Pensions Bill

Baroness Hollis of Heigham Excerpts

Monday 20th January 2014 Grand Committee

[Lord Bates]

My Lords, this Government recognise the importance of supporting individuals in making decisions about their retirement income choices. These choices can be bewildering and the implications of choosing an unsuitable product can be devastating, as the noble Lord has very clearly set out for us in moving this amendment. That is why the Government continue to lead on and to support a whole range of initiatives aimed at driving up standards among providers, providing guidance to trustees and education to members. As well as the ABI code of conduct, we welcome the new Pensions Regulator guidance setting out expectations for what trustees should provide for their members. In addition, the Money Advice Service is further developing its support for those approaching retirement to help them engage with how their personal situation relates to products and services which might be appropriate to their needs.

However, we need to understand whether this activity is making a significant difference in terms of value to the consumer. The Government will therefore be assessing the ABI evaluation of the code of conduct planned for later this year, and the Pensions Regulator will be assessing the impact of the new guidance this summer. We will also be looking at other indicators to assess the extent of change in the market.

Wider regulatory activity includes the Financial Conduct Authority’s thematic review of annuities and consideration of a market study. The review will assess the extent of detriment to consumers of not shopping around—the numbers presented this afternoon have been quite startling and stark—and will consider other indicators of risk, such as insurers’ retention rates and whether profits in the market are high or unreasonably high. The FCA will report later this quarter. In addition, Her Majesty’s Treasury and the Department for Work and Pensions are currently reviewing the broad range of available research and statistics on decumulation to explore the impacts and interactions between market and consumer behaviour and government policy.

Our concern about the noble Lord’s amendment is that, while rightly highlighting a key issue, it would increase the risks for consumers and place additional burdens on employers. I will deal first with the risk for consumers. By sending all members to an annuity broker, we would effectively be pushing them away from regulated advice routes, as brokers, unless they are also FCA-regulated advisers, are not required to ensure that the product is suitable for the consumer. At this point, it is worth saying that the range of options available to somebody facing retirement are bewildering but are also many: there is not just the open market option but whether they should be retiring at all or whether they should be using the flexibility that is available, whether they should be drawing down on a pension pot rather than actually purchasing a new version of it, and what type of annuity—

[Baroness Hollis of Heigham (Lab)]

That is very helpful from the Minister but, if he is going to do that, he is going to have to look at the artificially high base of alternative income—the £20,000 a year you have to have before you are allowed to enter into these arrangements, which was based on not being a charge to public funds but which is unreasonably high. I fully support the Minister’s argument but it follows that he must actually look at his minimum alternative income requirement.

[Lord Bates]

Those points about alternative income requirement are correct but there are a number of reasons, not just those, as to why annuity rates are historically low, to do with interest rate levels.

[Baroness Hollis of Heigham]

The Minister may not have understood my point. He was, quite sensibly, making the point—I entirely agree with it—that people should be able to consider alternatives to annuity arrangements, such as draw-down and the like. All I am saying is that to do that, and not to have to cash in, you have to have, under Treasury rules, a minimum of £20,000 in alternative regular income. That is on the grounds that you need to protect people against falling into a charge on public funds if they exhaust their private savings. That figure seems to be artificially high and the Minister will need to look at that again.

[Lord Bates]

Okay, I have the right answer now: £20,000 is needed for flexible draw-down but not for capped draw-down or trivial commutation of benefits. There are different elements of it. My point, from which I have probably strayed into a trap—I should have stuck to the script—was that there is a range of choices, not simply the annuity rate which people face. That is why it is vital that all members engage early. That is the reason for the wake-up programme which is now being organised, to encourage people to engage with what they should be considering later on.

Also, making brokers the first port of call for all would create a captive market for one part of the industry, without effectively adding to consumer protections. Another risk to consumers is that they could fail to engage with options other than annuities that are more appropriate to them.

The noble Lord’s amendment suggests that a brokerage service would have to provide information on alternative at-retirement services, but it has to be recognised that brokers are not impartial. They make their money if the member buys an annuity, but not if they choose to draw down or defer, or to commute. While it is right that schemes should play a central role in informing consumers of their options, we would be wary of making this part of the qualifying criteria for automatic enrolment. The duty to enrol into a qualifying scheme does, of course, fall on the employer, and so to require them to take this step would be an unwelcome, additional burden.

I make it clear that we are committed to ensuring that consumers have the information they need to make good choices and that the annuities market works effectively for consumers and so, in this respect, we welcome the debate. The noble Lord, Lord Browne, has perhaps chided my honourable friend Steve Webb for raising this matter on annuities but, in many ways, he was doing just what the noble Lord is doing: saying that this is an area which needs to be discussed and debated. In many ways, this debate enables us to do that, but so do the reviews which are taking place and to which I have alluded in my response. I trust that, as part of that, the noble Lord will feel able to withdraw his amendment.

[The Lord Bishop of Chester]

My Lords, briefly, I listened to the Minister with great interest. I regard the amendment as important because, in a sense, the proof of the pudding is in the eating; it is when you are taking the benefits of the saving.

The Minister’s reply, it seems to me, says that in addition to all the complexities which the noble Lord, Lord Browne, set out, there is actually a whole load of other complexities about whether you should be having an annuity at all. My question is simply as follows. Until now, when we have often had final-salary schemes around, these decisions have been largely managed. However, we are increasingly moving into a position where most people will be on money-purchase schemes, and this will become normal; we will have to engage with these issues. Given the complexities which the Minister has so helpfully set out, is the Government’s view that the obligation to work this out is on the consumer—the person taking the pension—with some information provided somewhere, or is the obligation on the pension provider to provide information which covers all these options? Where does the responsibility primarily lie to advise the person at the point of retirement? I thought it was not quite clear enough as to where that lies in what the Minister said.

[Baroness Hollis of Heigham]

I will ask another question associated directly with that. To what extent does the Minister expect the Money Advice Service to take on some of this responsibility, given the slightly bumpy ride it has had so far? Or do the Government—and here I declare an interest—expect an organisation like the Pensions Advisory Service to take on some of this responsibility? It has to be free, independent, impartial and professional. Those are the only two organisations of which I am aware which might fit that role at the moment.

[Lord Bates]

I am grateful for the interventions of the right reverend Prelate and the noble Baroness. The Money Advice Service and the Pensions Advisory Service are, of course, important. However, the argument we are having at present is about saying that individuals need to focus on this issue. It is their responsibility. It is vital to them. That is what the debates about transfers and auto-enrolment are trying to do.

However, we are wary of putting the responsibility for providing information to members solely in the hands of annuity brokers. It is better to drive up standards by ensuring that all the players in the annuity market—providers, schemes, trustees and consumers—are engaged. That is why the Government have led in support of a number of different initiatives to address this important issue and will continue to challenge the industry if there is no significant improvement.

--- Later in debate ---

[Baroness Hollis of Heigham]

I support my noble friend, as that is precisely my recollection too. During a series of meetings with the organisations, the temporary cap came up because of the fear among pension providers that they would lose significant sums of money they had under management and the associated fees. The sole reason for doing it at the time was to get consensus to get it off the ground. Distraction was not a word that was ever uttered, and I must have been in about three years’ worth of those negotiations.

[Lord Bates]

These recollections will be there. I take it that it was in the mind of the Government that NEST had a huge task to focus on in actually attracting people who had never saved for their retirement before to start saving. That was a major responsibility, and issues were debated around that time relating to the effect that NEST’s creation would have on the market. Certain things were considered. It would be wrong to say that it was the only thing that was considered in terms of restrictions and the need to focus, but it was certainly one of the things which should have been focused on.

[Baroness Hollis of Heigham]

Does the Minister have any evidence that NEST—its chair, chief executive or board members—wanted this limit?

[Lord Bates]

I do not have any information to hand on that. However, we have got the point that I was perhaps overegging this by saying it was the only thing, and I need to recognise that other factors were perhaps considered when it came to putting this restriction in place. There was no sinister purpose, it was simply to say that there was a huge task to be undertaken and to ensure that NEST’s systems and operations could actually handle this. We do not want to put excessive burdens on NEST so that it fails when so many are dependent on its success.