Interviewed by Corporate Adviser in the spring of 2010, a few months before the general election when the idea of coalition was barely on the agenda, LibDem pension shadow Steve Webb’s reply to the suggestion that his party could help form a government was “They will govern alone”.
Barely five months later he had been made pensions minister, and almost five years later he has earned himself a reputation as arguably the most able pensions minister for a generation, his deep knowledge of the subject matter helping him to achieve a great amount of positive change over the course of this parliament.
But as with any government department implementing revolutionary changes in, not everything has gone smoothly. Webb admits for example that his flagship single-tier pension reform will create large numbers of losers as well as winners, and accepts that the post-April 2015 liberalisation will see some people make unwise decisions.
The extent to which this coalition government’s legacy on pensions is down to him is debatable, but for all the praise he has rightly earned, some of the minister’s words and deeds still leave some difficult questions.
Top of that list is the effect of the changes to the state pension. It has been broadly welcomed by both politicians and the public, neither of which understand quite what it means. Those who do understand realise that the biggest losers are, by definition, those with the worst pension provision in the land – those who have been contracted in for their entire working lives.
But Webb is adamant that he had no alternative but to favour the well-pensioned contracted out, including millions of public sector workers, in the overall state pensions settlement, as not doing so would see complexity remain in the system until the end of the century.
“When it came to getting contracting out of the system we had two extreme options. One would be to say we will completely forget contracting out ever happened. We will just give everyone 35th of the new rate and life would go on. And if we had done that, people would have said ‘that’s outrageous, my next door neighbour has spent all his life paying less NI than I did, yet they are getting the same pension and they are getting a company pension as well, and that is not fair. And I agree with that.
“The other thing would have been to say ‘contracting out means you paid less NI so you should always get less state pension. So anybody who retires with any contracting out has a deduction. It turns out that 80 to 90 per cent of people have at least one year of contracting out. My daughter is 18, so pre 2016 she could do one year contracted out, and when she gets state pension in at least 2066, she would be getting deductions for that year. God-willing she lives for at least 30 years, and that would be 2096 that we are still making deductions for contracting out,” he says.
“So we said how can we take account of contracting out, but not have the vast majority of people not getting the full rate for the foreseeable future. And that was the trade-off. And what we have come up with is a compromise. What is funny is, when I talk to public sector workers, they are outraged. Contracted out people say it’s unfair.”
Contracted out workers who stand to lose up to £48 a week state pension under the reforms, according to Hymans Robertson, might consider the current changes unfair. Hymans also calculates that contracted-in people in their late 40s such as Webb and the prime minister will gain pension benefits worth an extra £50,000, while the losses suffered by contracted-in low earners of the same age will total £35,000 in cash value. Meanwhile a poll of Corporate Adviser readers found a majority believe dinner ladies, security guards and other contracted in groups in their 40s and 50s will not replace their lost state pension through their auto-enrolment pots.
“The only way you can solve this problem is to run CODs on for 80 years. Are you really suggesting we should do that?
And did Webb expect when he formulated the idea expect the single tier pension would be £1.30 more than the means test?
“The proposition was always that this was about, certainly in the short run, spending about the same. I envy my predecessors who were able to make state pension policy in a period when there was a budget surplus. Of course you can pay more when there is money to spend. And we have to make the long-term system more sustainable. What I didn’t want to do was Serps – promise people very large unfunded pensions in half a century, when there was never going to be any money there to pay for it. So it had to be fairer within the existing budget, in my view.
“And that is my other response to you, with your £192 state pension example. I am not convinced that would have happened. I don’t think that was the counter-factual. You only have to look at the graph before we had done the reform and ask whether the government would have taxed people at that level. Someone would have cut it before we got there.
But if it is broadly neutral then surely some of that money that these people aren’t getting has gone to support the people who have contracted-out?
“As I said, it’s a compromise.”
As to those who, perhaps because they have been to see an IFA, who will get the same state pension, and get to keep their contracted out pot as well, Webb believes the point will be lost in the confusion around the whole system.
“I don’t think people will think it is unfair. Partly because it is all so fiendishly complicated. And part of the reason for the reform is that nobody has got a clue, and that is part of what we are trying to deal with,” he says.
Webb denies the rumour doing the rounds in the industry of a big row between himself and Danny Alexander when he found out he had promised public sector workers that they had a deal on pensions for 25 years.
“No. What’s the Ed Miliband phrase – pure fiction, or nonsense on stilts?”
Where he is less emphatic is in disclosing the extent to which he, or anyone in government, had spotted the full extent of the tax leakage possibilities opened up by the Budget. In this interview Webb does everything to steer away from this area (“let’s start with what I am responsible for”), and when the subject of the potential £2bn a year or so first-year loss of revenue as a result of over-55s salary being flushed through pension is raised, he attempts to fob me off with a printout of a Treasury memorandum that says little more than ‘we will disclose revised figures in the autumn statement’, before refusing six times to respond to the simple question whether he has seen an estimate for potential losses due to increased use of pension over salary.
In estimating the variables associated with the Budget, the Policy Costings document published alongside it refers solely on the number of people who access their money early. A Freedom of Information Act enquiry from Corporate Adviser drew nothing more.
“I don’t think because you have asked the Treasury an FOI question and not got what you wanted, and you ask the DWP minister the same question, I will give you what their response is to that set of questions. I am not going to give different answers for obvious reasons”, he said.
“The Treasury’s figures have been signed off by the OBR. So they have made an estimate of the global impact of this reform. The OBR have signed it off. I am not going to do a commentary on their numbers,” he added.
But surely Webb had an understanding, or a figure for what the potential NI loss was when he cross-examined at length Corporate Adviser editor John Greenwood about his own predictions as to the scale of potential leakage – estimated at £20bn if 100 per cent of people use the loophole, and therefore £2bn if a more realistic 10 per cent do – at a Pension Schemes Bill Committee session in October?
“You keep asking the same question and I am going to keep giving you the same answer,” said Webb.
Webb told the Pension Schemes Bill committee that “Paul Lewis of Moneybox was highlighting exactly the potential for cycling money around in this kind of way”. Paul Lewis has subsequently told Corporate Adviser that he did not look at NI loss through salary sacrifice at all – he just looked at tax loss. And the loss to the Treasury of NI is five times bigger than the loss of income tax for basic rate taxpayers flushing pay through pension.
“It’s the same issue essentially,” said Webb.
Webb also has nothing to say on what constitutes ‘bad’ behaviour that would lead to a government clampdown.
“The idea of salary sacrifice isn’t a revelation to HMRC. They don’t ban salary sacrifice schemes. They will look at it, just as they will look at the tax thing. People using the new system, that is where the £10,000 thing comes from. That’s an initial response and they will go on looking at that. But that’s a matter for the Treasury,” he said.
Webb is little troubled by the proliferation of master trusts. “I hear it said that there are all these master trusts being created. I believe that most of them are empty or nearly empty at the moment. Employers need to work out that if they are being asked for an extra cost, above the cheaper options out there, what they are getting for it,” he said.
He is taking a laissez faire attitude to the at-retirement revolution, preferring to under-regulate rather than slow down what will be a fast-moving market from April 2015.
“feeling is what happens next April – is people are talking about a decade of product innovation. I would not want to overregulate for April 2015. So people say you have a charge cap in the accumulation phase, why isn’t there one in the decumulation phase? In the long run there could be some action on charges in decumulation. But because we don’t know what the products are yet, are we going to have a bit of drawdown, a bit of annuity, then trying to regulate products at this stage seems the wrong time. Clearly we need as best informed consumers as we can, and that information is as transparent as possible. But at a time of innovation it feels like the wrong time to be regulating,” he said.
But there will be still people buying terrible annuities – with the ABI retirement window showing people lose half their saving by accepting the worst conventional annuity, when they could have, in some cases, got a best-in-market impaired life rate paying 100 per cent more. So does he see some role for non-advised brokerage as proposed by Labour, or a requirement to for people to at least answer a series of questions before they access their money?
“My reservation is financial services is littered with tick boxes. So while making sure people making retirement choices have thought through the consequences is important, we don’t want to make it that someone has to go through pages of documents. If someone in front of you says they want to take the cash, and you say, here is a list of tick boxes, I don’t want that,” he says.
And what about the potential for mass withdrawals of the over-55s for the Nest target market, as people withdraw cash to pay bills and debts?
“We know the biggest group to opt out is the over 55s. We may now get more pension saving not less. In the early years of AE people will have small pots. I don’t think it is my role to wag a finger at them. My role is to get people to where they have big pots,” he says.
Whether his tenure is drawing to a close, or is to be continued beyond next year’s General Election, Webb will go down as one of the most effective pensions ministers for decades. Nobody can please all the people all the time, but few the pensions industry can have expected a minister quite as on top of his brief as Steve Webb.
