(9 years, 10 months ago)
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Lord Bradley
“Drawdown funds: cap on charges
The Secretary of State may make regulations imposing a cap on the charges that may be imposed on members of flexi-access drawdown funds.”
Lord Bradley (Lab)
My Lords, the purpose of this amendment is to give the Government the ability to cap the charges on flexi-access draw-down pension products. It is important because it gives the Secretary of State the power to take action if it is clear that unfair charges are being levied. When the freedoms and flexibilities commence in April, there will likely be a large increase in the number of people using these products, and it is right that the Government are able to protect these savers.
In Committee, I laid out why this measure is necessary. A possible 320,000 savers will be looking to turn their pension pots into retirement income in April, and the charges that can be levied can be high. As Which?, the consumer body, has pointed out:
“Even for a simple fund structure from a low-cost provider, the annual management charge might be 1% plus an administration fee of £250 per annum, which would cover the cost of income payments and income level reviews, for example. A more common total cost is about 2% p.a. which is similar to that for an investment-backed annuity. Worryingly, we came across cases where the charges for a SIPP package and advice were 4%-4.5%”.
We remain concerned about ensuring that good products are available for low and middle-income savers, as well as for those who have large pension pots. As I have said, we should remember that the median pension pot is around £30,000. The cap on charges for these products on decumulation, alongside those in place during accumulation, could be a very important stage. As NEST pointed out in its recent consultation on the subject:
“The solutions we as an industry develop over the next few years could affect the lives of millions of people in old age. We absolutely cannot afford to fail consumers. Leaving their retirements to chance is not an option”.
As I said in Committee:
“A good first step would be to remove the possibility of savers being open to what may be termed rip-off charges. This should apply in the decumulation stage as well as the accumulation stage, because a rip-off charge is a rip-off charge, wherever a consumer finds themselves at the end of it”.—[Official Report, 12/1/15; col. 614.]
I accept that I have fallen into the jargon that we promised we would not pursue during our deliberations. Decumulation is when you are turning your pension pot into a decision on retirement income.
The Minister replied that this amendment was not required, because:
“There already exist regulation-making powers which allow the Government to cap charges on the new flexi-access draw-down funds. The Government took broad powers under the Pensions Act 2014 to limit or ban charges borne by members of any pension scheme. These powers would allow us to cap charges on draw-down funds offered by a pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers”.—[Official Report, 12/1/15; col. 617.]
This is obviously potentially very welcome, but I want take the opportunity provided by this amendment to probe a little further. Can the Minister advise the House today precisely which part of the existing legislation the Government would use were they to take action? Further, can he say whether the Government have any plans to take such action and when that would arise? I am trying to establish not just whether the Government believe that it is possible to do that but whether they would use the powers that the Minister says they now have. Even if the powers already exist—I look forward to the Minister’s response to my question—accepting this amendment would send a powerful signal that the Government intended to protect savers in this market from April. I hope therefore that the Minister will indicate that the Government are ready and willing, as well as able, to do so. I beg to move.
Lord Bourne of Aberystwyth (Con)
I thank the noble Lord, Lord Bradley, for his contribution and recognise that “decumulation” might be jargonistic—I am sure that I have used jargon myself—but “rip-off” certainly is not, and I think we agree that we do not want rip-off charges. The Government are as much against them as the Opposition, I am sure. I will do my best to answer the specific points that the noble Lord raised.
This amendment was tabled by the noble Lords, Lord Bradley and Lord McAvoy, also in Committee earlier this month, so noble Lords will forgive me if I have dealt with some of this previously. As I mentioned on that occasion, the Government take the issue of charges on pension products very seriously and are committed to taking action where there is evidence of consumer detriment. I can reassure the noble Lord on that point.
I am pleased to be able to say that the Government have powers under the Pensions Act 2014—specifically, Section 43 and Schedule 18 confer them—to limit or ban charges borne by members of any pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers.
Similarly, the Financial Conduct Authority has wide-ranging product intervention powers, including the ability to cap charges on flexi-access draw-down funds. These existing powers cover all the institutions that could offer such draw-down arrangements.
Flexible draw-down is a relatively niche product, aimed primarily at those savers with large pension pots. HMRC data from the start of 2014 showed that only 5,000 people per year have entered flexible draw-down, which has been in place since 2011. Flexible draw- down is clearly not currently a mass-market product.
With the introduction of the new flexibilities from April of this year, we expect this to change. We have given the industry a great deal of flexibility to develop a range of more flexible retirement income products and offer consumers greater choice. We want to see a vibrant and competitive marketplace, bringing forward products that meet consumers’ needs and enable consumers to make reasoned choices. The Government believe that a competitive market is the best way to ensure that products are well priced and we expect the expansion in take-up of draw-down products to exert a downward pressure on charges. Moreover, as scheme members can withdraw variable amounts, draw-down products generally require more administrative activity than accumulation-phase products. With the introduction of the new pension flexibilities, none of us can be absolutely certain how this market will develop. This was a point made quite fairly by both the noble Lord, Lord Bradley, and the noble Baroness, Lady Drake, in Committee.
Imposing a charge cap on draw-down at this stage, before we have seen the charges on the new products that are currently under development, could therefore risk setting a new norm and arrest any reduction in charge levels, or set a charge that is too low to be deliverable and stifle the draw-down market altogether. We therefore need to monitor how this market develops from April to gather further evidence about average charge levels before making any decision on what would be an acceptable charge level. The Government and regulators are therefore monitoring the development of new retirement income products, including the next generation of draw-down products, very closely.
Innovation and flexibility in the retirement income market must, of course, be for the benefit of consumers, not at their cost. The Government welcome the FCA’s commitment in its recent policy statement that it will commence a full review of its rules in relation to the retirement income market in the first half of this year. If these measures reveal evidence of sharp practice—rip-off charges, in the noble Lord’s phraseology—the Government and the FCA have the powers to act quickly to protect consumers. Along with the Financial Conduct Authority, we are also legislating to require reporting of charges and information on transaction costs by trustees and independent governance committees respectively of all workplace pension schemes from April this year. We are also committed to consulting further in 2015 on the transparency of additional costs and charges, to enable comparability across schemes; we will be considering draw-down funds as part of this work programme. We covered some of these transparency issues in Committee.
Baroness Drake (Lab)
The Minister made the point that I had not heard before that, from April 2015, the independent governance committees will be invited to report on draw-down products, which is to be welcomed. Could he clarify whether the full remit of the independent governance committees will apply to draw-down products, or is it just a question of reporting?
Lord Bourne of Aberystwyth
As I understand it, it would certainly cover the point that the noble Baroness makes about draw-down products; it will not simply be a question of reporting.
To conclude, while the Government share the concerns about member-borne charges, the Government and regulators are equipped with the powers to cap charges in all pension schemes, including draw-down products. We feel that intervening in the market at this stage would be wrong: intervention must be based on evidence, but it is an intervention that the Government have not shied away from making elsewhere in the market. We are closely and proactively monitoring developments in the decumulation market to consider whether there is need to use those powers.
In the closing remarks of the noble Lord, Lord Bradley, in Committee, he stated his hope that we would act in the interests of consumers if we were to see excessive charges in the new draw-down products that come to market. I can reassure him that this remains our intention. I therefore respectfully ask the noble Lord to withdraw his amendment.
Lord Bradley
I am grateful to the Minister for that response, and for taking up all the issues that I raised under the amendment. I noticed with interest his view that the competitive market will put downward pressure on charges, and I sincerely hope that that is the case. Monitoring of that situation will be essential to ensure that products do not come on to the market that seem attractive to customers, but with charges attached that are, because of the products’ complexity, hidden within them.
I welcome the fact that the Government have clarified to the House exactly what powers they have to deal with the matter, and the assurance that the Government not only have them but will use them in conjunction with the regulators if it is quickly seen that it is necessary to protect consumers from excessive charges. With those assurances, and with the certainty that this will be closely monitored both inside and outside the House, I beg leave to withdraw the amendment.
Lord Bradley
“National Employment Savings Trust transfers
In relation to NEST, within one month of the passing of this Act, the Secretary of State must lift the ban on transfers and the contribution cap.”
Lord Bradley
We return to the issue of the National Employment Savings Trust. The amendment requires the Government to lift the restrictions on NEST. In Committee and in a letter that the Minister was kind enough to send me between Committee and today, he explained why it is the Government’s opinion that that is impossible. I want to use this short debate to push back against that idea and explain why I believe that it is possible to lift the restrictions quickly, and why it should be done now.
NEST has been a success, as we all recognise and as the Minister acknowledged in Committee. As I said then, we should celebrate the fact that it has provided a high-quality, low-cost product in an important market that has not always—or often—served the saver well. Restrictions remain that prevent NEST building on that success. They limit, first, the contributions that can be made. In 2014-15, no more than £4,600 could be paid in. Secondly, there are restrictions on transfers from NEST in and out of other pots, except in certain circumstances, such as pension credits as part of a divorce settlement.
We have long argued that those restrictions should be lifted, but the Government pushed back, arguing that to do so would break EU state aid rules. That was obviously a serious point that needed to be addressed, as it was important not to leave NEST open to legal challenge. The EU ruled relatively recently that NEST is a service of general economic interest and did not breach state aid rules. My colleagues in the other place therefore sought legal advice to ensure that it would not breach state aid rules if the restrictions were lifted. That advice was published in November 2012, and concluded:
“It is important to appreciate that this can be done without offending EU state aid rules if the UK government presents the arguments as to why the subsidy no longer qualifies as a state aid under the Altmark principles”.
However, the Government still have not moved on that. Since then, we have had confirmation that legal advice sought by Gregg McClymont was accurate. The EU commission agreed that NEST would not breach state aid rules were its restrictions to be lifted. That is obviously welcome news, and has the potential to improve the savings environment for many in the UK. Alas, the Minister laid out, both in Committee and in the letter that he has since kindly sent me, why he believed that it was still not possible. The reason was that it appears to be EU state aid rules. In the Chamber the Minister argued:
“It is our understanding that we would have to reapply to vary the state aid consent that we have”.—[Official Report, 7/1/15; col. 442.]
However, later in the correspondence he said that the European Commission decision published on 26 June 2014 provided confirmation that removing the annual contribution limit and transfer restrictions from 1 April 2017 is compatible with the state aid measures afforded to NEST. The Commission also agreed that the removal of restrictions on individuals making transfers in and out of NEST could be brought forward to coincide with the introduction of automatic transfers, if they were earlier than April 2017.
Noble Lords will, therefore, understand if I am reluctant to accept the Government’s argument. We have been told repeatedly that state aid rules make this simple but important change to NEST impossible now. So can the Minister, first, provide more details as to why the EU state aid decision does not apply to any point earlier than 2017? Secondly, can he say why the decision on state aid would be challenged, as he suggested in the letter that it might? Thirdly, whose interests would be disadvantaged by the cap being lifted earlier? Lastly, how is that sufficient to invalidate the existing EU judgment? It would be helpful to the House to have further clarity on the Government’s argument as to why it is not possible to lift restrictions on NEST before 2017. I beg to move.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord Bradley, for his contribution and for allowing me to provide an update on NEST. I will do my best to answer the specific point on state aid rules.
I stress at the outset that the Government have broadly two concerns about the amendment. One of them is the state aid rules. The second is that we want NEST to focus on its mission to provide assistance to small and micro-employers in the run-up to 2017, when the restrictions will be lifted. However, I will go through some of the background and do my best to answer the specific points—or point—raised by the noble Lord, Lord Bradley.
As promised—and as acknowledged by the noble Lord opposite—during the Committee proceedings I wrote to the noble Lords, Lord Bradley and Lord McAvoy, copying it to other noble Lords who had participated in the debate, clarifying, I hoped, a point relating to state aid and the removal of the annual contribution limit and transfer restrictions from 1 April 2017. It must be noted that that letter referred to it certainly not being contrary to state aid rules to lift the restrictions on 2017. That was, of course, the consent given. However, it does not follow that it could be done any earlier; otherwise, a particular date would not have been chosen for lifting the restrictions. This is where the issue is: whether if a particular date is given, and consent is given for that date, it follows that you can lift the restrictions at any date before. This is the difference between us. I do not think it follows, where an application has been made for a particular date and consent is given, that you can predate it. However, I will try to come back to that.
Lord Bradley
My Lords, following that last point, perhaps I might quote again from the letter, which I accept I may not be interpreting correctly. It says:
“The Commission also agreed that the removal of the restrictions on individuals making transfers into and out of NEST could be brought forward to coincide with the introduction of automatic transfers if this were earlier than April 2017”.
Lord Bourne of Aberystwyth
Indeed, and I will come on to that point but it relates only to the transfers, not to the amount. The amount remains subject to the consideration of 2017. There are two limbs to this and I will try to cover that point, because we may be looking at a date slightly earlier than April 2017 if we succeed in achieving the aim of the automatic transfer. That limb of it could be there somewhat earlier but not the other limb, as it were. Let me proceed and, I hope, deal with the points. If not, I am sure that the noble Lord will let me know.
Later this week noble Lords will again, I hope, debate the National Employment Savings Trust (Amendment) Order, laid before Parliament on 16 December 2014. Its purpose is to implement the proposals that we have been talking about. As noble Lords will be aware, NEST was established to support automatic enrolment by ensuring that all employers had access to a low-cost workplace pension scheme with which to meet their duties, regardless of the size or profitability of their workforce. Its design, including the annual contribution limit—I think this is the point at issue, and is subject to the 2017 designation—and transfer restrictions, which admittedly could be somewhat earlier, focuses NEST on this target market of low to moderate earners, and smaller employers whom the market found difficult to serve. I believe that I mentioned this in Committee but I may be wrong on that point.
NEST already has more than 1.8 million members and 10,500 participating employers. NEST is doing what it was set up to do: supporting automatic enrolment, and doing so very successfully. During winter 2012 and spring 2013, the Department for Work and Pensions undertook a call for evidence on these issues of limitation. It sought to assess whether there was evidence that the annual contribution limit and the transfer restrictions placed on NEST were preventing it serving the market it was designed for. The evidence showed that although there was a perception that these two constraints were a barrier to access, the reality was that they did not prevent NEST from serving its target market. Seventy per cent of small and medium-sized employers expect to contribute no more than the legal minimum to their workers’ pensions. Until October 2017, minimum contribution levels are a total of 2% on a band of earnings. There is already a substantial amount of headroom within the annual contribution limit, which is currently £4,600, for contributions above the minimum. For example, minimum total contributions for a median earner on £26,000 a year would be £405.
In relation to transfers, individuals in other schemes who can already make transfers rarely do so. Evidence shows that more than 80% of workers fail to transfer their previous company pension funds across to their new employer’s scheme. In addition, around only 14,000 small and medium-sized employers currently provide trust-based workplace pension schemes that could be transferred to another pension provider. Of these, the Department for Work and Pensions estimates that around 5,000 might be able to consider a transfer of their workplace pension provision to NEST, which is equivalent to less than 1% of all firms.
Around 1.2 million small and micro-employers have yet to enrol their eligible workers. There is most likely to be a supply gap in this segment of the market, which underlies the rationale for establishing NEST. This is where the Government want NEST to focus. This is because of a shortage of provider capacity and the fact that other providers have traditionally not found it possible to serve this market at reasonable cost. Implementation on this scale needs NEST, the only scheme with a public service obligation, to be able to play a significant part in meeting this challenge.
If the House will indulge me for a moment, automatic enrolment has been a tremendous success so far, with more than 5 million workers enrolled into a workplace pension. Opt-out rates have been lower than expected, at around just 10%. We would not be in this position if not for the consensus that automatic enrolment has enjoyed from all sides of this House over the past decade. However, we must not be complacent. The 5 million workers enrolled so far work for only 43,000 employers. The challenge for the next phase of the rollout of automatic enrolment is to ensure that the remaining 1.2 million small and micro-employers are able to enrol their eligible workers.
The Department for Work and Pensions estimates that NEST will need to accept between 45% and 70% of those employers, ensuring that supply gaps are addressed. The scale of this challenge should not be underestimated—for example, during 2016, around half a million small employers will need to enrol their workers, which is an average of more than 40,000 employers per month.
With this in mind—and taking account of the evidence —the Government determined that removing the annual contribution limit and transfer restrictions immediately to address the perception of complexity would not be a proportionate response. Conversely, doing nothing would not be consistent with the Government’s broader policy objectives to encourage increased saving and consolidation of pots. We therefore concluded that legislating now to remove these constraints in 2017 was a balanced approach. Legislating now will address any current perception that the constraints are discouraging small employers from using NEST to meet their automatic enrolment duty. It will also send a clear signal that NEST will be on a similar footing to other schemes from 2017.
Lord Bradley
Once again, I am grateful to the Minister for his extensive response on this very important matter and his recognition, which the whole House shares, of the value of NEST and the excellent work it has done—particularly for low-income workers, giving them a very important model to pursue. It was not our intention for the amendment to undermine in any shape or form the focus of the mission of NEST that the Minister rightly referred to. It was to try to ensure that the continued auto-enrolment of employees continues, and NEST is part of that process because it is doing such a successful job. I am, however, grateful for his clarification of the European ruling and the distinction between transfers and contributions. I will read the explanation in detail following this debate.
We all want to ensure the continued success of NEST as an organisation. I am sure that over the coming months it will continue to play that role and I look forward to debating further these matters as further legislation is presented to this House. In the mean time, I beg leave to withdraw the amendment.
Lord McAvoy
“Scale of pension schemes
(1) The fiduciary duty of pension scheme trustees shall include a duty to consider whether the scheme has sufficient scale to deliver good value for members.
(2) Where trustees take the view that the scheme has insufficient scale, they must consider whether merger with another scheme would be in the members’ interests.
(3) The Pensions Regulator shall have the power to direct merger of pensions schemes where it would be in the interests of the members of each of the relevant schemes for merger to take place.
(4) The Pensions Regulator shall exercise this power in accordance with a methodology on which it has publicly consulted and which has been agreed with the Secretary of State.
(5) The methodology set out in subsection (4) shall be kept under regular review and revised when necessary, subject to further consultation and agreement from the Secretary of State.”
Lord McAvoy (Lab)
My Lords, Amendment 10 would ensure that the fiduciary duty of pension scheme trustees should include a duty to consider whether the scheme had sufficient scale to deliver good value for members. It is the same amendment that we proposed in Committee but, having reflected on the Minister’s answers, we believe that this is so important an issue that we want to return to it.
The Minister said in Committee that,
“although … the market is driving things in the direction of scale, it is the case that managers and trustees should be considering this as part of their duties”.—[Official Report, 7/1/15; col. 393.]
He also said that the framework was already there to enable mergers and scaling up, and indeed they are happening. However, it is crucial to us on this side of the House, whether the issue is governance and transparency or the way in which duties are imposed on trustees, that we should always be looking to get best value and protect the interests of the public throughout this process. Strengthening the arm of the Pensions Regulator will help to achieve that scale.
It is our view—and that of the Pensions Regulator, which was set out in evidence—that there has to be a scaling up of the UK pensions industry. At the moment there are far too many schemes, and we want a process in place to try to reduce that and build up scale. Our proposed new clause would not by any means reduce the number to a handful, but would give powers to trustees and the regulator to promote scale. It would be a sensible addition to the powers of trustees and the regulator. Given the widespread consensus in the pension industry that scaling up will have to happen, and that in doing so costs would be reduced and there would be a better outcome for savers, I hope and believe that the Government will wish to support the amendment. I beg to move.
Lord German (LD)
My Lords, once again I have a few questions for the movers of the amendment as well as the Minister. The sense that I get from the amendment is that bigger is always best and small is not to be preferred. The truth, presumably, lies somewhere in the middle of all that.
There are questions that arise from the amendment. When you have schemes—I presume there are many tens of thousands of them are around, but I do not know how many of them are of the size and scale interpreted by the amendment—it is important to ask what defines sufficient scale, which is the first part of the noble Lord’s amendment. I would like to understand what “sufficient” means. I presume that noble Lords would want to see all pension schemes with good governance, low fees and good outcomes for their members.
So my first question is: what is it that big schemes can provide that smaller ones cannot? I understand from reading Hansard from the other place that one of the suggestions from the movers of this amendment there was that asset management could be moved in-house. I wonder whether that is a sensible provision. Can the Minister tell us whether or not there have been successes with in-house asset management? Is that a given for securing lower costs and a better outcome for the consumer?
I turn to the other pressure that the amendment seeks to apply. The claim is that by forcing schemes to merge, there will be economies of scale. In the capping regime that the Government have undertaken, there must be a league table of high-cost fee pension schemes. Can the Minister say how many bigger and how many smaller providers are in that league table? This will enable us to discover whether or not big is best and whether there are appropriate economies of scale.
I need to test another issue with the movers of this amendment: namely, merging. Merging with whom and how is it to be determined? What the amendment seeks to do is to force pension schemes to merge. I understand that there has already been a significant shift in the number of schemes that have merged; the extent of the direction of travel is extensive. Perhaps the Minister could remind us of the speed with which schemes are merging and growing bigger. But if you force mergers, as with any arranged marriage you need to engage in a partner search. I wonder whether the movers of the amendment can tell us how this partner search is going to take place; who is going to undertake it and who is going to police it—because I think that would be almost impossible.
I remain to be convinced that forcing unwilling, low-cost, good value for money, well governed, smaller pension schemes to merge is the right approach to ensure that the members of the scheme get the best returns. There are alternatives. The fee cap, disclosure, regulation of governance and transparency are all issues that this Government have taken on board and are progressing. I am left with some doubts about whether the forced marriage regime which is being proposed by the noble Lords opposite is the best approach when there are better alternatives.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord McAvoy, for moving this amendment. It would impose an additional duty on trustees of pension schemes to consider whether the scheme is of a scale to deliver good value to members and, if not, to consider a merger with another scheme.
The principle of promoting scale to drive value for money for scheme members is one that we can all understand. However, the Government believe that introducing further legislation to ensure that the fiduciary duty of trustees includes a duty to consider whether a scheme has sufficient scale is unnecessary and overburdensome.
In response to my noble friend Lord German, I can confirm that there is already a trend towards larger schemes and away from smaller schemes. We contend that trustees’ existing fiduciary duties already require them to act in their members’ best interests, so it would be unusual if they did not consider this point. In addition, trustees must pay particular attention to four key areas. First, they must comply with governance requirements—for example, they must establish and operate internal controls. Secondly, they must have regard to investment governance and decision-making. Thirdly, they must adhere to administration practices—for example, record-keeping. Lastly, they should seek to prevent fraud—for example, theft or pension scams. Specific legislation would place the financial cost of managing a difficult and complex forced consolidation on members. In many cases it would be in direct conflict with scheme rules which may not permit such transfers and mergers.
A further difficulty with this amendment is the complicated underlying process that trustees would be required to undertake to implement its requirements. The noble Baroness, Lady Drake, put her finger on this in Committee when she said that problems could arise around transfers. Trustees would, for example, be required to find a suitable alternative scheme, assess the scheme’s suitability and undertake independent checks. Again, the costs of that would be borne by members; it could be a costly process if they were required to do that in the way this amendment suggests.
Lord McAvoy
I thank the Minister for his response. However, I have struggled a wee bit to align some of the comments made by the Minister and by his loyal and noble friend Lord German. We have been accused of saying that bigger is beautiful, but no, we did not, and of saying that bigger is best, but no, we have not said that. The Minister has used the word “sledgehammer” to describe this minor, moderate amendment, and it is just not true. The noble Lord, Lord German, referred to a “forced marriage”. The only forced marriage I see is, more appropriately, across the Benches here and it is heading for a rocky end in divorce and mayhem and not on good terms either.
I repeat what the amendment would do. It would ensure that:
“The fiduciary duty of pension scheme trustees shall include a duty to consider whether the scheme has sufficient scale to deliver good value for members”.
The only duty is to consider. It is not a forced marriage, it is not bigger is best, it is not big is beautiful, and it is not a sledgehammer. I am losing track of all the various adjectives used here to describe this little amendment. We think it is a reasonable duty to give them to make sure they at least consider it. No force of any kind is envisaged at all. The Minister is not an extreme person but I am disappointed that he has perhaps been waylaid by his loyal and noble friend into using some extreme language which does not fit the amendment. However, I beg leave to withdraw the amendment.
Lord Bradley
“Decumulation
(1) A qualifying money purchase scheme may not sell annuities directly to anyone who has saved with the scheme unless this is the recommendation of an independent annuity broker.
(2) A relevant scheme may provide an independent brokerage service itself.
(3) A self-provided annuity brokerage service will be considered independent for the purposes of this Act if the provision of its services is subject to the direction of independent trustees.
(4) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;(b) ensuring access to most annuity providers; and(c) minimising costs.(5) The standards meeting best practice for annuity brokerage services shall be defined by the Pensions Regulator after public consultation.
(6) The standards set out in subsection (5) shall be reviewed every three years and, if required, updated.”
Lord Bradley
My Lords, we return to decumulation, which is the process of converting pension savings into retirement income. The amendment is aimed at protecting savers who default into an annuity with their same savings provider. The annuity market is not working as it should and the Financial Conduct Authority’s recent Thematic Review on Annuities Sales Practices set out, first, that 60% of retirees with DC pension savings were not switching providers when they bought an annuity, despite the fact that around 80% of these consumers could get a higher income on the open market. Secondly, an estimated 91% of people with medical conditions could get a higher income on the open market through an enhanced annuity. Thirdly, firms’ sales practices are contributing to consumers not shopping around and switching, and missing out on a potentially higher income in retirement as a result. There is evidence of non-adherence by pension providers to the ABI code.
The amendment would provide safeguards for those who do not take advantage of the new flexibilities provided by the 2014 Budget changes and for whom an annuity remains the best product. There are people who will prefer the security of a product that guarantees them a set income for their entire lives, without the difficulty of making predictions about life expectancy. The FCA report recognises that annuities can still be a very attractive option—indeed, for some a better option—than a flexi draw-down product.
This amendment is about protecting people from a highly dysfunctional annuities market which can be riddled with excessive fees and charges, which sometimes capitalises on people’s inertia and lack of financial knowledge, that does not necessarily reward loyalty and that sometimes plays fast and loose with its regulatory framework. For example, the National Association of Pension Funds estimates that those who do not shop around receive up to 20% less in their annuity. The Financial Conduct Authority estimates that consumers could be missing out on up to £230 million in additional pension savings because they are not shopping around in the most effective way.
The annuitising process remains complex. The Financial Services Consumer Panel recognised this in December 2013 and said that a “good annuity outcome” might well require expert help. Our new clause would require the recommendation of an independent broker in order to sell an annuity to someone who has saved with the same scheme. This may be an existing provider or it may be another, but an independent broker would protect consumers from getting a bad deal when taking such a crucial decision in their lives.
In Committee, the Minister acknowledged that the process of annuitising is complex and requoted the evidence that says that,
“many consumers are not getting the most out of their hard-earned savings”.—[Official Report, 7/1/15; col. 363.]
He also concurs with us that annuities can be good value where the individual member selects a product that meets his or her needs. So, across the House, we recognise that the market is dysfunctional but that annuities should remain part of the options available for people planning for their retirement. However, we diverge on what should be done to help people find a way to the best product.
The Minister said that the Government, through providing the public with guidance,
“will ensure that individuals can access the support that they need to understand and navigate their retirement choices—for example, to help them decide whether an annuity product is the right choice for them … Where they decide to purchase an annuity, they must be encouraged and supported to shop around for the best deal. Those are key objectives for the guidance and the Financial Conduct Authority’s rules will underpin it”.—[Official Report, 7/1/15; cols. 363-4.]
I do not think that the guidance will be sufficient to enable the complex choice of deciding between annuity products. What guidance will do is to help people to consider where to annuitise, or whether to take the cash option or to go for some kind of draw-down product. This is fine as far as it goes. People who retain an independent financial adviser pay that person to select the best annuity options for them to choose between. There are hundreds of such products, all with a lot of small print and mystifying jargon and statistics. Choice requires expert help—even, dare I suggest, for the financially literate. The independent financial adviser is an expert, with regulatory backing and examinations to pass, so they do more than offer guidance. People may pay upwards of £1,500 for that assessment of options—a steep fee, and certainly one beyond the reach of people with small pension pots. However, the fee reflects the complexity of choosing the right product for that person to meet his or her particular needs. Guidance is not sufficient to choose an annuity.
There is other evidence to support advice for choosing annuities. As was made clear in Committee in the other place, pension schemes should ensure that any brokerage service they employ on behalf of their members meets best practice in terms of providing members with an assisted pathway through the annuity process, ensuring access to most annuity providers and minimising the costs. Pension schemes have a duty to get the best possible deal for their members, or to do it themselves in-house. Such good practice can be found in pension schemes such as the Royal Mail’s and the National Employment Savings Trust. Though this amendment, we are seeking such best practice in pension schemes across the country.
The Minister said in Committee in the same speech that requiring independent advice may have the perverse result of deterring people from selecting to stay with the same savings body. It is estimated that 20% of savers remaining with their existing company get a good deal, or perhaps even better than by changing companies. However, the fact that 80% do not get such a good deal indicates to me that our amendment is required to protect savers to ensure that they do. With respect, I think that the Minister is wrong in principle. An independent broker should consider all options, including remaining with the existing provider.
In many ways, I deeply regret the need for this amendment because it acknowledges that the change needs to come from government. Offering advice is best practice in some pension saving schemes, so why do they not all do it? If the industry acted in the best interests of all savers, it would not be necessary. Sadly, the industry does not always conform to the ABI code of conduct. Despite a series of damning reports from think tanks such as the Centre for Policy Studies, and the Office of Fair Trading report published in 2013 and the FCA reports in 2014, this financial sector has refused to change and put the best interests of savers first. Government action is required; the public should be able to look to us to protect them. At a time when the House collectively agrees that this series of pension reforms should seek to rebuild trust and confidence in pensions, particularly in the private pension sector, this amendment is needed to protect consumers.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord Bradley, for introducing this amendment, which we recently considered in Committee. In his speech in Committee the noble Lord explained the intent behind this amendment, as he has again today: to protect savers who put their pension savings into an annuity with the same provider they save with because of failure to shop around for a better deal. In Committee he also referred to the concept of empowering schemes to undertake the responsibility for ensuring the member gets the best deal, using their advantages of bulk buying. We can all understand the noble Lord’s motivation but, for reasons I will give, I do not think that the amendment would achieve these ends.
If the amendment were agreed to, an individual would be able to buy an annuity from their savings provider only if it was recommended by an independent annuity broker. This requirement would catch everyone who wants to buy an annuity from their savings provider, not just those who accept an annuity from their scheme without having looked for a better deal on the open market. It would also affect those who have made extensive investigations on their own behalf and who would therefore be paying a broker to tell them something they already know.
Moreover, the amendment would not protect consumers from getting a bad deal. I acknowledge that it might limit the providers who could offer that bad deal, but only regarding their existing customers. There would be nothing to stop someone getting a bad deal from an annuity provider chosen on the basis that it has a shop on their high street or appeared first on their internet search, as the annuity broker requirement would bite only if the member wanted to buy an annuity from his existing savings provider. If the broker does not recommend the savings provider, the member will not be permitted to buy an annuity from them. Are we so sure of the competence of all annuity brokers that we should, effectively, take this decision out of the hands of the person most affected by it and put it into the hands of the annuity broker?
On the idea of empowering schemes to undertake the responsibility for ensuring the member gets the best deal by using the advantages of bulk buying, there again appears to be nothing in the amendment to facilitate this. In any case, I remain agnostic on these advantages in the context of an individual choosing what to do with their pension savings. The purpose of the Budget changes is to allow the member to choose from a range of options that suit them best, based on their knowledge of their specific circumstances and wishes. It is not clear how schemes bulk buying annuities for cohorts of members would be able to reflect these choices.
In addition, we must always be careful of the law of unintended consequences—a law that cannot be amended by this House. There would be a real risk that members would simply stop even considering internal annuity products because of the inconvenience and delays, not to mention the extra costs involved in consulting a broker. In fairness to the noble Lord, that point was raised in Committee.
I remind noble Lords that some providers offer guaranteed internal annuity rates which can often be a higher rate than that available on the open market. We should be careful before we do anything which might deter members from taking advantage of such products. As I hope I have made clear, we agree that individuals should certainly be helped in reaching the decision that is right for them and, as noble Lords already know, we have put in place a number of ways in which this help is offered, and via the FCA we have brought forward additional safeguards thereto. However, we do not think that the individual’s decision should ultimately be constrained by others. On that basis, I urge the noble Lord respectfully to withdraw his amendment.
Lord Bradley
Again, I am grateful to the Minister for his views on this amendment, so clearly laid out. I was particularly interested in his comment that we should recognise the law of unintended consequences on this amendment. Some may consider it to be true of the whole Bill, but that remains to be seen.
Maybe the reason I am most persuaded to withdraw the amendment is that I will not have to try to pronounce “annuitise” as many times in the future as I have in the last few days. I recognise the points that have been made, and we will be debating further this afternoon matters relating to the guidance guarantee and how robust that will be in supporting people. We are particularly concerned about the number of people who remain within the same scheme and do not seek advice. We will look at that again as these matters unfold further through regulation. In the mean time, I beg leave to withdraw the amendment.
Lord Newby
“Public service pension schemes
In Schedule 5 to the Public Service Pensions Act 2013 (meaning of “existing scheme”), in paragraph 1, after “1972” insert “other than a scheme which relates to staff of the Secret Intelligence Service or Security Service”.”
Lord Newby
My Lords, these two amendments make a small change to the Public Service Pensions Act 2013 in respect of the pension schemes of the Security Service and Secret Intelligence Service to put beyond doubt the application of that Act to those agencies.
The first amendment introduces a proposed new clause after Clause 79 to ensure that the pension schemes of the Secret Intelligence Service and the Security Service are not included in the list of existing schemes in Schedule 5 to the Public Service Pensions Act. The amendments are necessary because since the Act was passed in 2013 new information suggests that the pension schemes for those security services might fall within the Act’s definition of an “existing scheme”. As such, they would be subject to the requirements set out in the Act that their current pension schemes should close on 1 April this year, and a new scheme, reformed in line with the Government’s principles on public service pension reform, should take its place.
However, at the time the Act was drafted it was thought that the security agencies’ pension schemes fell within a different category—that of public body pension schemes. The requirements here are different. Instead of a closing date of April this year, the Government have set out an expectation that public body pension schemes will reform by April 2018. Consistent with our original understanding of their status, the Government have been working with the security agencies to ensure that a new reformed pension scheme is in place ahead of 2018.
As I am sure noble Lords will understand, it would not be possible at this late stage for the Government to change course and put in place a new pension scheme for the security agencies in time for this April. It would also not reflect the agreement the Government have with the agencies and their staff to keep the existing scheme open until 2016. As things stand, without introducing a new pension scheme in April this year, there is a significant risk that the agencies’ staff would be left without any lawful pension provision after this date. That is obviously a situation that the Government could not allow to happen. The amendments I propose today will prevent any risk that the security agencies’ pension scheme will be forced to close on 1 April 2015 and will allow the Government to continue to work with the security agencies to put in place a new reformed scheme by the original deadline. The amendments do nothing more than this and will have no wider bearing on any other public service or public sector pension scheme. The second amendment enables the new clause to come into force on Royal Assent. This is to ensure that it is in force before 1 April 2015, so the risk of forced closure never manifests itself. I beg to move.
Lord Bradley
I am grateful for the explanation from the Minister and I can assure him that I have no intention of opposing changes to the secret service’s or the security services’ pension schemes.
( ) the first regulations under section 8(3)(b), 9, 10, 11 or 21,”
Lord Bourne of Aberystwyth
My Lords, this amendment changes the parliamentary procedure applicable to the exercise of some delegated powers contained in Part 2 of the Bill from the negative resolution procedure to the affirmative resolution procedure the first time these powers are exercised. These powers relate to exclusions from the definition of collective benefits and how schemes that provide collective benefits will operate in relation to certain key matters. The Delegated Powers and Regulatory Reform Committee recommended that the regulation-making powers in Clauses 9 to 11 and Clause 21 should be subject to the affirmative procedure the first time they are used. In response to amendments tabled by the noble Lords, Lord Bradley and Lord McAvoy, in Committee, I made clear that the Government accept that recommendation in respect of those powers. This amendment therefore places regulations made under those powers subject to the affirmative procedure on first use, as the Committee recommended. The Committee also recommended that the power in Clause 8(3)(b), allowing regulations to exclude a specified benefit from the definition of a collective benefit, should be subject to the affirmative procedure every time it is used.
I also explained when we debated the noble Lords’ amendments in Committee that the Government do not consider this to be appropriate because there needs to be flexibility to respond to new developments in scheme and benefit design that could result in benefits falling within the definition of “collective benefits” and hence becoming subject to the requirements of regulations made under Part 2 of the Bill, contrary to policy intention. Clause 8 is a key provision as it defines the scope of the provisions relating to collective benefits in Part 2. Because it is a key provision it should be subject to the affirmative procedure the first time it is used but there are circumstances where the Government may need to use this power without unnecessary delay to avoid members’ benefits being affected and to avoid schemes being subject to expensive requirements around the setting of targets, actuarial valuations and so on, which are not appropriate because other regulatory and governance requirements would be more appropriate to them. As the affirmative procedure could result in delay, leading to significant distress to members who would be without clarity as to whether their benefits were caught by the collective benefit provisions, we believe that the power in Clause 8(3)(b) needs to be affirmative on first use only. I therefore beg to move this amendment.
( ) regulations under section 48(3)(b), or( ) ”
“( ) Subsection (2) applies where regulations made by the Department for Social Development in Northern Ireland contain—
(a) provision made under section 51(3)(b), or(b) provision made under section 82 that amends, repeals, revokes or otherwise modifies a provision of primary legislation,(whether alone or with other provision).”
“( ) section (Public service pension schemes);”
““( ) regulations made under Schedule 17 to the Pensions Act 2014;( ) regulations made under Schedule 18 to the Pensions Act 2014;”
““( ) regulations made under paragraph 17 of Schedule 17 to the Pensions Act 2014;( ) regulations made under paragraph 6 of Schedule 18 to the Pensions Act 2014;”
Lord Bradley
“( ) must be sufficient to ensure that the body is capable of carrying out its functions under section 333C(1).”
Lord Bradley
We now come to the very important issue of the guidance guarantee. In Committee we debated a number of significant issues that this amendment addresses. However, I would like to probe the Government a little further on the arrangements for providing guidance through Citizens Advice and the Pensions Advisory Service.
Specifically, I am seeking assurances that those two organisations are capable of delivering the guidance and that the quality of the guidance will be consistently high across the two delivery partners. Key to this is that the delivery agencies receive the funding they need to deliver a quality advice service for those who request it. The whole purpose of this is to ensure that when the pensions freedoms and flexibilities are introduced in April, people have the quality guidance to make the crucial decisions about their retirement income.
Guidance—not advice, which is a regulated function—will be available from April 2015 to assist all the 600,000 people due to retire next year, or those who have deferred making decisions about their annuities until the legislation is passed, together with any 55 to 65 year-olds who are thinking of cashing in their pension pot. Further demand for the service may also come from younger people as the Treasury has said that people in their 50s or even 40s may be eligible for guidance.
In the debate on the previous amendment, we talked about unforeseen consequences of the legislation. I hope— this is just a background comment—that we are not in a position that a previous Government were in in the 1980s, when we blundered into a massive pension reform without thinking through all the implications. As Black and Nobles said in “Personal Pensions Misselling”, as quoted in The Blunders of Our Governments:
“No-one looked at pensions as posing particular problems because no-one knew or thought to look”.
To her credit, my noble friend Lady Turner was pretty much a lone voice in the debate in this House in raising concerns about that Bill, and concluded in a speech on 11 July 1986 that it was “vital” that people buying personal pensions should be offered adequate protection. I am very pleased that my noble friend is in the Chamber this afternoon.
It is against this background that we still have concerns and questions about how guidance will be organised and delivered in practice. These concerns include: people who decide to cash in their pension pots or to move money into complex draw-down products when an annuity may still have been their better option; the potential for product scams and whether the introduction of the criminal offence, although welcome, will be enough to deter the proliferation of what the Financial Times called “whizzbang investment schemes”; that the Financial Conduct Authority will not be specifically regulating the guidance guarantee; that the guidance will not be comprehensive enough to ensure that people fully appreciate the consequences of the decisions they make; and that all government policy has not been thoroughly thought through and clarified, because unless the policy is clear, the guidance staff will be put at a great disadvantage.
We know now that in the first instance the Government have allocated £35 million to the guidance service to recruit around 300 staff for the Pensions Advisory Service and Citizens Advice. It is still not clear how this amount has been calculated. Has the Minister made any further assessment of the likely take-up of the guidance from the first tranche of, say, the 600,000 people who may seek such guidance? As was pointed out in Committee, there has been a huge variation in projections on this point, from the Legal & General study of 9,000 people being offered free advice but with only a 2.5% take-up, to the Chartered Insurance Institute, which predicted a 90% take-up.
Further, has an estimate been made of the proportion of people who will seek guidance by phone from the Pensions Advisory Service and those who will seek a face-to-face interview delivered by the citizens advice bureaux? Without such an assessment, it is difficult to understand how demand for the service will be managed by the different delivery agencies.
Next I will deal with qualifications and training. These issues have been explored well by outside commentators, including Radio 4’s “Money Box” programme, Money Marketing and other specialist pension advisers. It has been noted that TPAS is recruiting telephone advice workers at a salary of around £30,000 per annum. Applicants are expected to have five years’ experience of pension work and advice and, ideally, a relevant qualification. However, the CABs are recruiting people for face-to-face work on salaries of around £18,000 to £24,000. Applicants there need merely to be numerate, and knowledge of pensions is desirable but not essential.
Further, the Treasury has said:
“All Citizens Advice and TPAS staff delivering the pensions guidance will receive intensive and detailed technical training prior to April 2015. They will be tested to ensure they have the necessary pensions knowledge before they talk to the public. They will also have access to a programme of continuous professional improvement”.
However, Barnett Waddingham, senior consultant and former TPAS chief executive Malcolm McLean has said:
“You can train people until you are blue in the face, but they need to have a starting point of knowledge. Citizens Advice seems to think that you can take people with absolutely no pensions knowledge and train them up in a few weeks’ time. Why is it asking for such a different level of pensions knowledge to TPAS? Arguably the face-to-face service is more difficult, because you are on your own in a room with someone”.
Is the Minister satisfied that staff recruited will be of sufficient quality to deliver the service? “Money Box” suggested that the face-to-face service could be second class compared with TPAS. Will he confirm that to date TPAS has recruited only 20 extra staff. Crucially, will he confirm that the intensive and detailed technical training will be completed when the system goes live in April?
My next questions are about coverage of the face-to-face service being provided by the citizens advice bureaux. In Committee, it was pointed out that Citizens Advice has a network of some 300 bureaux across the country, but the specialist pension guidance staff would be located in only 44 offices. In the light of the International Longevity Centre study that suggested that 63% of people seeking guidance would prefer a face-to-face interview, are 44 centres sufficient to meet the demand from April? Can the Minister confirm that these are sufficient? Have the Government made any estimation of the maximum waiting time for an appointment at one of these centres? If there is a delay in getting an appointment, a decision could be made about pension pots that is not in the best interest of the customer.
Since there are only 44 centres, what is the maximum distance that a person will have to travel to get guidance, and has account been taken of the distribution of these centres for public transport for those who may need it? In terms of the day-to-day operations of the service, will the offices be open early in the morning or late in the evening, or at weekends, particularly for those people who are in employment? Further, on the money allocated for the service, will the Minister again assure us that the invaluable work undertaken by CAB staff for some of the most vulnerable people in local communities will not be affected by the pensions work and that no funding provided by local authorities will be used by CABs for pensions guidance? Will the Minister also confirm that each interview will last up to 45 minutes and that the designated guidance adviser, as the CAB worker will be known, will just lay out the options for the customer to consider? Will the customer after a period of reflection be entitled to further consultation, or will they then have to seek paid independent financial advice?
Will the Minister confirm what the complaints procedure will be? Will the customer first complain to the CAB and what form will that take? If it is not resolved, will it then be passed to an independent adjudicator approved by the Treasury? Can the Minister give details about how that independent adjudicator service will work? If the complaint remains unresolved, will the Parliamentary and Health Service Ombudsman then intervene, but only with the support of a Member of Parliament? Is this all correct, and will the Minister give full details of the complaints procedure? If he cannot do so today, can he tell us when it will be published?
Finally, will the Minister give us an absolute assurance that both the TPAS and the CAB service will be ready to go live from April, in barely eight weeks’ time, not only in England and Wales but in Scotland and Northern Ireland, and that there will be clarity on all policy areas so that those delivering the guidance are able to give accurate information to the customer?
At the heart of the amendment is our wish to ensure that the Bill works in the way that is intended and that the guidance will be available, taken up and prove effective in helping people to choose the right products to fund their retirement, and to make the right decisions about lump sums or other retirement income. To date, this House has been provided with too little information about the guidance to be offered. At this late stage, we must be satisfied that the guidance will be fit for purpose and will address all the issues that the public will need to consider in order to make one of the most important decisions of their lives. I beg to move.
Baroness Oppenheim-Barnes (Con)
My Lords, this Bill is a very welcome reform and has been met with a good deal of justified praise. I, too, have concerns about the possibility of the citizens advice bureaux being able to take on such another role—and to do it effectively, because I have the greatest admiration for it having dealt with it over many years. Its staff are all volunteers. They do not necessarily have specialised knowledge. Those who have had training in dealing with the pensions market are scattered quite thinly, as has already been said by the noble Lord, Lord Bradley. We had not very long ago two big Bills which imposed new duties on the citizens advice bureaux, the most recent being the Consumer Rights Bill and, before that, the regulatory reform Bill. They were given extra sums of money, which were not overgenerous, because they now have to give specialised information. I know that big-shot financial advisers often get things very wrong and they are supposed to be experts, so a great onus is being placed on the citizens advice bureau that I am concerned about. These are very important matters; this is a very important and welcome Bill; and I hope that my noble friend will be able to say something that is helpful and pacifies my concerns.
Lord Flight (Con)
My Lords, I, too, have some reservations about the guidance arrangements, in two different types of area, which I hope can be put at rest. First, imagine that an individual with a pension of £20,000 goes to get guidance. Is the guidance likely to say, “Go on—pay the tax, take the money and spend it”? The main guidance will be divided between buying an annuity or entering into a draw-down. The pension might be a bit small for the mechanics of a draw-down, so one is likely to be guided towards an annuity. For the present and foreseeable future, we all know that bond yields are artificially low, and that anyone who buys an annuity today will look back in five, seven or I do not know how many years’ time, when bond yields are back to normal, and say, “My God, I got a really bad deal when I bought that annuity. I know that I cannot sue the Government because it was guidance, not advice, but it was pretty bad guidance to suggest that I buy an annuity when what it was based on—mainly bond yields—were artificially low”.
The second thing that worries me is that people will, as it were, be left in the air. Their guidance might sort out whether they would be right to buy an annuity or right to do something else, but let us say that the guidance is, perhaps, that they should leave their money in the pension scheme and draw down only when they want to. They will then need someone to manage those investments. As a result of what I believe to be the very mistaken RDR reforms, most financial advisers are not willing to take on individuals with less than a substantial sum of money. How, therefore, will the individual get from the position of government guidance on what type of product they might buy to selecting a fund manager or a fund, if they are not able to get financial advice? As a result of the contortions that we have got into in financial regulation, people cannot get such advice from the government guidance bodies because the Government cannot give investment advice. I think a lot of people will end up feeling that they are left hanging in mid-air, even if they have gone through a very good guidance process, as to where they should go to choose the right product.
Baroness Turner of Camden (Lab)
My Lords, it was very kind of my noble friend on the Front Bench to mention me in his very interesting summary in support of this amendment. This is a Bill that involves a number of risks for the individual. That is one of the reasons why the individual benefiting from it should also have access to very reliable advice. That is what this amendment is all about: ensuring that the Government make quite clear that individuals have a right of access to reliable information. This has to last them for a long time, and it is on a risky basis unless they have proper guidance before they enter into it.
Lord Newby
My Lords, this amendment relates to the funding of the Pension Wise service. It requires that financial assistance given to the service and to Citizens Advice is sufficient to allow them to discharge their function of giving pensions advice. The Government wholeheartedly agree that it is vital that delivery partners are funded appropriately to discharge the function of giving pensions advice. As I made clear in Committee, there are already provisions in the Bill that effectively safeguard that. The Bill places the Treasury under a legal duty to take appropriate steps to ensure that people can access pensions guidance. Implicit in this duty is a requirement to ensure that delivery partners are appropriately funded to deliver their element of the service.
The noble Lord, Lord Bradley, asked a number of questions, in Committee and again today, about both funding and process. I hope that I can reassure him on them.
On funding, I am happy to reconfirm that all delivery partners, especially those such as the Pensions Advisory Service and the three Citizens Advice bodies in the UK, which will rely wholly or largely on government funding, will be appropriately funded to allow them to deliver pensions guidance, and that that funding will be ring-fenced for that purpose. There is no question that Citizens Advice core grant funding from local or national government will be expected to be diverted from other activities to fund pensions guidance. Citizens Advice is very experienced in effectively managing multiple ring-fenced funding streams.
I can also reassure noble Lords that grant agreements are already in place to ensure that delivery partners are appropriately funded in the current set-up phase. That funding is coming out of a £20 million development fund that the Chancellor announced in the Budget, of which a £10 million advance was approved by Parliament last July to cover preparatory work on the service. Funding agreements for the live running phase are currently being discussed and agreed with the delivery partners.
In its guidance publication on 12 January, the Treasury set out further detail on the costs of preparing to deliver the guidance service in the current financial year, and an initial estimate of how much it will cost—namely, £35 million. Both in Committee and today, the noble Lord, Lord Bradley, asked me to give a more detailed description of what assumptions have been made to come up with that figure, because there is a wide degree of uncertainty as to how many people will take it up. I am sure that he will understand why the Government are reluctant to publish a central assumption, as it were. Inevitably, it will be less than 100% accurate and will raise all kinds of questions about whether it should be higher or lower than the figure given. All that I can say today is that we have talked to the potential guidance providers and other stakeholders, and formed a range of likely outcomes, which has informed that figure of £35 million.
I can confirm that the majority of the funding estimate will go to delivery partners. We are continuing to take on board information from delivery partners and others. I can confirm what I said in Committee, which is that we will confirm a levy figure in March, which we expect to be £35 million, or very similar. If the Treasury finds that more resource is needed, it will provide that resource in the forthcoming financial year and claw it back from the industry in subsequent years. So there is flexibility to ensure that we can meet demand once we see how the scheme is going.
The noble Lord and other noble Lords asked a number of detailed questions about citizens advice bureaux’s readiness for 6 April. I hope that I can reassure them on progress to date. First, delivery partners have had clarity on FCA standards since they were published last November. That provides the framework for the guidance against which their compliance will be measured. I can assure him that delivery partners and the Treasury have been working hard to ensure that the service will fully comply with those standards.
The noble Lord asked about the 44 participating bureaux. The 44 bureaux, the names of which have already been published, are the first tranche of participating bureaux. We will not limit the number to 44 across the country as a whole; that is the first tranche, and a further wave will be announced shortly. So there will be significantly more than 44, and we are still in discussion with Citizens Advice about exactly what that number should be.
Recruitment is under way, and there has been a very encouraging response so far. I understand the concerns of the noble Lord and others about training and whether, at the end of it, people will be able to give high-quality advice. The development of that programme is well under way and it will be accredited by the Chartered Insurance Institute, which is an extremely well respected professional standards body. All trained guidance specialists must have undergone training and passed the assessment at the end of the training programme.
Lord Bradley
Is the Minister confirming that they will be accredited with that qualification before the service goes live at the beginning of April?
Lord Newby
My Lords, that is the intention. I was about to say that although not every person recruited by Citizens Advice will be an expert in the field, it is recruiting at two levels, including those with relevant experience. It would, therefore, be a complete mistake to gain the impression that the Citizens Advice workforce will be made up of well meaning people who have just had a bit of training. Some will have had a small amount of training but others will be seasoned experts in the field. That has been borne out to a certain extent by the people coming forward so far.
Lord Bradley
On that point, will the customer be able to choose whether they have a specialist adviser or someone with a very small amount of training on this issue?
Lord Newby
No, I do not think that that is the intention. We believe, and are confident, that everybody will have been trained to a level at which they can give appropriate advice. It would be completely impractical and unnecessary to proceed as the noble Lord suggests. I can assure him that the Treasury is working extremely closely and collaboratively with the guidance bodies to design the service and ensure that we are ready for April. Are we confident that we will be? Yes, we are.
The noble Lord asked a number of other questions. Could I confirm that we expect a typical advice session to last 45 minutes? Yes, we can. He asked whether people would be able to go back and get a second bite of the cherry. We have already said that that will be possible, although we hope that if people do not have all the guidance they need, directing them to the website will deal with a lot of second-order issues.
The noble Lord outlined his understanding of the complaints procedure. I believe that the way he outlined it is correct. If not, I will write to him—I need to read it first.
The noble Lord also asked about operating hours, which are still being finalised.
Baroness Hollis of Heigham (Lab)
Would the Minister mind expanding a little on this? He, or certainly his colleagues, will know that as a result of cuts by the MoJ, CABs have lost 60% of their funding that has been going into legal aid. To my knowledge, this means that CABs have substantially restricted their hours, they are often unavailable on the telephone and they are offering a very reduced and spartan service, particularly in rural areas, where, at the same time, individuals cannot access through broadband any of the websites that TPAS and so on may go on to produce. Is the Minister saying that there will be enough funding, over and beyond paying the CAB advisers £18,000 a year or whatever after their training, to keep CABs open at full hours, rather than simply to mount the skeleton service that is all they can afford at the moment, thanks to the cuts by his colleague, the right honourable Chris Grayling?
Lord Newby
My Lords, I am saying that we will designate a very significant number of CAB offices to provide this service, and the funding that we will provide will allow them to meet this additional requirement without having to draw on any of their existing funds. We are not planning to operate this service through every CAB, so I cannot say how it will affect any particular one. However, the key principle under which we are operating is that the CABs which participate in giving this advice will have the funding to do it without drawing on any of their other resources.
Baroness Hollis of Heigham
I am grateful to the noble Lord for giving way. Is the Minister saying therefore that the CABs will be open all the hours necessary for pensions advice, but will still be unavailable to help people who are at risk of losing their home because they have housing benefit problems?
Lord Newby
My Lords, all I am saying about operating hours is that they are still being finalised.
The noble Baroness, Lady Oppenheim-Barnes, expressed some concerns that other noble Lords have expressed, in particular that CAB volunteers might be expected to do this onerous job. I assure her that everybody who will be providing the guidance will be paid, so it is a rather more formal arrangement than that.
The noble Lord, Lord Flight, talked of the possibility of people being given inappropriate advice. It is not a question of the guidance being like advice, to the extent of saying at the end of the session, “You should therefore do X rather than Y”. The purpose of the guidance is to set out the options so that people can make informed choices. He referred to people hanging in mid-air because they would not know what to do next. We hope that the combination of the guidance session and the information on the website will be extremely helpful. As we discussed earlier, the companies with which an individual already has a pension pot will have significant responsibilities to ensure that their existing policyholder takes all relevant circumstances into account. To the extent that the companies believe that the policyholder may be going off the rails, they are able to point this out to them and, we hope, guide them on to a more sensible path.
Perhaps I may conclude by quoting Gillian Guy, the CEO of Citizens Advice, speaking on BBC Radio 4’s “Money Box” last Saturday. She said:
“We are absolutely confident that our service will be up and running and … we’re really pleased that we have a role in this pensions guidance delivery, because it actually plays to our strengths in helping people understand the options that are open to them and setting them on a path where they can take decisions in a well-informed place”.
We agree. I hope that the noble Lord will feel reassured that the Government will provide sufficient funding to delivery partners to provide the guidance service and therefore feel able to withdraw the amendment.
Lord Bradley
Again, I am grateful to the Minister for his response to the many questions that I and other noble Lords have raised today. I must admit that I am not particularly reassured by the responses. I am still concerned about the level of qualification and training of the staff in CABs. This is no reflection on the CAB which, as the noble Baroness said, does invaluable work. When I was a Member of Parliament, my local CABs were superb in giving supporting advice to my constituents, many of whom I referred directly to them. This is no comment on the integrity or the quality of the CAB. I just worry that by moving into this specialist area, it will not have the level of expertise to give the proper guidance to ensure that people make the right decisions about their retirement income.
Again, while I cast absolutely no criticism on the CAB, I worry that the haste in which the service is to be rolled out—in barely eight weeks’ time—will not ensure that the bureaux are able to deliver as comprehensively as will be required, or that they have the level of staff in the 44 offices in the first instance to respond to the demand. In regard to the second tranche which the Minister mentioned, the CAB website refers to “a small number” of additional officers. Again, that concerns me when it comes to the national coverage of the scheme—there will not be a sufficient number of accessible officers to meet the demand.
I recognise why the Minister is not able to give me a take-up figure, but surely in determining what the demand will be on 7 April, some estimate must have been made. Again, I worry that if that has not been done in a very effective way, people may have to wait weeks or even months for an appointment with one of the advisers to get advice, by which time they may have taken a decision that is not in their best interest. The underpinning of the freedoms and flexibilities will quickly fall into disrepute because of the lack of opportunity to get an appointment and for the guidance to be in an accessible place at the time the person needs that help and advice.
A huge number of issues have been raised this afternoon across this House that still need to be properly addressed. I fear—I mentioned it as background—the problems of the 1980s; I sincerely hope that the guidance service will not quickly fall into disrepute due to lack of preparation, lack of staff qualifications and lack of coverage to meet the demands made of it. I make all those points to ensure that they are recognised by this House. We will monitor the situation closely, as will the public and outside bodies. Suffice it to say that that is what we will do. In the mean time, I beg leave to withdraw the amendment.
“( ) must ensure that guidance includes the consequences of pensions flexibility on eligibility for income-related benefits and on assessment for care and support under section 17 of the Care Act 2014 (assessment of financial resources).”
Baroness Hollis of Heigham
My Lords, I would like to move Amendment 21 in the names of my noble friends Lord Bradley and Lord McAvoy and the noble Baroness, Lady Greengross, who apologises for having to leave early. I hope, as this is a modest amendment asking for guidance, that the Government will accept it. I really do. There are huge issues to be untangled.
The Government are proposing that, at 55, people should have full access to their DC—defined contribution —pots, without, I believe, fully considering how this affects entitlement to means-tested, income-related benefits, IRBs, as well as payment for social care. Clearly, if a warehouseman of 56, earning perhaps £20,000 per year and living in private rented accommodation with a DC pot of £25,000, in future extracts £8,000 of it to buy a new car, that £8,000 will count as extra income in that year. Some of it will be taxable and it will affect any income-related benefits he may have, such as housing benefit. Obviously, guidance is absolutely essential, so that people with modest pots understand this. Taking some capital from their DC pot adds to their income—no question. It can both be taxed and affect any benefits.
So far, so simple—sort of. But what if our warehouseman can access the £25,000 in his pension pot but chooses not to do so, so that it sits there as capital? The social security capital rules of people of working age are clear: you are allowed £6,000 of savings without affecting your income-related benefits; from £6,000 to £16,000 your savings are assumed to generate an additional income of £1 for every £250 of capital per week; more than £16,000, you lose entitlement to means-tested benefits altogether. If, therefore, our warehouseman has savings, say, in an ISA worth £25,000, he has to spend down £10,000 of that to become eligible, say, for some housing benefit.
The question then is: what counts as accessible capital or savings such that they affect working-age benefits? Not your home—I will not raise issues of equity release here—nor an inaccessible pension pot; but savings accounts, unit trusts, stocks and shares, and ISAs do count, sensibly, so that one cannot shelter large savings, say of £100,000, while claiming taxpayer-funded benefits. The rules are there for a purpose. If you deliberately deprive yourself of capital—perhaps buying that Lamborghini—in order to claim housing benefit, you are treated as though that capital is still available to you.
However, from April you can access your DC money purchase pot at 55 in exactly the same way as you can access your ISA. Both pensions and ISAs are tax privileged. From 55, the only difference will be that with pensions you get tax relief when putting money in, and with ISAs when taking money out. Growth in either a pension or an ISA pot is tax-privileged in exactly the same way.
We know, however, that £25,000 in an ISA pot debars you from IRBs. What will happen now to a £25,000 pension pot equally accessible at 55? Under the existing rules on social security, having such a pot should stop you claiming IRBs until you have spent it down to below £16,000. Our warehouseman, who after 20 years with the same firm injured his back at 53, gets ESA and housing benefit, but at 55, because he can access his DC pot of £25,000, exactly like ISAs, he should lose his benefit—until, exactly like ISAs, he has spent it down to £15,000, whether or not he actually takes money out of the pot.
However, the Government do not like that; it rather spoils the pensions party. So they seek—irrationally, in my view—to treat pensions and ISAs differently, because, as the letter to me of 22 January from the noble Lord, Lord Bourne, of which other noble Lords have also received copies, states:
“The key difference between the classification of pensions and ISAs rests on the tax treatment. Pensions have never been taxed, and so are effectively deferred income which has yet to be taken. As the primary purpose of pensions is for retirement, this is not assumed to generate an income until pension credit age. ISAs on the other hand are treated as capital rather than income, because they have been saved for out of already-taxed income. Although ISAs and pensions may appear more similar in the light of flexibility, they remain fundamentally distinct”.
But they do not; the argument is patently absurd. The key difference between pensions and ISAs in the past has not been their tax treatment, which is effectively identical if you are a basic rate taxpayer, both in work and in retirement, with the same tax relief on the way in and on the way out. That makes no difference at all, despite the letter from the Minister. The key difference has always been that ISAs are accessible and pensions are not. Because ISAs were accessible, they counted—rightly, in my view—against income-related benefits. Because pensions have not been accessible but were ring-fenced for retirement, they rightly did not count against income-related benefits.
The Minister says that the primary purpose of pensions, and therefore the reason for treating them differently from ISAs between 55 and 65, is that they are for retirement. That is true now, but it will not be after April 2015. That DC pot of £25,000 can be used at 55 for anything—buying a car, helping a daughter with university fees or helping a son with a mortgage deposit—just like ISAs. The pension pot can be wiped out by 65 even before you hit retirement—just like ISAs. Equally, the pension pot and the ISA pot made by choice both remain untouched until 65—just like ISAs. There is no difference. To argue that they have a different purpose because “pensions are for retirement” is whistling in the wind. DC pensions need no longer be for retirement at all; they are just like ISAs. Much of the research so far suggests that some people will treat them in practice exactly like ISAs and use them for whatever they see fit. For the Government to treat them differently makes a mockery of fair and consistent rules in social security.
Baroness Drake
My Lords, this amendment addresses the need for the Government to make savers aware of the interplay between pension freedoms, entitlement to income-related benefits and assessment for care and support. Pension reforms give rise to a significant risk that those with modest incomes will be overtaxed when they take cash out of their pensions—a concern shared by the FCA, the Pensions Policy Institute and the International Longevity Centre.
In the face of complexity, people get security from taking cash and putting it in the bank. They may not understand that that could result in their facing a significant tax bill, generating less income for their retirement. However, that is not the end of it. Savers accessing the cash from age 55 may not understand the risk of depriving themselves of income-related benefits. Some savers therefore risk both moving into a higher tax band than normal and paying unnecessary income tax, and losing benefit income because cash in the bank means loss of entitlement to benefits.
For pension savers below the state pension age who are claiming income-related benefits, the DWP will not take into account their pension savings if they do not access them. Once they do, however, the funds accessed will be treated as income, such as an annuity, or capital, depending on how they take them; the rules are different. Savers receiving benefits—such as housing benefit, council tax deductions, income support and income-based jobseeker’s allowance—could therefore experience benefit loss if they take significant cash out of their pension pot. For example, and as my noble friend explained, under current rules, anyone below state pension age with capital below £16,000 can apply for housing benefit. When an individual’s wealth goes above £6,000, they will start to see a reduction in benefit, and once it reaches over £16,000 it will stop completely. Reductions in council tax operate on a similar principle.
For pension savers above the state pension age, under the new freedoms, as now, pension savings are taken into account when assessing entitlement to benefits —whether or not the saver has accessed them. Defined contribution pots are given a notional income, or the actual income taken from the pension pot is used. Under the new freedoms, a saver, through income draw-down, can keep varying the amount of cash that they draw down. As it is not a single decision, will people have to report every time they access their savings?
If the saver takes all of their pension pot in cash—not to behave irresponsibly but to put it on deposit in their building society—they might meet a loss of entitlement to benefit. The noble Lord, Lord Newby, in his letter to my noble friend Lady Hollis, states:
“We believe that people should use their funds responsibly if the alternative to doing so is claiming income-related benefits”.
I completely agree with that sentiment. However, that message has not been communicated clearly to people on income-related benefits or to those who are potentially on those benefits. It has been lost in the “Your Money, Your Choice” promotion. Pension savers who take the cash and put it on deposit may not believe that they are behaving irresponsibly. As Martin Wheatley of the FCA observed: when faced with complexity, people prevaricate. If the simple option of just taking the money and putting it in their bank is given to them, they may just make that snap judgment.
Where savers take the cash and go on a spending spree, they risk being caught by the “deliberate deprivation of assets” rule, which is meant to stop benefit abuse. I will paint a scenario. Complexity and behavioural bias push people towards taking cash. They are overtaxed and the value of their savings falls. The cash, put responsibly in the bank, results in a loss of benefit income so the real value of their savings falls further. If they spend their capital too aggressively they could be caught by the deliberate deprivation of assets rule. One could say that it was their freedom of choice: they made the mistake and took the cash and put it in the building society; or they blew it, so they should not be allowed to fall back on the state. However, we should at least make sure that people understand that. I am pretty confident that most people out there do not have a clue on the interface between the benefit system and the pensions freedom. If the Government want them to make an informed choice, they are entitled to and need to know.
How does one police the new arrangements? Does the DWP have the capacity to keep track of how pension cash has been spent? Will providers have to keep records of savers’ behaviour, and for how long? What if someone takes their savings in cash in their 50s, when working, and there is a long gap between taking it, spending it and seeking benefits? What evidence will be used for determining deliberate deprivation? Will it include taking too many cruises? The Government’s policy and rules need to be clear and people need to have clear information so they can take informed decisions. I do not demur from the sentiment explained by the noble Lord, Lord Newby, but at least allow people to understand how they discharge responsible behaviour.
There is also a lack of clarity on how the Government’s pension freedoms are intended to complement their policy on the provision of care and support. I have not seen any analysis that has worked through the subtleties of that interplay. Rather, as the noble Baroness, Lady Jolly, confirmed in her letter to my noble friend Lord Hunt, the Government’s view is that the impact on care and support in the longer term is difficult to assess, because it is difficult to predict how people will behave under the new freedoms. The Government have therefore chosen a practical response on how people will contribute to the cost of care. In essence, people will be charged and assessed on the basis of their assets at the point of needing care. Cash taken from pension pots is an asset to be taken fully into account. If a saver has an annuity, that income will be taken into account. If the saver has not accessed their funds, a notional income will be calculated. These are complexities which have to be explained to the saver who is looking to make an informed decision. On the one hand, if people take all their pension fund in cash and put it in a savings account, it could be utilised more quickly when paying for care. On the other hand, if people do not take an annuity and spend their pension cash quickly, they will make less of a contribution to the funding of social care costs. This presumably has policy implications for any Government.
How will access to cash from income draw-down products be monitored or required to be taken? If draw-down is to be treated as income, could you take such a little tiny bit that you protect your pension assets and have a minimal amount taken into account? I do not have a clue and I am sure most people do not either. Will the rules require you to take a certain amount from your income draw-down product when you are being assessed for care support? I do not want to get into debate on government policy, but people need clear information on what the policy and rules are so that they can make informed decisions.
Lord Bradley
I will be brief as I cannot better the brilliant analyses of my noble friends Lady Hollis and Lady Drake on the interrelationship between the pension freedoms, income-related benefits and care costs. The only point I want to emphasise relates to our previous amendment on the guidance guarantee—namely, it is critical that there is absolute certainty and clarity of policy in this area to ensure that those who are giving guidance to customers are consistent and clear about what that guidance should be. I look forward to the Minister’s detailed response to the analyses of my two noble friends.
Lord Newby
My Lords, I hope that noble Lords will forgive me if I concentrate on the amendment. First, the Government believe it is right that the content of the guidance session is set out in FCA standards which are unfettered by a restrictive legislative framework.
The FCA consulted on these standards last year and published its responding policy statement, including a near-final version of the guidance standards, in November last year.
Baroness Hollis of Heigham
I apologise for interrupting the noble Lord quite so quickly, but the amendment was not meant to refer solely and exclusively to face-to-face guidance that may or may not be offered by the CABs or TPAS. What I am talking about is a government leaflet, the content of which should also be on a website, explaining in very plain English exactly what all these interactions mean, and therefore allowing people to reflect on those before they then go off to the CABs to decide what is the best thing for them.
Lord Newby
My Lords, I remind the noble Baroness that there will be three strands of guidance: face-to-face guidance; telephone guidance; and information on the Treasury website. Perhaps we will produce a leaflet, but we hope that much of the detail of the background to the way in which the system will work will be on that website.
Baroness Hollis of Heigham
I am sorry to press this, and the noble Lord is being very generous in allowing me to intervene again. However, after following this Bill through, I do not know how these provisions will interact. I do not know whether it is okay to recycle your ISAs into pensions and carry on claiming full income-related benefits. This is not about guidance from the CABs. Unless the CABs know whether you are allowed to recycle your ISAs into pensions, how the hell can they give anybody any advice?
Lord Newby
My Lords, I will come to that. I shall deal with the amendment first because it raises an important point in itself before we get to some of the broader issues.
As I say, the FCA consulted on the guidance standards last year, and published its policy statement in November. The near-final FCA standards make certain specific requirements with regard to both collecting relevant information and providing certain types of information. Ensuring that consumers consider factors which are pertinent to their retirement decision, as relevant to them, is an important part of that which the standards capture. The standards require that, according to consumer needs, people are encouraged to provide relevant information about their financial and personal circumstances and their objectives to ensure that they can get maximum value from their guidance experience. In terms of financial information, this might include pension pots or benefits, other sources of wealth or income, including where the individual has a spouse or partner, tax status and debt. In terms of personal circumstances, this might include whether an individual has dependants, or a spouse or partner, and the state of their health and potential long-term care needs. In terms of objectives, this might include the consumer’s plan for retirement, so they can identify their income needs.
The noble Lord, Lord Bradley, spoke to this issue in Committee and asked about the effects of the new flexibilities on eligibility for income-contingent benefits and social care. That has been the burden of other speeches today. This is an extremely important issue and one to which the Government have given, and continue to give, detailed consideration. It is important that the treatment of such products is clear for claimants and for decision-makers, as noble Lords have pointed out. On guiding principles, the Government want to ensure that someone’s decision to use a flexible pension product does not significantly impact on how their means are assessed for social security purposes or social care charging purposes.
Our intention is for the principles of the current rules to remain in place after April this year. At the last Autumn Statement we announced a change to the notional income rules for benefits from April 2015, so that 100%—rather than 150% as now—of the income that an equivalent annuity would offer is taken into account. This will therefore be a more generous calculation than under the previous rules. Guidance will be tailored to an individual’s circumstances and give consideration to issues such as welfare, the need for and future likelihood of social care, and levels of savings and debt. However, where it is clear that consumers need specialist help, they will be directed to relevant specialist guidance and information as appropriate. In the case of social care needs, the guidance service will direct people to their local authority, which, under the Care Act, is obligated to direct them to sources of information and advice.
Benefits entitlement will be one issue for individuals to consider in making their choices, but it is only one of several important factors, such as tax consequences and personal circumstances. As we discussed on tax, there is a special requirement on pension providers to discuss with customers the potential tax implications of the course that they might follow. I can also reassure the House that the guidance service will ensure that consumers also consider relevant issues related to pension decisions, such as state pensions, debts, and other assets, wealth and income. The Government are committed to ensuring that individuals are equipped and empowered to make informed decisions on how to use their pension savings and to take account of these wider circumstances.
On the amendment, the guidance will include benefits. The problem that the noble Baronesses so eloquently described, particular concerning ISAs, is that there are a number of extremely detailed interactions between the savings options and the benefits and tax consequences that will need to be dealt with as part of the guidance. The concern expressed by the noble Baroness, Lady Hollis, which I completely understand, is that the Treasury and DWP will not get their act together and are not up to the job of doing this. Unsurprisingly, I am significantly more confident than she is. She has begun a correspondence with the DWP on the ISA issue; an e-mail from her to the department is awaiting a response. I can give her an assurance that she will get a detailed response in writing to the questions she has raised between now and Third Reading.
I am not seeking in any way to diminish the fact that potential areas of confusion might arise in particular cases. The challenge that we have accepted, and hope that we can rise to, is to ensure that the guidance and the people providing it will be able to guide people through some of these thickets. If it were not complicated, we would not need to go to such lengths to set up a guidance system in the first place. We are confident that we will deal with these issues, and that people, as they take up guidance, will get the information they require to enable them to make informed choices.
Baroness Hollis of Heigham
My Lords, the Minister’s answer—this is of course not personal; he is dependent on the briefing and the current state of the consideration in the two departments—frankly has appalled me. It is shocking. We are eight weeks away and apparently the two departments have not yet worked out the different rules for the treatment of ISAs and pensions. Are you allowed to cycle your ISAs into pensions to protect them but see the benefit bill go up? Answer: we know not.
We seem to have different rules for social care for those below 65 and above 65—above 65 you will pay, but below 65 you need not. A capital asset is essentially your pension. Is that right? We do not know. We do not know whether we will have fairness between people of a generation—those aged from 55 to 65—or whether we will have intergenerational fairness between those below 65 and those above it.
This is not about guidance; it is nothing to do with guidance at this stage. It is about getting the darned policy right. The policy has not been established. On all the difficult issues, the Government have said, “Have your choice and don’t worry about the small detail”. I am sorry but something like 15 million people are out there who in one way or another will be getting income-related benefits or state pension who need to know. We are eight weeks away and the Government, in the Minister’s words, say these issues are under “detailed consideration”.
This is awful. I have never seen anything of such significant importance to individuals in all my time—20-odd years in social security—or of such sizeable financial implications for taxpayers. We are eight weeks away and we have no clarity of policy that could therefore inform guidance. Writing guidance down and sending it off to CAB and TPAS is easy. What matters is getting the policy straight, and as far as I hear from the Minister tonight the Government have not even begun to do that. It is frankly appalling. I do not blame him. He is obviously a messenger—if I may use that word impertinently—from the DWP and is trying to put the best case he can, but this is shocking. I am sorry that unless he can tell us the policy answers to the questions raised by my noble friends and me tonight this has to be further explored at Third Reading because, as he said, it is under “detailed consideration” and he cannot give answers now.
All that the Minister has so far are inconsistent and contradictory policies, whether they come from HMRC, social care or the DWP. Even though he has had plenty of notice, he has been unable to put those bits together into a jigsaw so that we can even begin to recognise the picture on the box. Eight weeks away! He must be mortified. I would be if I had come to the House with that brief. I hope that, as a result, he will stamp his foot, and we will see whether he is in a position to give clarity of policy, following which there may then possibly be clarity of guidance on Third Reading. If not, I strongly suggest that he postpones Third Reading until the Government have got their act together. In some anger, I withdraw the amendment.
Lord Bradley
“Pension flexibility: Treasury review(1) The Chancellor of the Exchequer shall, within a period of 18 months from 6 April 2015, publish and lay before both Houses of Parliament a comprehensive review of the impact of pension flexibilities.
(2) The information published under subsection (1) must include—
(a) the distributional impact, by income decile of the population;(b) a behavioural analysis;(c) an analysis of the cumulative impact on Exchequer revenues;(d) an analysis of the impact on the purchase of annuities.”
Lord Bradley
I will be brief on this amendment because I share the concern of my noble friend Lady Hollis about the previous amendment, and I do not want to delay the Treasury Minister stamping his feet to get it sorted out as soon as possible.
This group contains amendments which, in their various ways, require the Treasury to publish updates on the key fiscal and behavioural effects caused by the freedoms and flexibilities introduced in this Bill and in the Taxation of Pensions Act. I wanted to return to the debate that we had in Committee and see whether this time I could convince the Minister of the importance of doing so. I hope that I am not unfairly characterising his argument in Committee by saying that the essence of it was that this is not necessary because the relevant data will be published elsewhere. He said that,
“there is no need, in the Government’s view, for further reviews of the Exchequer impacts of the policy as the Government have already committed to keep these under review through the usual processes”.—[Official Report, 12/1/15; col. 576.]
There are two reasons why I still believe that these amendments represent a good additional way of tracking the effects of the policy. The first is that while the relevant data may be published elsewhere, a single document containing the Government’s assessment of the effects, specifically of the new freedoms and flexibilities, would be a welcome addition and require the Government to focus on the overall effects of the policy.
The Government are fond of talking about how significant and novel the changes are. In the foreword to the recent update the Chancellor wrote:
“The government is introducing the most radical changes to pensions in almost a hundred years”.
It is therefore incumbent on the Government to go further than before in thoroughly monitoring the effects and ensuring the public have easy access to the information.
Lord Newby
My Lords, these amendments would require the Government to publish two reviews of the impact of pensions flexibility. I will explain again to noble Lords why the Government believe that they are unnecessary. First, on the issue of the request for distributional analysis,
“by income decile of the population”,
Amendment 23 seeks to require that the Government review the distributional impact of pensions flexibility no less than 18 months after the Bill takes effect. As set out during debate on the Taxation of Pensions Bill, pensions flexibility does not have a direct consequential impact on household incomes. Distributional effects will be driven by the choices individuals make about how and when to take their pension. In addition, household income is not necessarily a reliable measure of pension wealth, particularly in the years immediately prior to retirement. It is possible that the impacts of this policy could be misrepresented if we were to review them only against the distribution of household income.
Turning next to the issue of behavioural analysis which we discussed in Committee, the costing of tax policies often takes account of how individuals will behave in response to them. The assumptions that underpin this behavioural assessment and the methodologies used to arrive at them are certified by the independent OBR. The assessment of how people will behave is, of course, fundamental to the costings that the Government published in the Budget for the impact of pensions flexibility on the Exchequer. The policy costings note published alongside the Budget sets out in detail how the figures have been calculated and so how the Government have estimated the number of people who will access their pension flexibly.
Although I will not describe that methodology in detail here, it is freely and publicly available. Additionally, the Government have set out information elsewhere on the number of people they expect to access their money flexibly. The Tax Information and Impact Note published at the Budget and updated since states that the Government expect,
“around 130,000 individuals a year to access their pension flexibly”.
Policy costings notes set out the assumptions and methodologies underlying costings for tax and annually managed expenditure policy decisions. This practice was established at the June Budget 2010 and reflects the principles outlined in Tax Policy Making: A New Approach, published alongside the Budget that year. This publication is part of the Government’s wider commitment to increased transparency. However, as discussed in Committee, the Treasury considers that in certain circumstances—usually regarding tax-planning and avoidance—making more detailed behavioural assumptions public can have the potential to affect the behaviour they relate to, and can as such be potentially detrimental to policy-making. I reassure noble Lords that the Government will be closely monitoring the behaviour of individuals through tax data when the new system comes into force. This will also be made public through the significant amounts of data on tax receipts and liabilities that HMRC publishes annually.
Both these amendments would also require reviews of the effects of pensions flexibility on the Exchequer, including the impact on income tax, national insurance contributions and the use of salary sacrifice arrangements. When considering this, it is important to note that at the Autumn Statement the Government published estimates of the Exchequer impact of the policy as a whole. These costings, which were certified by the independent Office for Budget Responsibility, cover all the changes made to the policy since the Budget as a result of consultation.
As noted earlier, table 2.1 of the Autumn Statement document set out the total impact of these decisions publicly. After debate on this subject in the other place during the passage of the Taxation of Pensions Bill, the Financial Secretary to the Treasury wrote to the former committee for the Act, setting out these impacts. This included costings for the £10,000 annual allowance, which the Government have introduced to protect the flexibilities from being used by individuals to gain unintended tax advantages.
Turning first to the issue of salary sacrifice, as I explained in Committee, the costings published as part of the Autumn Statement are based on the same central assumptions that underpin the costings published at the Budget. Since the Budget, the Government have explored in more detail the effect of salary sacrifice on this costing. These costings have been scrutinised by the OBR, which was created to provide independent and credible analysis of the public finances. In line with standard practice, these are accounted for as changes to the forecast and so are not outlined in table 2.1 of the Autumn Statement document.
In recognition of the concern raised by Members in the debate on the Taxation of Pensions Bill about the likely impact of salary sacrifice on the Exchequer, the Government’s estimates of these costs were included in the letter sent by the Financial Secretary, and I outlined them in Committee. As the Financial Secretary stated in the debate on the Taxation of Pensions Bill in the other place, the Government will be closely monitoring behaviour under the new system and will work closely with industry to ensure that the system remains fair and proportionate.
The Government therefore believe that there is no need for further legislation in relation to reviews of the Exchequer impacts of this policy, as the Government have already published a significant amount of information and have committed to keeping the Exchequer impacts under review through the usual processes.
Amendment 23 contains a provision that would require that any published review include any impact the pensions flexibility measures might have on the sale of annuities. Data on annuity sales will continue to be available through other channels, such as the data published by the ABI and publications by individual firms. For the Government to review this would be an unnecessary duplication of information already in the public domain.
As I have set out, much of the information requested by this amendment is already in the public domain, published as part of the fiscal process. I hope that that will satisfy the noble Lord. He asked me a specific question about whether his assumption in Committee was correct. I believe it is; if I am wrong, I will write to him. But in the mean time, I hope he will withdraw his amendment.
Lord Bradley
I am grateful to the Minister for his response, particularly on that last point about the example I gave in Committee regarding salary sacrifice. I accept his assurance that, as far as he is aware, all possible scenarios in relation to salary sacrifice have been taken into account in the calculation of impacts on Exchequer revenues, and thank him for his offer to write to me if that is not comprehensively covered by the point I made in Committee.
I am obviously disappointed that the Minister is not prepared to bring all the issues together into one coherent document that would be available to the public and to Members in both Houses of Parliament for ease of analysis of that information. However, I am pleased that he has assured us that, as part of the process of monitoring, the behavioural effects will be taken into account, because the consequences of all these changes need to be very closely monitored. But, in light of the time and the urgency with which he needs to address many of the issues raised today on Report, I beg leave to withdraw the amendment.
“( ) provide for this Chapter not to apply in prescribed circumstances in relation to a member of a prescribed scheme or schemes of a prescribed description;”
Lord Bourne of Aberystwyth (Con)
My Lords, this group of amendments is required to ensure that the transfer provisions contained in Schedule 4, which replace provisions under the Pension Schemes Act 1993, continue to operate effectively. The amendments will also ensure that the regulations being adjusted to take account of the new transfer rights that we are creating operate correctly. It may appear that we are taking a range of additional regulation-making powers, but I reassure noble Lords that that is not the case.
Many of these amendments will enable the continued operation of regulations that have been created under existing powers in the Pension Schemes Act 1993 and their adaptation for the new transfer provisions. These regulations were created under a broad power in the Act to modify or disapply the transfer provisions. This power related to salary-related schemes. As this term will no longer be used, that section of the legislation was removed. However, the regulations that flowed from it still need to operate in the broader regime that we are now creating. Rather than replace the broad power, these amendments introduce a number of more specific powers so that it is clearer in the primary legislation what the regulation-making powers are being used for.
I will now briefly set out what each amendment does. Amendment 25 restores an existing power to ensure that the Transfer Values (Disapplication) Regulations continue to have effect by creating a new limb to new Section 93(10) to provide a power to disapply the right to transfer in prescribed circumstances in relation to a prescribed scheme or a member of a prescribed scheme. It is necessary to restore this power to ensure, for example, that the current provisions relating to NEST and transfers continue to have effect. Amendment 33 makes identical provisions for the corresponding Northern Ireland legislation.
Amendment 26 will allow the continued operation of the regulations that give a member more time to make a decision about their transfer if their cash equivalent value has changed—for example, due to a mistake in the original calculation—after they have received their statement of entitlement. From April, members with safeguarded benefits will be required to take “appropriate independent advice” before their transfer out can be processed. This amendment would allow regulations to provide for more time to apply for a transfer if they do not obtain their financial advice within the usual three-month period, should this prove necessary. Amendment 29 will allow regulations to make corresponding time extension provisions for trustees to do what is necessary to give effect to their members’ wishes.
Amendment 27 provides a power to allow the continued operation of the transfer regulations that enable a member to choose whether to proceed with a transfer where the amount of the cash equivalent shown in a statement of entitlement is subsequently increased or reduced.
Amendment 28 makes a consequential amendment to the existing legislation that sets out when a member’s right to a transfer falls away. It puts beyond doubt that the right to a transfer value falls away either after three months or after any extension period granted by the legislation. This amendment has been made in response to industry concerns that the current situation could place trustees in a conflicting position where they could not action the transfer, as the advice had not been obtained within the relevant period, even though, in theory, the right to transfer still existed.
Lord Bradley
I am grateful to the Minister for his explanation. Clearly, it is important that the transfer provisions smoothly flow between this legislation and previous legislation to safeguard people’s benefits in their pension schemes. While I acknowledge the Minister’s comment that the amendments do not add even more regulations, in the scheme of things, this matter probably would not be something that we would be too concerned about because of the number of other matters that already have to be dealt with. However, that is the nature of the Bill—it relies heavily on regulations—so the explanation of these amendments is important in the overall scheme of the Bill.
“( ) After subsection (6) insert—
“(6A) Regulations may extend the period specified in subsection (1A)(a) in prescribed circumstances.””
“(3B) Where regulations under subsection (2)(b) provide for the cash equivalent shown in a statement of entitlement to be increased or reduced after the member has made an application under section 95, the regulations may provide for the application under section 95 to lapse (but this does not prevent the member making a fresh application in respect of the increased or reduced cash equivalent).””
(1A) A member of a pension scheme loses the right to take a cash equivalent in accordance with this Chapter if, after the member makes an application under section 95, the duty of the trustees or managers to do what is needed to carry out what the member requires is extinguished by section 99(2A).
(1B) Nothing in subsection (1) or (1A) prevents the member from later acquiring a new right to take a cash equivalent in relation to the same benefits.”
“( ) After subsection (4A) insert—
“(4B) Regulations may extend the period for compliance under subsection (2) or (3) in prescribed circumstances.””
“( ) provide for this Chapter not to apply in relation to a person of a prescribed description;”
“Regulations may extend the period specified in subsection (2)(b) in prescribed circumstances.”
“( ) After subsection (2) insert—
“(2A) Regulations may extend the period for complying with the notice in prescribed circumstances.””
“( ) provide for this Chapter not to apply in prescribed circumstances in relation to a member of a prescribed scheme or schemes of a prescribed description;”
“( ) After subsection (6) insert—
“(6A) Regulations may extend the period specified in subsection (1A)(a) in prescribed circumstances.””
“(3B) Where regulations under subsection (2)(b) provide for the cash equivalent shown in a statement of entitlement to be increased or reduced after the member has made an application under section 91, the regulations may provide for the application under section 91 to lapse (but this does not prevent the member making a fresh application in respect of the increased or reduced cash equivalent).””
“( ) After subsection (4A) insert—
“(4B) Regulations may extend the period for compliance under subsection (2) or (3) in prescribed circumstances.””
“( ) provide for this Chapter not to apply in relation to a person of a prescribed description;”
“Regulations may extend the period specified in subsection (2)(b) in prescribed circumstances.”
“( ) After subsection (2) insert—
“(2A) Regulations may extend the period for complying with the notice in prescribed circumstances.””
“8 (1) Section 29 (regulations and orders) is amended as follows.
(2) In subsection (2), after “other than” insert “regulations under section 18A above or”.
(3) After subsection (2) insert—
“(2A) A statutory instrument which contains regulations under section 18A may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.””
Lord Bourne of Aberystwyth
My Lords, the House will be relieved that this amendment is relatively straightforward. It enables any regulations that are made under new Section 18A of the Judicial Pensions and Retirement Act 1993 to be subject to the affirmative resolution process.
Clause 78 of the Bill provides a power to create a fee-paid judicial pension scheme via new Section 18A of that Act. The creation of such a pension scheme is a legal requirement on the Lord Chancellor as a consequence of the Supreme Court ruling in O’Brien v Ministry of Justice.
The Delegated Powers and Regulatory Reform Committee report for the Bill recommended that such regulations be subject to the affirmative regulations procedure, and we are pleased to confirm this. This brings regulations on judicial pensions in line with those that will establish the new judicial pension scheme starting in April 2015, providing a high level of parliamentary control in respect of any changes to judicial pensions. I beg to move.
Lord Bradley
It would not behove me well to challenge anything that the Supreme Court rules on, but I am sure that it is as relieved as we are that the regulations would be subject to affirmative resolution.