Occupational Pension Schemes (Charges and Governance) Regulations 2015
Debate between Baroness Drake and Baroness Donaghy
Baroness Drake (Lab)
My Lords, there is much to welcome in these regulations, including the banning of active member discounts—what I prefer to call “inactive member premiums”—where charges increase when a member stops contributing; the capping of charges at 0.75% in the default arrangements; that the cap will apply at the level of the individual member; and a set of minimum standards for governance, including the oversight of master trust multiple employer schemes where employers are not all part of the same corporate group. As I said, there is much to welcome.
When the staging of automatic enrolment is completed in 2018 and some 8 million to 9 million people will be newly saving, or saving more, most of them will not have made an active choice about their scheme or their investments. Many employers will be making most of the key decisions about their workplace schemes but they lack the capability and/or the incentive to ensure that workers receive value for money. Therefore, neither employers nor employees can be expected to drive competition—a proposition stated by numerous bodies in recent months.
As we know, auto-enrolment is built on inertia. At the same time, several reports reveal conflicts of interest in the industry. Therefore, it would be a failure of public policy if millions of citizens were auto-enrolled into workplace pensions but Parliament had not ensured that sound governance was in place and value for money delivered.
I am most grateful for the helpful replies to all my queries from the person at the DWP identified as the contact point in the Explanatory Memorandum. However, I have further questions. Regulation 3 specifies that, once an arrangement satisfies the definition of a “default arrangement”, it will always be a default arrangement and will be subject to the charge cap. If a scheme has a default arrangement covered by the charge cap but contributions then cease because the employer chooses to close that scheme, or a company becomes insolvent so that there is no employer, will the scheme’s default arrangement in those circumstances always remain subject to the charge cap? Are there any circumstances in which a default arrangement ceases to be covered by the cap?
Similarly, an employer’s scheme has a default arrangement but when an employee leaves, the employer is not bound to keep the ex-employee in their scheme. An increasing number of employers are choosing not to do that. If an ex-employee does not arrange their own transfer, the employer defaults their savings into a pension product that is not covered by the workplace pensions charges and governance protections. I can see no provision in these regulations that imposes restrictions on the pension products into which employers can default their ex-employees’ accumulated savings. I would be very happy to be told that I am wrong on this point.
Furthermore, if an employer is able to close their scheme and default arrangement, and bulk transfer the deferred members’ savings into an alternative pension product, which some can under the rules of their scheme, there appears to be no restriction on the products into which such bulk transfers can be made. Can the Minister say whether there are any restrictions on such bulk transfers, where they would breach the principle that a default arrangement is always covered by the charge cap?
Coming on to value for money, any charge not covered by the cap will be covered by the value-for-money assessment which trustees have to undertake on charges and transaction costs—a very welcome requirement—but some imponderables remain. TPR and the FCA want trustees and the independent governance committees to adopt a common approach. Although the Pensions Regulator publishes guidelines, good value is not defined in the regulations so it is not clear what is intended by a common approach. Trustees are required under the regulations to calculate,
“in so far as they are able … the transaction costs”,
which anticipates the complexities in the different types of costs—brokerage fees, bid-offer spreads, transaction taxes et cetera—and of getting hold of all the data. Trustees will need the co-operation of investment managers but if those managers are subject to confidentiality agreements with their own service providers, they will not provide all the information. So the Government need to consider such confidentiality agreements if transparency on transaction costs and other costs is to be achieved.
A matter of interest is how the charge cap will apply to the new pensions flexibilities. I welcome the provision that a saver who wants to access the new flexibilities and transfer out of their default arrangement into another scheme or draw-down arrangement will be protected by the cap for charges incurred by transferring out. But that leaves outside the cap the costs of transferring into the draw-down arrangement and the ongoing charges in the draw-down product. On the final rules for charges, the FCA reports that the Government have decided that, for the time being, draw-down should not constitute a core service and that in view of this temporary position, the FCA does not intend to amend its proposed rules. Can the Minister confirm that excluding from the charge cap the charges in income draw-down arrangements is indeed a temporary position and that they will be included later?
The regulations ban active member discounts but employers will be able to pay some or all of the charges on behalf of their current employee. So when Regulation 11(1) refers to prohibiting trustees and managers imposing higher charges “on a non-contributing member”, that means the overall level of charges to which the member’s pot is subject and not the charges borne by the member themselves—a subtle but important distinction.
The regulation allows employers to choose to subsidise active members, but active members cannot be subsidised by deferred members. I support the Government in wanting to allow generous employer practices towards employees who are active members. It will be important to ensure there is no masking of differential charging. The requirement that the amount the employer pays must be equal to the subsidy the employees receive will act as a control up to a point. But these practices will need to be properly documented by employers and providers if differential charging is not to be masked. The ban on applying higher charges applies to workers who cease contributing after 6 April 2016—not before, I understand. Similarly, the charge cap will not apply to those who ceased contributing before its introduction. That still leaves a lot of pension savings vulnerable to poor value for money.
The minimum standards of governance are welcome. The requirement on the chair to sign an annual statement will focus the minds of trustees, although many trustee boards are already very focused. Failure to prepare such a statement will result in a fine but it is unclear what the penalties are for non-compliance with other governance duties. Raising the governance standards in master trusts for multiemployer schemes is very welcome, but the requirement to have at least three trustees is a rather low threshold, especially as only two of them need to be independent of the provider.
I welcome the regulations because they represent an important start, not the end of the journey to achieve better value for the saver. However, there are still important matters to be addressed. A cap of 0.75% on a default arrangement needs to come down further. It is not the role of the saver or public policy to fund inefficient business models or conflicts of interest. Full transparency on all costs levied on the saver is needed. Extending the cap to include transaction costs is also a need, as is achieving value for money in draw-down products and annuities. We await the regulations to ban commission and consultancy charges in occupational schemes.
I repeat that there is much in these regulations that are welcome, but ensuring sound governance through the effective control of conflicts of interest I am sure remains unfinished business.
Baroness Donaghy (Lab)
My Lords, I feel to some extent that this is where I came in. I spent the 1970s persuading a number of university colleges to join a decent occupational pension scheme and to leave their insurance-based, extremely poor-value local college schemes. Incidentally, the charges for those poor-value schemes were between 4% and 5%. I was able to persuade people that that was such appalling value that they would be much better off in a different scheme. That is where I think there is a bit of repetition of history. That is not counting, of course, what the investment people took from the scheme; that was just the administration charge. Therefore, I cannot help thinking that in the pensions political world we take one step forward and then sometimes two steps back.
Inertia selling is something that I strongly agree with when it comes to an issue as important as pensions, and we certainly had that in the 1970s. People were joined up to their schemes and they had to take a step to opt out. That was made unlawful by a Conservative Government and it changed the pensions world substantially.
I am sorry if I have a good memory on these things but that is very important when we start off on something that might turn out to be a very good thing, as only history will show whether it is. My fear is that the smaller schemes will have a worse record on governance and compliance. The surveys that are pointed out in the Explanatory Memorandum prove that 24% of small schemes are likely not to conform, compared with 10% of big schemes. So here we go again on this roundabout. I understand that the Government do not want to force schemes together, but there is a logic in pointing out that you get better value for money in the larger schemes.