BBC On The Record - Broadcast: 03.03.02

Interview: Interview with Alistair Darling MP, Secretary of State for Work and Pensions.

What will the Government do to ensure that people can look forward to a comfortable old age?

JOHN HUMPHRYS: Alistair Darling, putting aside the details for a moment, bearing in mind that we are talking about the future and people having a reasonable income in their old age, are you worried about the way that things have changed over the last year or two? ALISTAIR DARLING MP: I think for a long, long time, most people probably ought to be saving a lot more than they actually do. One of the reasons that we are introducing annual pension forecasts for people is that within about five or six years' time people will receive an annual statement which will tell them precisely how much or how little they will get in retirement. But, in respect of most of your report, if you look at the final salary schemes, they have been in decline actually since the 1960s. It is true that that decline has accelerated slightly in the last year or so, but what we want to do as a government is to make sure that whether people have their money in a final salary scheme, or whether it's the money purchase scheme that was illustrated on the programme, we want to make sure that we get more people saving more than they are doing at present. HUMPHRYS: You say that this trend has been with us for some time, as far as the final salary scheme is concerned, but if you look at the figures, two million fewer people in final salary schemes now than there were ten years ago. It's accelerating very rapidly indeed. I mean ten per cent have closed down effectively, shut their doors to new members at any rate, in the last year alone, that's a very rapid acceleration isn't it. DARLING: There are about twelve thousand final salary schemes in this country of which about four per cent have closed... HUMPHRYS: ...ten per cent in the last year. DARLING: What has been happening over the last year or so, is that many companies, seeing what has been quite a substantial fall in the Stock Exchange and seeing that their contribution holidays, that is the time that they don't have to put money into their pension fund has come to an end, a lot of employers have said, hold on we don't want to continue with this. Now, we could see this trend happening, that's why last year I asked Alan Pickering, formerly of the National Association of Pension Funds, and Gordon Brown and I asked Ron Sandler, to look into these matters and to make recommendations to us with a view to improving the situation so that we can encourage more people to save. Now, we will have Pickering's recommendations in June, at about the same time Sandler will also report to Gordon and myself. Thereafter, the government will publish proposals on which we will consult and our objective will be, firstly, to see how we can reduce the amount of regulation to simplify matters, to get rid of some of the complexities which undoubtedly add to the cost of pension schemes. Secondly, to see how we, with companies, can do more to encourage employees to save towards their retirements and thirdly to make sure that we have the right incentives and they are operating in the right way, to encourage people to save for their retirement. So we will be publishing those proposals later this year. But this is something that has been building up for some time. I believe that the basic pension structure that we have in this country, the partnership between what the public sector does and what the funded schemes have done is absolutely right. But I do think and certainly in the simplification of regulation, getting rid of some of that red tape, these are things that we need to do a lot more and we will be publishing our proposals later this year. HUMPHRYS: And do a lot more pretty quickly too, because according to the Association of Consulting Actuaries and actuaries by and large aren't people who make wild statements, but they use the rather colourful description of what's happening, they say they are very concerned that the drift away from good occupational arrangements is accelerating towards a trot if not a gallop. Well, coming from people like the actuaries, that's a pretty serious comment. DARLING: Remember of course that in this country, final salary schemes tended to be provided by large companies. Now, as these large companies are less and less in number and you know with the change in the public sector, more of it being moved into the private sector over the last twenty years ago, the proportion of the population who could get access to final salary schemes, has been declining anyway. That's why, we introduced the stakeholder pensions which are designed for about, you know five million people or so, who will never have access to company pension schemes, because they don't exist for them and remember, as more and more people move jobs, that sort of person who may have several jobs between starting out and retirement, the final salary schemes are not particularly appropriate for them. So you do need both money purchase, stakeholder schemes as well as the final salary schemes. HUMPHRYS: But there are many people who do rely and are now relying on final salary schemes, thinking that they are going to have decent incomes when they finally retire and what people like KPMG are now telling us and they've done the sums for themselves, they will get thirty per cent less in money purchase schemes, than they would in final salary schemes. You don't seem as if you are terribly worried about that. DARLING: The KPMG study was curious in the sense that most people's income actually comes from the State, rather than even when they do have occupational schemes. You know that's always been the case. I want to make sure that we do everything we possibly can to encourage employers who have occupational schemes, to continue with them. To make sure that as much money as possible that people save, actually goes into their pension and not into red tape. That's why I've said on a number of occasions, I think we've reached the stage in this country, where we do need to reduce the amount of regulation, it's been put on for the best of reasons by successive governments, but we've got a situation for example, if you look at stakeholder pensions, where you have a tightly regulated product, sold on a tightly regulated market, the result of which means that it can sometimes be difficult to sell pensions to the very people that you actually want to sell them. Despite that though, I am pleased that some, tomorrow the ABI will publish figures showing that nearly seven hundred thousand stakeholder pensions have been sold in the first nine months. That's encouraging and remember, that represents a billion pounds worth of new pension business. So, whilst people are quite right to say, look the government ought to be doing more on final salary schemes, and we are, you do need to get this into perspective. Last year, saw a fifty per cent increase in pension sales last year, so it isn't all the case that there's less money being saved, some people are saving a lot more and that's something to be encouraged. HUMPHRYS: And I want to come back to stakeholder pensions in a moment, but let's just deal with the final salary schemes and the effect of various things that have been happening that we heard about in David Grossman's film. FRS 17, on the face of it, immensely complicated, actually not all that complicated when you come to look at it in some detail. Do you share the concern about the consequences of this new rule. DARLING: Well, at the risk of getting rid of your viewers let me explain very briefly... HUMPHRYS: Very, very briefly. DARLING: What FRS 17 does. It's a new accounting standard, a UK accounting standard that's designed to make company accounts more transparent. It is fixed by the Accounting Standards Board which, of course, quite rightly is independent of government. What it has done though is to bring into very sharp focus the costs associated with pension funds. Now I have the .... HUMPHRYS: And therefore cause an awful lot of people to say we don't want anything to do with it. DARLING: It is one of a number of matters.... HUMPHRYS:, no, there are other facts, I freely admit that, but if we deal just with FRS 17 for the moment. DARLING: If we look at that last week I had the Accounting Standards Board in to see me and I made the point that the standard we have in UK is different from the international accounting board standard which allows you with pension funds to allow for a bit more smoothing effect, so that you avoid a situation where on any one day if the Stock Market has fallen the pension fund looks terrible, whereas the next day it might actually look okay. Now they're thinking about that because as I say they're independent of government and that last thing on earth I think you'd want is a government to start saying, you know, that accounts shouldn't be transparent. Accounts should be transparent and they are talking to their international counterparts, but I do say this to you John, that it is - I think it is quite wrong for people to blame HUMPHRYS: No, no. DARLING: ...of accounts of what is happening now. You made the point there are other problems that I think do need to be addressed. HUMPHRYS: Indeed. You made that point, but as far as FRS 17 is concerned you've said to the accountancy people: Look, we are concerned about it. Is there a better way of doing it maybe using the international rule instead, so that's what we may have, we may see a change. Is that right.? DARLING: It is up to the board because... HUMPHRYS: Of course. DARLING: ... of government. But I think there is a recognition, it's not just us saying, that when you look at pension funds you must look at them in the round, just as when you look at company accounts you should never ever just take a snapshot on one particular day and say the company is good or bad. But I repeat the point that if you are looking at how to get more people to save, which is actually the thing that ought to concern governments, the whole point of us setting up the Pickering and Sandler reviews that I referred to are because I think we can do more to ensure that more of the money saved goes into a pension, that's why we need to reduce the regulatory burden, reduce some of the complexity. I do think to make sure we are doing the right things we've got the right to balance the right drivers to make sure that more people can save, so as I say we will be making those recommendations later in this year and that will build on all the reforms we've made since 1998. HUMPHRYS Right, so as far as FRS 17 is concerned you've made your position clear and it's your understanding that the board is looking at it and we may see some changes there. DARLING: They are but I think they will be keen and you know common sense tells you this must be right, to make sure that our standards are the same as the international standards, because we live in an economy, we're a very international open economy. HUMPHRYS: Right. Let us - as you say there an awful lot of factors involved in this, but another big factor and it's a five-billion pounds a year factor, therefore cannot be ignored is ACT the changes again, technical complicated changes that the Chancellor made a while back, but the effect of them is to take five billion pounds a year out of pension funds. That is a great deal of money and it is having an effect isn't it? DARLING: If that was right you'd have expected...... HUMPHRYS: Well everybody says it is right. DARLING: With respect they're not. In view of an excellent leader in the FT last week which drew attention to the fact that it was probably the very large fall on the Stock Market, some four-hundred-and-fifty billion pounds because of events that we know about...... HUMPHRYS: Oh, that as well of course. Yes, yes, I'm not disputing that. This is five billion pounds of real money coming out of pension funds. DARLING: That is big money. If the ACT changes had been the main driver you'd have expected all this to have happened four years ago. I would also just make the point...... HUMPHRYS: But the markets were booming four years ago. That's why it didn't happen four years ago. DARLING: What is driving companies at the moment is the falling Stock Market, the fact that people are living longer, all sorts of factors but remember also when we made those changes we cut corporation tax by three pence which has hugely affected companies profitability and therefore the amount of money available to its shareholders, most of which are pension funds. I don't buy that argument at all. What I do accept which is why we set these reviews up last year, is that we do need to do more on the regulation front, we do need to make sure that we.... HUMPHRYS: You make that point very clearly, but as far as this ACT change and this five billion pounds - as Frank Field says, you saw him on the film - you'll not have been surprised to see him there - he often talks about this particular subject, he knows a lot about it. What he says is there is no such thing as a free tax, and we'd have to agree with that, and when you look at the effect on specific organisations, take Tesco, it had a very big pension fund, it had to put another fifteen per cent a year in, I'll just finish this point if I may - it had to put another fifteen per cent a year in to cope with the effect of ACT changes. Now it's decided to close its fund altogether, so you can't say that there's no effect from this. DARLING: No, the major influence of what is happening just now, is as I said to you is the fact that the Stock Market has fallen, for reasons that we all know. HUMPHRYS: I don't dispute that. That is the big factor, but there are all these other things as well. DARLING: Finance directors of companies are also aware of the fact that they are paying less corporation tax. Now quite deliberately when we made those changes, and incidentally nobody - maybe Frank has, but nobody else - is arguing we go back to the very complex corporation tax system we used to have with ACT. Nobody's arguing that at all. What they said at the time was it was a very sensible reform, it meant that companies could decide on investment decisions....... HUMPHRYS: A lot of people were very very upset about it at the time. The pension funds hated it. DARLING: Nobody is arguing that we should dismantle the present corporation tax system and go back to the old one, but the main thing John, the main thing that is affecting companies' considerations at the moment is the fact their contribution holidays are coming to an end and you know, their faced with having to put more money in. I may say though, we will bring forward proposals that I hope will help companies as well as the government encouraging people to save, but I do think some companies ought to start thinking, you know, a little bit more long term at a time when some of them find great difficulty in attracting and retaining staff. A pension fund - available access to a pension fund ought to be seen as a major part of the remuneration package. Now as I say, whether it's final salary which is fine for people who stay with companies their whole working life and tends to benefit the higher earners, or whether it is what we call defined benefit, that is the money purchase schemes, that you put in so much and then you buy an annuity when you retire - the crucial thing is how much money are people putting in. I do think companies do need to take a longer view than they're taking at the moment. You know I think some of them are citing all sorts of reasons that you know, perhaps aren't altogether convincing as to why they're coming out. HUMPHRYS: But they all add up, don't they, and one of the things... DARLING: ...which is precisely why, as I say, later this year, when we've got the Sandler and Pickering recommendations I want to publish specific proposals which I think will go, you know, quite a substantial way to encouraging more people to save, indeed... HUMPHRYS: ...what sort of thing are you talking about? DARLING: Well, I haven't had Sandler or Pickering's recommendations yet... HUMPHRYS:, no, I understand that... DARLING: ...but what I want to look is, for example, you know, I've mentioned to you, you know, the regularity burden, there's no doubt that the cost of selling pensions means that there is less money available for saving. One of the reasons that I put a one per cent cap on the charges that could be made for stakeholder pensions is because I believe that we could drive down the costs and interestingly, right across the pensions piece now, charges have fallen thanks to stakeholder pensions. And as I say, you know, it hasn't affected sales, because sales have gone up some fifty per cent in the last twelve months as well the nearly seven-hundred-thousand stakeholder pensions themselves. But I think we need to ask ourselves, have we got the right incentives there? Can we do more to encourage more people to save? Are we doing the right things? Are we doing it in the right sort of way? That is what the proposals will cover. HUMPHRYS: Just a very quick thought about this story we see in the papers this morning, that some of the biggest bosses are taking very, very large pensions for themselves indeed. Does that concern you at all? DARLING: Well the argument that is used, I see, is that in an international world you have to attract you know... HUMPHRYS: ...the usual calibre. DARLING: I understand that argument and you know, I can see. But I think also within this country, companies, as I said just a few moments ago, need to do more to encourage to people to remain in the workplace. I know in the United States for example, there is one particular form of saving, what they call a Section 401K, it's like our ISA's where, my understanding is that if you want to operate, get the tax relief for operating that for a year and for the executives, you've also got to operate it for your employees. I'm not going to anticipate what we're going to ... HUMPHRYS: ...but you might go down that road, so in other words, the fat cats as it were, you wouldn't use that expression I dare say, but the fat cats would have to make provision for their workers as well for themselves. DARLING: My interest, as a member of the government, and frankly, the interest of all of us in this country, whether we're a company director, or anybody else, is that we get more people to save. Now, I'm not going to anticipate what our proposals are going to contain... HUMPHRYS: ...but you're looking at that sort of area... DARLING: ...what I can say is, we will be publishing those proposals later this year, and that will, just so no-one's in any doubt about this, it will build in the reforms we're making, so we're keeping the state second pension, we're keeping the basic state pension, we've got the pension credit legislation which will reward savings in a way that doesn't happen at the present time because there's all sorts of disincentives in the present system, we are going to build on the structure we've got, I think the basic structure is sound, but I do think we need to look further at those areas I've indicated. HUMPHRYS: Some people looking at the way things have changed over the last few months may say that's a slightly complacent view, but then, and let's have a look at the stakeholder's pension that you seem pretty pleased about, the figure tomorrow I gather will be about six-hundred-and-ninety-thousand of them sold. The problem with that, it sounds a lot, but if you look at your target group which is two-point-eight million, these are not, by and large, members of that target group, there we heard in the film there, they're often fairly well-to-do grannies who are taking pensions for 'little Jimmy' or something. It isn't exactly what you intended and, can I just finish this point because we've not unlimited time unfortunately, the problem is that unless you go down the compulsion route, which you were going to do in the early days as I understand it, and you got cold feet about it, then things aren't going to change very much. DARLING: Right, you make three separate points. Let me try and deal with them. Firstly, pension planning by its very nature is a long-term business and that's why no government should, you know, chop and change its pension policy you know every time there's a headline that you don't like. We've put in place since nineteen-ninety-eight a structure that I believe is workable and it's affordable. It's the basic state pension, the state second pension which helps particularly low and moderate earners, we've introduced new options to enable people on moderate and high earnings to save through a funded pension. That brings me to the stakeholder pensions which is one of those new options. Now I've always said that it would take time to build up. If everybody on the first day that stakeholders went on the market rushed out and bought one, I would be concerned, because buying a pension isn't something you rush into like buying a television set or a CD or something like that. The fact though that sales have steadily built up, and I notice that Willetts there on the telly was telling you that 'oh, they've only sold five-hundred-thousand' and you know, he's been, he told us we wouldn't sell any, he said no companies would sell stakeholder pensions. Well he was wrong on both counts. What you're seeing is a steady increase. Who's bought them? Well the truth is, that until the Inland Revenue completes its analysis, because they actually know who buys them, we won't know for a month or two yet, but I find it hard to believe that you know, there are seven-hundred-thousand you know, grandparents who bought their grandchildren pensions, so I am never, you know, I've always said you have be cautious about this, so all these things I think will help, but what I do say to you, I think we've got the structure right, it's our job now to make sure that we can do more to help people save in the future. HUMPHRYS: Alright, in the midst of all this, and a final thought, MPs I see, are going to get fatter pensions in future while most people are having to slim down, they're going to do rather better, another twenty per cent in their pension funds because of course they'll enjoy the final salary scheme, or so it seems. Are you happy with that? Doesn't it make you all look a bit greedy? DARLING: Well, the House, if I recall correctly, voted last year in principle to change the pension scheme. I firmly believe that MPs should think very long and hard about doing things themselves that others can't, you know, can't get. Now it's a free vote on all those things, there's no, the government can't ... HUMPHRYS: Did you vote against? DARLING: Well I didn't vote for it in the summer... HUMPHRYS: ...but you would vote against it? DARLING: ...I think, frankly, we as MPs ought to be concerned about the pensions of our fellow citizens, that's first and foremost what we ought to be doing and certainly that's what I intend to do. HUMPHRYS: Alistair Darling, thank you very much indeed. DARLING: Thank you.
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.