Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013
(Limited Text - Ministerial Extracts only)
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Baroness Stowell of Beeston
That the Grand Committee do report to the House that it has considered the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013
Relevant document: 7th Report from the Joint Committee on Statutory Instruments
Baroness Stowell of Beeston
My Lords, I am pleased to introduce this draft instrument which was laid before the House on 1 July. I am satisfied that it is compatible with the European Convention on Human Rights.
Automatic enrolment introduces the biggest change to private pension saving that this country has seen for 100 years. It will result in up to 11 million people starting to save, or saving more, for their retirement, with a contribution from their employer. In fact, data published last week by the Pensions Regulator show that since last July more than 1 million people have been automatically enrolled. Automatic enrolment is transforming our savings culture by encouraging and supporting people to take personal responsibility and save for their future, helping to ensure that they have a more comfortable lifestyle in retirement. It is of vital importance, therefore, that we ensure that people have confidence in the pensions that they are automatically enrolled into and are protected from excessive or inappropriate charges.
The draft regulations before us will introduce a new condition that a scheme providing money purchase benefits must meet to be an automatic enrolment scheme. The condition specifies that the scheme cannot allow an employer to make an agreement with a third party under which that third party is paid from the members’ pension pots. This will effectively ban consultancy charges from schemes used to comply with automatic enrolment. In doing this, we do not want to prevent the normal day-to-day running of pension schemes. Trustees and managers of occupational pension schemes and pension providers have therefore been excluded from the definition of third party. This will mean that they can continue to pay for important services for the efficient running of schemes.
We recognise that a small number of schemes which include consultancy charges were put in place before the Minister for Pensions announced the Government’s intention to legislate on 10 May. Therefore, these regulations will not affect pension schemes where there was a legally enforceable agreement in place between an employer and a third party before 10 May 2013. We intend to consult in the autumn on widening the ban on consultancy charges so that it covers all qualifying schemes. Clause 35 of the Pensions Bill currently before Parliament—it is in the other place at the moment—will enable us to do this. Our direction of travel is clear: consultancy charges do not have a place in qualifying schemes.
The concept of consultancy charges was introduced as part of the Retail Distribution Review carried out by the then Financial Services Authority. The review banned the practice of providers paying commission to advisers for recommending their products. Consultancy charging enables employers to pass on the costs of advice provided to an employer to the members who join the pension scheme. While some of the services to employers can improve the outcome for some members, the primary aim in many situations is to support employer compliance with their automatic enrolment duty. Fundamentally, therefore, there is a misalignment between the interests of the employer and the member. The employer chooses the service and the price is agreed between the employer and the adviser, but the fee is paid by the individual member. That fee is paid regardless of whether they receive any particular benefit other than being automatically enrolled into a workplace pension scheme. There is no one in this arrangement who has the incentive to and is capable of driving down costs and ensuring value for money. The member’s only choice is to accept that they have to pay the consultancy charge to the adviser out of their pension or to opt out of pension saving and forgo the employer contribution. That is why we are bringing forward these regulations today.
Between November 2012 and May of this year, the DWP conducted a thorough review of the emerging interaction between consultancy charging and automatic enrolment. This involved the full range of organisations with an interest in the issue, including pension providers, advice firms, employer representatives, consumer groups and pensions experts. The review found that consultancy charges were likely to be used to pay employer compliance with the automatic enrolment obligation.
Baroness Stowell of Beeston
My Lords, I had just finished explaining why we were bringing forward the regulations and had started to explain the review that the department undertook between November last year and May this year.
The review found that consultancy charges were likely to be used to pay for employer compliance with the automatic enrolment obligation. This has been likened to expecting workers to pay for the steps that their employer takes to ensure compliance with health and safety law.
Over the course of the review, a broad consensus emerged that there was a significant risk of consumer detriment with consultancy charges; that is, individuals paying for a service from which they receive no individual benefit. With this risk came a wider risk to the reputation of pensions more generally at a critical stage in the rollout of automatic enrolment.
The review also found that consultancy charges can have a disproportionately negative impact on people who move jobs regularly, because they might repeatedly have to pay higher “initial” scheme set-up charges. In April, the Work and Pensions Select Committee raised concerns about consultancy charges and the ultimate impact on individuals’ income in retirement. The committee recommended that the Government ban consultancy charges in automatic enrolment schemes without delay.
A number of options were considered during the review, including restricting the use of consultancy charges through setting a cap, imposing decency limits and providing statutory guidelines. Our conclusion was that none of these options would protect consumers sufficiently or quickly enough. Even a low consultancy charge will have a detrimental effect on a member if they do not receive any tangible benefit from the advice that they are paying for. Our approach is the simplest rule to understand and enforce, and sends a clear message that we are protecting consumers.
While employers are free to get advice if they want it, the Government do not believe that the cost of seeking such advice should be passed on to the members of the pension scheme. Let us not forget that the Government have established NEST, a low-cost and simple scheme designed for automatic enrolment compliance, and joining that scheme requires no consultancy advice.
Banning consultancy charges in automatic enrolment schemes, which is essentially the effect of the draft regulations, will increase competition in the advice market. Advisers will compete on a more transparent fee basis and deliver value for money for employers. I therefore commend the regulations to the Committee and beg to move.
Baroness Drake
My Lords, the decision to prohibit consultancy charging for any scheme used for auto-enrolment and charges which arise from an amount paid to a third party under an agreement between a third party and an employer is very welcome, and I am pleased that the Government have taken this decision. The decision recognises the vulnerability of pension savers where they have not chosen the pension product but are automatically enrolled in the employer’s choice of scheme and where who has responsibility for protecting the best interests of the saver in contract-based pension provision is at best uncertain.
It is also welcome that the Government have called for evidence on standards of governance and quality in defined-contribution pension schemes. I hope that this decision on consultancy charging is the first of many by the Government which put the interests of the pension saver centre stage.
It is also important to reflect that consultancy charging was initially allowed by the FCA—previously the FSA—and its subsequent abolition, because it is quite clearly not in the saver’s interest, is compelling confirmation of the need for the two pensions regulators, the Pensions Regulator and the FCA, to co-ordinate very clearly on what is the appropriate framework of protection for pension savers in an auto-enrolment world where one has a mix of both trustee and contract-based pension provision and where, increasingly, the future looks as though it is contract based.
It is important to reiterate a point to which the Minister referred: Parliament having secured broad popular support for automatic enrolment—which is certainly manifest in the preliminary evidence of people not opting out from being auto-enrolled into a pension scheme—cannot afford to fail those millions of people who are allowing themselves to be auto-enrolled by not having a framework of protection that ensures that the interests of the saver are centre stage in any regulatory framework. Public confidence on this issue, once lost, will not be easily regained. This is a framework for auto-enrolment. I suspect that we have one chance at securing a rebuild of private pension saving in this country and we cannot afford to get too much of it wrong. I therefore welcome regulations but encourage the Government to be even bolder in forthcoming challenges.
Lord McKenzie of Luton
My Lords, in thanking the Minister for introducing these regulations, let me make it clear that they have our strong support, as the Committee will have gathered from my noble friend Lady Drake.
At the start of her presentation, the Minister made reference to the progress that has been made with auto-enrolment. That is indeed heartening. I think the figure was more than 1 million people already enrolled—I was not quite sure whether that was gross or net of opt-outs. I understand from my noble friend that, thankfully, the level of opt-outs has been quite small.
It was a particular delight to hear from my noble friend Lady Drake in this short debate because she was there at the heart of the creation of auto-enrolment as one of the three members of the Turner commission. We always endeavour to follow her wise words.
We particularly endorse the analysis which points up the misalignment, which the Minister referred to, between the interests of the primary consumer—the employer—and the end customer—that is, the member. As my honourable friend the shadow Pensions Minister Gregg McClymont has made clear, the workplace pensions market is not made up of fully informed consumers. The inertia that this phenomenon fostered is, in part, to be addressed by auto-enrolment. A lack of informed consumers is not sufficiently balanced by good governance arrangements, particularly for contract-based DC schemes.
We see the issue of the complexity of charging as inextricably tied up with the wider issues of governance, especially for defined contribution schemes. My honourable friend has gone further and challenged whether the Financial Conduct Authority’s regulation offers sufficient safeguards for the workplace pensions market, and has proposed an extension of trust-based governance, a widening of fiduciary obligations and bigger schemes to improve the bargaining power of members. He argues that full disclosure of costs and charges is not a sufficient improvement to the current situation but it is a necessary one. We welcome the call for evidence around some of these matters.
As we have heard, in April 2013 the Work and Pensions Committee covered a number of these issues and made the point, with which we agree, that auto-enrolment will mean that many more people in the UK will be saving for their retirement. But given that most will be auto-enrolled into DC schemes, hence bearing most pension-saving risks themselves, the issue of good governance is of heightened importance. The committee says:
“Decisions made by contract-based scheme providers, and the employers who enrol their employees into them, may not always be made in the best interests of the scheme member. Trust-based schemes generally offer members greater protection, as scheme trustees have a fiduciary responsibility to act in the interests of scheme members”.
The committee also pointed out that:
“A confusing array of costs and charges is applied to pension pots by pension providers … and these costs and charges can have a serious negative impact on an individual’s retirement income”.
My noble friend’s comments about the need to maintain and build on the broad popular support for pensions saving that auto-enrolment has thus far engendered are very important.
Like the Minister, the Work and Pensions Committee was particularly concerned about members bearing consultancy charges. As the committee sets out:
“The provision of pensions advice to employers is currently an unregulated activity”,
and it would seem that the Government have no plans to change this, so tackling consultancy charges, which end up being paid by scheme members, has to be seen in this context. We consider that the Government are right to ban these arrangements rather than seek to ameliorate them by capping or strictures from the regulator. As the Minister has explained, such charges can have a particularly pernicious impact on the low-paid and transitory job holders, as the Explanatory Note makes clear.
I have a few brief questions. In fact, I think the Minister has pre-empted two of them. I am not sure whether that is foresight or I am getting predictable. Have the Government considered the risk of trading down in circumstances where employer contributions would be above the statutory threshold but could be reduced to the statutory threshold, with the savings covering the consultancy charges that would otherwise be on-charged to scheme members? I was going to ask what assessment has been made of the ramifications of the cut-off point where an employer has entered into an agreement before 10 May 2013. Those agreements presumably will run for some time in the future. Can the Minister say something about the nature of these contracts and whether they tend to be short or long term? If they can be terminated by notice, there does not seem to be an obligation on an employer to do that under these arrangements. However, the Minister in her opening remarks said that there seem to be just a few of them, so it does not seem to be a particularly big issue.
The Minister has covered my final question, which was to get an update on auto-enrolment. That is encouraging news. We are thoroughly supportive of the impact of these regulations.
Baroness Stowell of Beeston
My Lords, I first thank the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for their support for these regulations. I am grateful to them for that.
In response to the comments of the noble Baroness, Lady Drake, in particular, I will say a little more about the market study into workplace pensions that the Office of Fair Trading launched in January. The aim of the study is to examine whether DC pensions are set up to deliver the best value for money for savers and to take a forward look at the impact of auto-enrolment. On 11 July, the OFT published an update on its progress. This included several areas it wishes to explore further, including the current level of governance over the performance of some schemes, which the noble Lord, Lord McKenzie, raised; schemes with two-tier charging structures in which deferred members pay higher charges; and schemes that do not have a realistic prospect of reaching sufficient scale to generate value for their members. The OFT is also concerned about the way that charges are currently presented and about charges in older schemes that may not represent value for money.
The Government intend to publish a consultation in the autumn, following the publication of the OFT’s report and recommendations. Our consultation will cover a number of issues including a charge cap, active member discounts and extending the prohibition on consultancy charges to all qualifying schemes. These regulations are a first step in a wider move towards addressing the whole area of consultancy charges and their potential effect.
The noble Baroness, Lady Drake, stressed the importance of the FCA and TPR working together. The regulators have already set out how they will co-ordinate and exchange information. The FCA and TPR will jointly publish a document which sets out how regulation of work-based pensions operates in the autumn. This will better articulate the existing regulatory framework. The FCA is updating its pensions strategy and this will inform its business plan, to be published in the spring of 2014.
The Deputy Chairman of Committees
My feeling is that the noble Baroness wishes to go on a bit longer. If she could finish in 60 seconds—
Baroness Stowell of Beeston
My Lords, I had just completed my response to the points made by the noble Baroness, Lady Drake, about the importance of the FCA and TPR working together.
Perhaps I may turn now to the points made by the noble Lord, Lord McKenzie, about the importance of good governance in automatic enrolment, with which of course I agree. There are various provisions to ensure this. In occupational schemes, the trustee already has a fiduciary duty to act impartially and in the best interests of scheme beneficiaries. There are also some requirements in place for people running personal pension schemes. In particular, the Financial Conduct Authority’s Treating Customers Fairly programme says that customers’ interests should be at the heart of how firms do business. The FCA’s “client’s best interests rule” states that,
“a firm must act honestly, fairly and professionally in accordance with the best interests of its client”.
However, there may not be a body within a personal pension scheme with an identified ongoing responsibility for considering whether the scheme is being run in the members’ interests.
As I mentioned earlier in response to the question put by the noble Baroness, Lady Drake, on prioritising savings, DWP’s call for evidence seeks views on the minimum standard that all schemes must be overseen by a governance body with a duty to act in the members’ interests. We are interested in how this could work in practice, including the decision-making powers that such a body would have, how it would fit into existing government arrangements and the resources that it would need to act effectively in members’ interests.
The noble Lord, Lord McKenzie, asked whether the Government will legislate for greater transparency on charges. We have published guidance on default funds for automatic enrolment schemes, which sets out that a breakdown of charges should be provided, illustrating their effect on outcomes. We welcome the steps taken by the industry to improve transparency and disclosure of charges, and we have powers to legislate for greater disclosure to members, employers or the regulator if necessary. Prior to any further action, consideration should be given to balancing the burden of any further requirements on the industry against their effectiveness in protecting consumers. There are a number of areas which may cause concern in this market, including complexity and charging, financial capability among consumers, and principal-agent issues.
The noble Lord, Lord McKenzie, asked about schemes already in place before 10 May and those that are not captured by these regulations. It is not possible to know with certainty how many were in place then, but as I said earlier, we understand that it is a limited number. Pension providers were reluctant to make new agreements for business when they knew that we were reviewing in this area. We will consult on extending the ban to qualifying schemes in our consultation on charges this autumn.
The noble Lord also asked for further information on the updated numbers of those who are now members of the automatic enrolment scheme. The figure of 1 million that I cited is the gross figure for all those automatically enrolled before any opt-outs. The opt-out seems to be running at a low rate, which is good news.
We have considered these regulations carefully this afternoon. As I have said, I am grateful for the support from noble Lords today. The regulations will provide important protection to millions of new pension savers as automatic enrolment continues to roll out.