Mr. Philip Dunne (Ludlow) (Con): I declare an interest, which is in the register. I am the director of an investment management company, which, while it is not directly involved in pensions, has some relevance to the debate.
I welcome the debate and the Turner commission's contribution to it. The lack of attention to the pensions crisis, which has been growing over the past eight years, is one of the major failings of this Government. I am delighted that they now plan to make some proposals, which we will study with interest when they are released.
I agree that there is a dire need to address the lack of savings in this country. The savings ratio has more than halved under this Government, from 9.3 per cent. in 1997 to 4.25 per cent. in 2004, according to the pre-Budget report. The UK has a substantially lower savings rate than our main European competitors-France, Germany and Italy-all of whom have a rate in the range of 10 to 11 per cent. The Secretary of State referred to the level of under-saving; indeed, some 10 million people in this country are not saving. It is clear that this group in particular need to increase their level of saving in order to make some contribution to providing for their old age.
My contention is that accelerating the means-testing of pension credit has significantly accelerated the disincentive to save that we have witnessed under this Government. I know that they do not agree with me because earlier this month, when I raised this issue with the Minister for Pensions Reform in this place, he said:
"There is very little evidence that means-testing, under the previous Government or this Government, has reduced saving on the part of pensioners, but since 1997 there has been much greater confidence in the economy . . . In 1992, when there was deep anxiety about the future of the economy, people saved more. Today they are more confident."-[Official Report, 9 January 2006; Vol. 441, c. 14.]
Well, I am pleased that the Minister is here to respond and I urge him to read, if he has not already done so, the contribution of the Association of British Insurers. A report that it commissioned from the Personal Finance Society
"shows that means-testing is already starting to have a negative impact on public attitudes to saving and on the willingness of financial advisers to discuss saving with lower earners."
In looking at Lord Turner's proposals, it is important that the Government are a bit more ambitious than Lord Turner has been in reducing the proportion of pensioners covered by the pension credit, given its means-testing nature. Currently, some 40 per cent. are on pension credit. That figure is supposed to come down by a mere 7 per cent., to 33 per cent., through the report's recommendations. I regard that reduction as insufficient if we are to change this country's savings culture.
I invite the Government, in considering the report's recommendations, to address the issue of consumer protection, which was touched on by the right hon. Member for Birkenhead (Mr. Field). The Secretary of State mentioned in his opening remarks the difficulties that the pension mis-selling problems of the past pose for the culture of saving and for the credibility of the pensions regime. I agree that they undoubtedly contributed to a lack of public confidence in pensions and in saving for retirement. I also agree with Lord Turner that introducing greater simplicity into the pensions industry is a desirable objective, but simplicity does not equal suitability. Means-testing, by definition, gives rise to the need for a suitability test. As we have heard, individuals will need to be willing and able to save a substantial amount of money to be confident of an adequate return in their retirement-one that will exceed funds available from the state under the proposed arrangements.
I raised this issue with Lord Turner when he appeared before the Select Committee last month. I asked him whether he had consulted the Financial Services Authority regarding the mis-selling risks associated with his proposed national pension saving scheme. He said:
"We have not directly consulted the FSA on this."
I found that a very surprising response, given the diligence that he had shown in producing such a comprehensive report.
Consumer protection is, I assume, of considerable concern to all hon. Members. I therefore urge the Government to address the issue when they consider Lord Turner's proposals. We all know of people across all income groups, particularly the lower paid, who, at various stages of their lives, have other commitments and are not in a position to set aside money to save. For those people, some element of consumer protection and advice should be available.
Another problematic aspect of the national pension savings scheme is asset allocation. Who is to decide whether it is appropriate for some individuals to have their assets invested in predominantly fixed income returns, compared with equities? Other hon. Members referred to that earlier. It is difficult to produce a one-size-fits-all investment policy for the entire population. That is why I agree with other hon. Members who recommended a mixed approach. There may need to be some form of state-sponsored provider, but there must a role for private providers to come up with alternative schemes to allow choice. That again raises the question of suitability and advice. If suitability and consumer protection can be ignored, as Lord Turner suggests, is that appropriate Government policy? Does it not leave the Government exposed to the risk of mis-selling? It is a risk that the Government must consider carefully.
In the remaining few minutes, I shall highlight specific issues relating to the NPSS. In the absence of compulsion, the combination of auto-enrolment and a very low cost offering will replace existing pension schemes. That is not just my view; it is the view of leading consultants in this area, Cazalet Consulting, who were quoted in the Financial Times earlier this week. I shall read one conclusion from their report on pensions profitability, which states that
"the Turner NPSS system, if implemented, would be likely to cause a surge in life company pension plan lapses as consumers move to take advantage of the very low proposed pricing levels. We doubt whether the NPSS could ever work as planned, however, as the best case persistency assumptions used in that report anticipate a dramatic improvement in persistency, which is at odds with the current reality of steadily deteriorating lapse rates."
To put that in layman's language, the current average lapse rate of pension schemes-both individual and group corporate schemes-is about 18 per cent. a year. In other words, 18 per cent. of people contributing cease contributing. In the Turner report that rate is estimated to be 10 per cent. a year, and the heroic assumption is made for the NPSS that the lapse rate will fall to 2.5 per cent. a year. That seems an ambitious assumption, to say the least. It raises the question whether employers will put pressure on employees to encourage opt-outs from a voluntary system, and whether it is feasible to achieve adequate investment management skills to manage funds on such a low commission basis. With a 30 basis-point charge, at least 22 per cent. would go in administration costs, which leave only eight basis points-
