Pension Plan Charges

Debate between Jim Shannon and Brandon Lewis

Wednesday 7th December 2011 Westminster Hall

[Brandon Lewis]

The hon. Gentleman makes a good point, and I will touch on it later. I fully agree that one of the issues that people do not understand is that a figure that seems small now can have a huge impact on how a pension pays out later on—up to 25%, as I will touch on later. The hon. Gentleman is absolutely right. That is exactly the clarity and understanding that we need.

Provident Financial’s clients are low earners, who often borrow just £100 or less to get through to the end of the month. The company told me recently that the issue for many of them is not so much about whether they can save. They may be able to save only a small amount; I know that the Minister appreciates that, because we have had a conversation about it. In some cases, it could even be just a few pounds a week or month. However, all that money can add up to mean something later.

The hurdle that those customers find is psychological. The company said to me that people who are on the lowest incomes understand and learn how to manage their money and how to get their family through a week or a month. Within that, they will still do certain things—£1 or £2 a week on sweets for the children, or something like that. What they do not do is trust an unnamed and unknown big organisation with some of their money, because it is complicated and there is no face to it. That is why they use organisations such as Provident Financial rather than high street banks.

By dealing with the issue of transparency, we may well be able to break through that psychological barrier and get more people saving. If the industry is clearer and puts things across more simply, it will instil more confidence in the customers that it is looking to pick up. I will return to that with a clear example in a moment.

The system is complex. People’s underlying attitude is unsurprising, given that we have such a diverse and complex pensions industry, with a wide range of schemes and options alongside an array of different regulatory regimes. A wide range of items may be included in pension charges—and alas, with no clear industry standard at the moment, providers often differ on what is included. Just to name a few, any or all the following may be included: product management, communications, services, administration, regulatory requirements, some investment management and, possibly, the cost of providing advice. How can any consumer find an easy way to compare like with like when there is such a range of options and figures printed on a statement? It is simply not possible.

[Jim Shannon (Strangford) (DUP)]

I, too, congratulate the hon. Gentleman on bringing the matter to the House today. We need clarity about hidden charges—charges that people do not know are being made and which are removed from people’s funding regularly—and about sales commission. There are often hidden charges before someone can leave a scheme.

There is also excessive trading in respect of those who are trying to keep on top of the portfolio; there is a charge every time that happens, and customers do not know that. There are a lot of hidden charges that customers do not know about. Does the hon. Gentleman think that such charges should be made known to the pension holder, so that they are aware of the costs involved?

[Brandon Lewis]

It is absolutely right that as much as possible should be transparent—potentially, everything should be as transparent as possible. The hon. Gentleman is right. As I will come on to say, people do not necessarily understand that when they come out of certain schemes or change jobs, the potential cost to them can as much as double. The costs are effectively hidden, because they are not clear or transparent at the time of entry, let alone of exit. That is why we need regular transparency. I will touch on that further in a moment.

It does not seem possible to find an easy way of comparing like with like. Just last week, the Work and Pensions Committee was taking evidence on pensions and it became very clear from looking at different operations that there are major variations in style between companies. What highlighted the issue of transparency for me more than anything was the fact that one company said that the simplicity and transparency of its charges is its single biggest marketing advantage. If Members will bear with me, I will read a short quote from that session. Adrian Boulding of Legal & General, which I congratulate for having this kind of transparent operation, said to the Committee:

“We compete on price in the market place and we are able to do that because we have invested heavily in technology. If I look at pension schemes that we have sold this year, they have all been sold within a price range of 0.3% at the bottom to 0.8% at the top. 90% of them have been sold at 0.5% or less.”

Again, that is a range of figures that many people will struggle to understand. However, Mr Boulding went on to say:

“One of the particular features of our pitch to the market is that we charge just a single charge for the scheme, whereas some providers now want to charge £1.50 in addition to a fund management charge. NEST charges a contribution charged at 1.8% in addition to a fund management charge. Some insurance companies charge higher fund management charges when people leave the scheme. We charge a simple, straight fund management charge and it is the same for all members whether they are in the scheme or whether they have left, and there is only the one charge. We find that gives us an edge in the market place.”

It was interesting that a company specifically said that the simplicity of its charging—it only has a single charge—was its marketing edge.

What is included in the charge element of a pension fund varies, but the inconsistency in how charges are communicated is an additional complicating factor. In fact, the wide range of approaches is needlessly complicated. Some pensions are regulated by the Financial Services Authority and require an illustration of the effects of charges. Other pensions, mainly those that are trust-based, have no requirement for such disclosure. The stakeholder pensions were introduced in 2001 and I credit the previous Government for introducing something that provided some simplicity and clarity. Stakeholder pensions require disclosure of individual deductions.

The lack of comprehensive and consistent information prevents effective monitoring by the FSA, the pensions regulator, and, potentially, by the Department of Work and Pensions itself. We risk creating a regulatory black hole if we fail to create a clear communications framework. That is why there is also a need to specify which regulator covers which area and to define regulators’ powers to avoid market confusion over which regulator covers which issue—let alone confusion among consumers or among the employers that are implementing a scheme.

The approach taken by different pension providers and schemes also varies widely, as the National Association of Pension Funds has helpfully highlighted. Some providers quote an annual management charge as a percentage; others illustrate the effect in cash terms. Some present information in a personalised form, where charges are illustrated in a very varied way over different periods, whereas others provide information with a generic example. In some cases, the information is prominent, but in others it can be hard to find. In some cases, there are even charges for different parts of the process—for example, fund management prices can be shown separately.

We should compare the pensions sector with the banking sector, in which statements now clearly show what bank charges are on a weekly or monthly basis. The example of the banking sector is certainly one that the pensions sector should look at.

There is also financial jargon, which is unhelpful in any industry. If the range of charges and the communications about those charges are inconsistent, a pensions fog is created, and the impenetrable financial jargon that consumers must navigate has created a further consumer whiteout. In fact, I have used much of that jargon in my opening remarks today. I want to illustrate that point by giving two real-life examples, courtesy of the National Association of Pension Funds. They highlight how difficult it is for any consumer or business to understand what they are taking on with pensions. The first example is taken from a handbook provided to employees on a trust-based scheme. The handbook says:

“The manager’s charges differ according to the type of fund. The charges are made within the fund and are reflected in the price of fund units. With some funds, two unit prices are shown - the “bid” price, at which units are sold, and the “offer” price, at which units are bought; the difference - the “bid/offer spread” - reflects the manager’s dealing costs. The bid/offer spread on these funds vary.”

Then there is an impenetrable table listing six funds, showing for each one:

“a percentage annual charge on fund and a percentage bid/offer spread”.

Just looking around the Chamber now, I can see that Members are already somewhat glazing over with the difficulty of trying to understand what we ask ordinary people to understand in their daily lives.

Rural Bus Services

Debate between Jim Shannon and Brandon Lewis

Tuesday 11th October 2011 Westminster Hall

[Brandon Lewis]

I thank my hon. Friend for his intervention. Nottinghamshire’s funding has fallen by £1.7 million, or about 18%, so it, too, will feel the effect of the changes. He is absolutely right that people in rural areas of all sorts have problems with access to transport, whether they are young people looking for work or older people. Bus services can be their only way of leaving their rural community and accessing an urban area for shopping and everyday needs. That is why things are so difficult for rural areas, particularly in Norfolk. Some villages have low bus usage due to low population, yet buses can be a lifeline for people there who are without access to vehicles. They provide their only mode of transport and access to other areas.

[Jim Shannon (Strangford) (DUP)]

In Northern Ireland, rural transport has been provided by community and voluntary initiatives. Does the hon. Gentleman feel that such initiatives could happen across constituencies on the UK mainland? If so, how would that happen?

[Brandon Lewis]

I thank the hon. Gentleman for his intervention. I agree that we can do more to look at alternative forms of transport and how they can be funded. If he bears with me, I will come to that in a few minutes, but I absolutely agree with the principle of what he says.

In rural areas, public transport is a lifeline. Equally, however, the problem for local authorities and bus companies is that they have to make an economic case; they have to do the best they can with taxpayers’ money to ensure that it is properly invested. As private companies, bus companies also have to look after their financial interests.

--- Later in debate ---

[Brandon Lewis]

I thank my hon. Friend for his intervention. I fully support what he says. It is important to find a way of ensuring that local authorities can be more flexible in how they work with the bus operators and other forms of community transport, so that they can allow for more cost-effective usage and be more responsive to local needs.

[Jim Shannon]

I congratulate the hon. Gentleman on his points. A pilot scheme similar to that operated by Translink in Northern Ireland could be considered as an option. It identifies what services are needed through the community; for example, there may be a run on a Tuesday and a Thursday. Elected representatives work with communities, Translink and the bus companies. We are looking for flexibility. Does he agree that having flexibility within bus companies is the type of initiative needed to ensure that rural communities—isolated ones and others—can have the advantage of rural transport?

[Brandon Lewis]

I thank the hon. Gentleman for his intervention. We certainly need more flexibility in the system. Whether that is purely in relation to bus operators or we have a system that allows for community transport to be authorised, run and organised by local authorities, we need an approach that is more flexible than simply looking at the traditional system of buses. As my hon. Friend the Member for Broadland (Mr Simpson) has mentioned, buses are not necessarily the most cost-effective solution or, indeed, the best answer for users. We need transport that can be used in rural areas by those with concessionary passes. As I was saying, demand-led services are vital if a rural network of transport is to exist. It is perhaps time to start talking about transport in the rural sense, rather then simply focusing on buses, which might not necessarily give the best service and use.

I am delighted that my county council in Norfolk has agreed to provide additional funding to look at and develop exactly that style of service. At the moment, more than 1,700 community transport organisations operate in England alone and offer transport services for people who are unable to access traditional public transport. It is vital that local authorities and organisations are empowered to provide alternative provision for residents.

An additional £10 million funding for community transport in rural areas is very, very welcome. However, the concessionary fares scheme does not apply to most community transport schemes because they operate under section 19 of the Transport Act 1985. Currently, only registered services run by community transport operators under a section 22 permit are eligible for the scheme. I was disappointed that, when I received a reply from the Minister to a recent written question, it indicated that the Government refuse to consider altering the legislation to widen the eligibility further and that they are leaving the matter at the discretion of local authorities. I ask the Government to look at that issue because dealing with it would be a positive step forward that could further encourage, develop and empower local decisions to be made by local councils and bus and other transport operators based on local need. I agree with the Select Committee on Transport’s recommendation made in August this year:

“If the Government genuinely wants to encourage the growth of the community transport sector, it should legislate to permit the use of the concessionary pass on a wider range of community transport services.”