providing an opportunity for the pensions industry to get on the front foot in engaging people in their long-term financial security?

Harriett Baldwin: I welcome that sensible intervention. I think this will completely transform the landscape. I spoke about an individual with a £200,000 lump sum at retirement. If we multiply that by the up to 10 million additional savers that we could be looking at, it shows how this country’s savings culture is going to be transformed. The scale of the issue to which new clause 1 refers will get much bigger over time.

The Minister reassured us in his earlier comments that there is a cross-departmental working group. I certainly hope that that group will move quickly to come up with some firm recommendations. I know that all who are signatories to this particular new clause look forward to that. We look forward, too, to seeing the action that will come about as a result.

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Harriett Baldwin: I thank the hon. Gentleman for giving way, welcome him to his post and declare an interest also as a woman whose state pension age was increased to 66 under the previous Government. Given the £10 billion—

Mr Duncan Smith: Eleven billion.

Harriett Baldwin: Eleven billion, that’s right.

Given the £11 billion commitment that the hon. Gentleman is making, and the £12.5 billion commitment that the shadow Chancellor has made, at what point do these billions of pounds add up to real money in the minds of Labour Front Benchers?

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Harriett Baldwin: Does the right hon. Gentleman not welcome, as I do, the additional £25 billion going into the triple lock of the state pension, which, as of today, will protect pensioners from the rise in inflation?

Malcolm Wicks: That issue—how the shift from the retail prices index to the consumer prices index will affect the real value of pensions in future—is a subject for another day, although colleagues might want to touch on it today. My guess is that that shift, which seems quite dry and technical, will become the big pensions swindle of the 21st century. I am therefore not quite as impressed by the triple lock as the loyalist hon. Lady is.

Harriett Baldwin rose—

Malcolm Wicks: However, I will give her another chance.

Harriett Baldwin: Does the right hon. Gentleman not acknowledge that whereas his proposal was to uprate the state pension in line with average earnings, which would mean an increase of 1.8%, the triple lock chooses the best of the three? That is an incredibly important reinforcement of our state pension.

Malcolm Wicks: Yes, but I hope that the hon. Lady will consider my point about CPI and RPI, because we are talking about billions of pounds that could be lost to British pensioners when that change is implemented over coming decades.

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Harriett Baldwin: Is the Chair of the Select Committee confirming that a pledge to reverse the position, in line with the amendment, will not feature in the next Labour manifesto?

Dame Anne Begg: I may be Chair of the Select Committee, but I am afraid that I have no direct say in what should be in a Labour or any other manifesto. However, common sense tells us that whoever is in power after the next election—the Liberal Democrats might have a majority then, and might want to reverse the arrangement—voting against the amendment tonight will remove any chance of our ever finding a solution for this group of women. Events will have moved on, the timetable will have been set, and the pension age will have already changed by the time of the next election. That is what I mean about the lack of time in which to plan.

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