Pension Schemes Bill
Lord Bradley Excerpts(9 years, 2 months ago)
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Baroness Turner of Camden (Lab)
I will support very briefly what my noble friend Lady Hollis said in her introduction of this admirable amendment. We have discussed this during the progress of the Bill through this House, and have made the point on a number of sides that it is necessary that people should be fully informed of what they are doing. It is up to the Government to make sure that those arrangements are available for people to become properly informed of what they are doing. It has to be understood, of course, that people are making decisions about their future and what may happen if they make the wrong decision. It is very necessary that the appropriate choices are made by the people who are facing these alternatives. I therefore hope that this admirable amendment receives the full support of this House.
Lord Bradley (Lab)
My Lords, I will be brief, because the issues presented by this amendment have been brilliantly articulated by my noble friend Lady Hollis.
Throughout the passage of the Bill we have sought to ensure that consumers’ interests are fully protected, particularly in respect of the guidance that they will receive from the citizens advice bureau or TPAS. But the accuracy of the information for them is wholly dependent on the clarity of government policy. We are concerned that the treatment of pension funds in respect of income-related benefits and social care do not meet this test of clarity. Such clarity is particularly essential here, because the decisions that people make will have a dramatic impact on their future lives. I hope that the Minister in response will be able to give the House the assurances that we are seeking through this amendment so that there is no confusion in the public’s mind and no inconsistency across the country in the guidance that will be given on this incredibly important issue.
I thank the Minister for his letter dated 4 February, which lays out the Government’s position on how they will deal with some of these matters. But I—and, I am sure, my noble friends—remain concerned that, as they say, “the devil is in the detail”, and we have already heard this morning of cases where there has to be clarity and consistency of treatment of individuals in this respect. Clearly, we will continue to look closely at the regulations that follow and the guidance issued in association with them, to ensure that the public understand the implications of the decisions they take in respect of any entitlement to income-related benefits or social care costs.
Lord Newby
My Lords, I begin by thanking the noble Baroness for her amendment, which obviously addresses an extremely important issue.
This amendment seeks to place a separate and additional duty on the Treasury to provide appropriate information on the effect of pension freedoms and flexibilities on income-related benefits and social care costs. I agree that it is vital that people understand how benefits and social care entitlements interact with the new pensions flexibility and that consumers need to be aware of the impact of accessing their pension pot on their eligibility for income-related benefits and help with social care costs.
The Treasury is working to ensure that the content of the Pension Wise service includes information about entitlement and deprivation rules so that consumers are aware of these when choosing whether to access their pension savings. We are also working to ensure that people are aware of the need to plan for later life, including the risk of needing care and support and what that might mean for their choices. This will help people think about how they wish to live the rest of their lives. In response to the noble Lord, Lord Lipsey, the Care Act provides that no one is required to sell their home to pay for care. The difference in this case is that the lump sum is income in the year taken, and we agree that this will need to be covered in guidance, both on pension pots and on social care, which we will provide.
The DWP will issue clear guidance on the treatment of pension pots in income-related benefits in advance of April. This is to help people make informed decisions about accessing their pension pot. We plan to do this, as requested by the noble Baroness, by producing a leaflet which we will both print in hard copy and place online on GOV.UK. Other websites will be able to link to this information, and there will definitely be such a link from the GOV.UK Pension Wise website, which will direct those who are affected by this issue to the DWP information. Pension Wise will be a key way of equipping people with this information online on GOV.UK, on the phone through the Pensions Advisory Service, and face to face through citizens advice bureaux across the country. Alongside the new content being developed for Pension Wise, the new guidelines will also be reflected in the training programme for guidance specialists from the Pensions Advisory Service and Citizens Advice.
As the noble Baroness said, she met my noble friend Lord Bourne and me earlier this week to discuss the substantive policy issue—namely, the interaction of pension flexibilities with the benefits and social care means tests. The principal query that the noble Baroness raised is whether the distinction we make between ISAs and other savings vehicles, as opposed to pension pots, in benefits means testing remains fair after the introduction of the new flexibilities. ISAs are taken fully into account in income-related benefits, whereas we ignore untouched pension pots until someone reaches pension credit qualifying age. The noble Baroness argues that this is an arbitrary distinction now that the tax treatment of the two products is more aligned.
The Government, however, firmly believe that the difference is an important one. ISAs are for use at any time, but we specifically encourage people to save into pensions to provide for themselves in later life. We would not want to design our benefit system in such a way as to encourage people to spend their retirement savings when they are still below pension credit qualifying age. Aligning the treatment of ISAs with that of pension pots in the means test would be expensive for the taxpayer, as people with resources could secure more benefit. On the other hand, aligning the treatment of pension pots with that of ISAs would mean that claimants could lose benefits and so may deplete their pension savings before reaching their retirement. Neither outcome is desirable, and we therefore believe that the current position remains the right one.
This gives rise to a second question that concerns the noble Baroness, which is whether this situation gives individuals the opportunity to move their ISAs, which would be taken into account, into their pension pots, which would not be taken into account until pension credit qualifying age. The Government have considered the matter seriously and, in the light of our analysis, we do not feel that we need to act on this matter presently. The numbers of income-related benefits claimants with substantial ISAs is relatively modest and, should people move their savings to their pension pot, the additional upfront welfare costs to the Exchequer are partly offset by welfare savings in later life as those individuals would rely less on income-related benefits as a pensioner. On this issue, we plan to monitor behaviour after April when the new pension flexibilities are introduced, and respond proportionately if we need to.
I should add that people deliberately depriving themselves of money in order to secure or increase benefit entitlement may be subject to rules on deprivation of assets that already exist in both the benefit and social care systems.
Lord Bourne of Aberystwyth (Con)
My Lords, I apologise that this amendment may not be quite as highly charged as the previous one. It corrects an oversight in relation to the amendments that we made to the transfer provisions on Report and simply inserts the provision relating to when a member’s transfer rights fall away into Northern Ireland legislation.
The amendment makes a consequential amendment to the existing transfer legislation, which sets out when a member’s rights to a transfer fall away. It puts beyond doubt that the right to a transfer value falls away after either three months or any extension period granted by the legislation. This amendment and the one applying to the legislation relating to Great Britain have been made in response to industry concerns that the current situation could place trustees in a position where the right to transfer somehow still subsisted, although the trustees could not action the transfer.
I also take this opportunity to clarify the purpose of Amendment 30, which I spoke to on Report. That amendment inserted a new limb into an existing regulation-making power in Section 101F(6A) of the Pension Schemes Act 1993. It created a power to disapply, in prescribed circumstances, the right of prescribed persons to transfer pension rights acquired as a consequence of divorce. In describing that amendment, I stated that it restored an existing power. I now understand that this is in fact a new power which expands upon the narrower existing power. I hope that noble Lords will accept this new amendment to align Northern Ireland legislation, along with my clarification of the operation of Amendment 30 made on Report.
As this is the final amendment to which I will speak, before I sit down I would like to take a moment to thank the Opposition for their constructive and positive engagement in this process—I do so sincerely; their engagement has been valuable. I also thank colleagues across the House who have dedicated their time and expertise to scrutinising and improving the Bill. It has been the House of Lords at its best. I think we can all say that your Lordships’ House has done a good job in scrutinising the Bill and that it goes back to another place a much better Bill than it was before.
A significant amount of work goes into preparing a Bill and supporting its passage through both Houses, to say the very least. This Bill contains a wide range of measures and has involved a number of different policy teams from the Department for Work and Pensions, Her Majesty’s Treasury and the Ministry of Justice. They have worked unstintingly and with dedication. I am grateful to them and to the excellent draftsmen in the Office of the Parliamentary Counsel, who have worked very hard on this Bill.
I am also indebted to my noble friend Lord Newby for his considerable work and assistance on the Bill, to my right honourable friend Steve Webb, the Minister for Pensions, for his advice and help, and to my noble friend Lord Freud for his support. With that, I beg to move.
Lord Bradley
My Lords, I again thank the Minister for clarification of the amendments, and these are obviously acceptable. I also thank him for the clarifications he has given throughout the Bill’s passage, as well as for the courtesy that he and his fellow Ministers have shown to this House and for the help that he has given to the Opposition as we have debated the issues. I also thank the civil servants for the support that they have given to the Opposition in answering the questions that we have raised.
As we come to a close in the Bill’s passage through this House it is worth reminding ourselves that on Second Reading we considered two Bills together—this one and the then Taxation of Pensions Bill—as it had been recognised that the two were inextricably linked. That has clearly been shown to be the case during our deliberations generally and in our consideration of this amendment. The speed between the announcement of pension freedoms and flexibilities in the Budget last year and implementation of the policy in April of this year has led to a huge number of amendments and policy clarifications, with many significant regulations still to come. Let us remember that implementation is barely nine weeks away.
Although broadly supporting the policy, we have tried during these debates to ensure that the interests of the public have been paramount and properly protected. We have sought and received assurances from the Government that the policy is clear and fully thought through, including in our debate today on the treatment of pension funds for income-related benefits and care costs assessment. However, in the light of today’s debate, I remain deeply concerned. We have been assured that not only will the crucial guidance guarantee service be fully in place by April but that it will have capacity and its staff will have the expertise and be fully trained to deliver a quality service for the 320,000 people who may seek guidance in the first instance.
Obviously, we are pleased that the Government accepted our argument for a second line of defence to give the public greater protection. We will continue to monitor closely the implementation of the powers vested in these two pieces of legislation. However, we remain concerned on many issues. These issues will be closely scrutinised both inside and outside this House to ensure that the public’s interests are properly and fully thought through and protected.
Finally, I thank all noble Lords who have participated in our debates. I would particularly mention the support I have been given by my noble friends Lady Drake, Lady Hollis, Lord McKenzie and, of course, Lord McAvoy and Lady Sherlock.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord for that. Clearly, we recognise the support that we have had generally for these important pension freedoms. The noble Lord, Lord Hutton, who is not in his place, certainly spoke of this as a revolutionary measure—which it is in many ways. I accept that guidance is at the heart of it. We need to ensure that these freedoms are exercised with proper guidance and proper advice, which is where this House has been quite properly engaged, and recognise that there is still ongoing work to do, to which we will return.
Pension Schemes Bill
Lord Bradley Excerpts(9 years, 3 months ago)
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Lord Bourne of Aberystwyth
My Lords, I address the House as one half of the Welsh mafia or the Taffia—a charge I reject totally of course.
These amendments are consequential in nature. They address an omission in the current legislation. In the course of checking through the changes made as a result of the Bill, omissions in the Pensions Act 2014 came to light. The amendments needed all relate to overriding legislation—that is, when legislation overrides provision in the scheme rules such that the legislation is treated as if it were part of the scheme rules.
Without these amendments, any overriding requirements made under regulations under Schedules 17 and 18 to the Pensions Act 2014 would not be treated as part of the scheme rules for the purposes of the Pensions Act 2004 and subsisting rights provisions in the 1995 Act, leading to inconsistency in the way in which overriding provisions are dealt with and a potential lack of clarity.
I beg to move.
Lord Bradley (Lab)
I shall briefly respond as this is the first set of government amendments. I thank the Minister for the courtesy of writing to me with his proposals around these amendments; it is very helpful to have that in advance, as it limits the need for further debate on these matters. Maybe I should declare an interest in that my great-uncle was Welsh, but I do not claim to be part of the Welsh mafia. With those remarks, I am supportive of the amendments.
“( ) The FCA must discharge its functions in relation to pensions with a view to securing an appropriate degree of protection for consumers with a right or entitlement to flexible benefits whether they have used pensions guidance or otherwise throughout the decision-making and purchasing process, including safeguards actively to inform consumers of key risks and benefits.”
Lord Bradley
My Lords, this amendment is connected to Amendment 22. We had an extremely interesting debate in Committee on the merits of what is known as the second line of defence, and I am pleased that we are able to return to it today as a result of our amendment.
I preface my brief remarks on this matter with our general approach to the Bill throughout its passage in the House. While we broadly support the new freedoms and flexibilities in the Bill and its related Bill on taxation, we have sought throughout to ensure that the interests of pensioners—customers—are protected in what has often been a very dysfunctional annuities market. Our overriding aim has been to ensure that those protections for the public are in place before the Bill is enacted at the beginning of April.
To return to this specific amendment, we argued in Committee that a second line of defence was vital. We discussed evidence from two reports from the Financial Conduct Authority, quoted in Committee, that the market is often not functioning as it should and is letting consumers down. We believed that action was needed immediately to protect savers when making possibly the most complex financial decision that they will ever have to make.
In Committee, the Minister did not seem to accept that action for a second line of defence should be in place by April this year, when the new freedoms and flexibilities are implemented. Instead, he suggested that, because the FCA is a relatively new body with new powers, and has committed to reviewing all its rules in the first half of this year, we should in effect await the outcome of its deliberations before any further action was taken. In response to the Minister, I said that while I would reflect on what he had said, I believed that the public sought reassurance and the confidence that a second line of defence would give them. That is why we have continued to champion a second line of defence throughout the passage of the Bill in both Houses, as have many pension groups and organisations outside this House.
I and my noble friends therefore welcome the Government’s apparent change of heart today, and the fact that they have recognised the strength of the arguments to protect pensioners that we have been making. It is with pleasure we received, and read, the very welcome letter from the Financial Conduct Authority, dated 26 January, saying that it would ensure the,
“appropriate protection of consumers, accessing their pension saving”.
This is extremely welcome, and starts to put together a proper second line of defence.
At this stage of the debate, though, I have three questions for the Minister. First, as the letter says:
“Subject to agreement of the Board, we are minded that it is appropriate to bring these rules into force on a temporary basis from 6 April, and prior to consultation, to provide important additional protection for consumers”.
Will the Minister confirm that the Board will agree to putting this second line of defence in place and that, at a future stage, the Board may decide that it is not necessary?
Secondly, the letter goes on to say:
“As part of that consultation we will also consult on whether to retain or modify the temporary rules that we are proposing to introduce in April”.
Will the Minister assure the House that, after the temporary period that the Financial Conduct Authority is proposing, there are no circumstances in which it would then remove the second line of defence?
Thirdly, in relation to trust-based schemes, it is my understanding that the Pensions Regulator is responsible for these schemes, not the Financial Conduct Authority. Will the Minister assure the House that similar protections for trust-based defined contribution schemes will be made by the Pensions Regulator, in parallel with the FCA?
The merits for a second line of defence seem now to be accepted. I look forward to the Minister’s responses.
Baroness Drake (Lab)
My Lords, I had a lengthy and impassioned speech prepared on the need for a second line of defence to address the risks that pension savers might make detrimental and irreversible choices when they access their savings. However, this has been tempered by the letter from the FCA, so my contribution is shorter and less passionate as a consequence.
This amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings when they are engaging with providers during the decision-making and purchasing process. This is distinct from the duty on the FCA to protect savers receiving guidance from designated guidance providers.
The guidance guarantee, now referred to as Pension Wise, is a key measure for helping people navigate the complex retirement options arena from April 2015. There are people working hard to make its delivery a success, as it will provide a very important service to savers. The FCA will expect providers to check whether a customer has used the guidance service and, if not, to encourage them to do so. In popular parlance, this is the first line of defence.
Beyond the guidance stage, the saver has to move to the process of making a decision, and of selecting or purchasing a retirement income route. It is what happens at this stage—the exchange between the consumer and the provider—that is causing so much anxiety and to which the amendment is directed. It puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. This is what is popularly referred to as the second line of defence.
As my noble friend has said, we have now received the letter from Mr Woolard, Director, Strategy and Competition at the FCA, advising that FCA board approval is being sought for this second line of defence. It is minded to bring these rules into force on 6 April 2015, pending a review of all the current regulatory requirements around the customer’s interaction with the providers. The CEO and chair of the FCA have made some thoughtful and welcome speeches that have set the framework for debate in addressing the challenge of poorly functioning financial services markets.
The recent FCA reports on retirement income markets have been hard hitting and on the nail. It is worth reminding ourselves what they observed: annuity sales practices were contributing to consumers missing out on a potentially higher income; consumers’ tendency to buy from their existing provider lowered the potential for higher income; consumers will be poorly placed to drive effective competition; the retirement income market is not working well; and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The anxiety was that that analysis and the heightened risk of consumer detriment with the advent of the new freedoms would not translate into sufficient regulatory protection. Against that background, the FCA letter is most appreciated, although I await with interest the answers to my noble friend Lord Bradley’s three questions.
The second line of defence is not a total solution to the risk that consumers will make decisions that are not in their interest, but it will make a very important contribution to what we know is a poorly performing market. I therefore welcome the FCA letter and thank the Minister for facilitating its publication.
Lord Newby
In Committee, the issue of the second line of defence was the subject of more debate than anything else. I, and other noble Lords, received a lot of lobbying from all sides of the industry and consumer groups about the need for a second line of defence. So I am pleased that other noble Lords are as pleased as I was when I heard, at the end of last week, that the FCA was planning to announce yesterday that it would make new rules by April to protect consumers as they make decisions on how to access and use their pension savings in later life. The Government share the aspirations of the noble Lords, Lord Bradley and Lord Hutton, that we should put in place a new system which gives the maximum opportunity for people to take informed decisions, because we accept that these decisions are, very often, for life and have very significant consequences.
Yesterday evening, I circulated the FCA announcement to noble Lords who had taken part in earlier debates. In short, the rules will introduce a second line of defence. Pension providers will be required to ask consumers seeking to access their pension savings about key aspects of their circumstances relating to the choice that they are making and give relevant risk warnings in response to the answers. This is a very important element: we are keen not simply to have another tick-box exercise, which we could have done at this point. Providers will also have to highlight that guidance from the Pension Wise service, or regulated advice, can help them to avoid making a poorly informed decision. The FCA will also require that messages should be delivered to consumers in direct and simple language.
The FCA announcement illustrates precisely why the amendments we are considering are not needed. The FCA already has a duty to ensure that the retirement income market is working for consumers captured under its statutory objectives, including its objective to secure an appropriate degree of protection for consumers. The announcement demonstrates just how seriously the FCA is taking this duty. It would also be unusual to legislate to give the FCA a specific objective in relation to one sort of investment—pensions—and to do so outside the Financial Services and Markets Act.
I was asked a number of specific questions. The first related to the board agreeing the proposals. It is notable that the press release does not refer to the board. I suspect that this is not an unusual way of dealing with announcements that the FCA wishes to make between board meetings. I believe that there will be a board meeting next month at which the decisions announced yesterday will be ratified. It would be extremely unusual if the board were to go against the advice of its officials on a matter such as this. I am not on the board; its members are independent. However, if I were a betting man, I would be prepared to put my shirt on the likelihood of these new rules being ratified.
The second question was whether these are temporary or permanent rules. The temporary element of them relates to the fact that there has been no consultation. In order to get them in place in time, they have to be introduced quickly under a fast-track procedure. Again, while I cannot formally commit the board or the FCA, I think it is fair to say that there is no intention in anyone’s mind that this should be a temporary provision. The new rules have a long-term purpose; there is no temporary element. It is certainly the intention that there will be permanent rules—but, as I say, the transition from temporary to permanent involves the consultation process which they would normally undertake.
The third question related to whether trust-based schemes would also be covered. As the noble Lord, Lord Bradley, pointed out, the FCA will not cover trust-based schemes, but the DWP, which writes the regulations for trust-based schemes, is working with the Pensions Regulator to consider how this can best be dealt with for trust-based schemes on the same basis, so we have it in hand. This is a very recent development so far as the FCA is concerned; it was announced only yesterday.
Lord Bradley
I am grateful to the Minister. As the DWP is working on the issue with the Pensions Regulator, will it be on the same timetable for introducing such a second line of defence from 6 or 7 April?
Lord Newby
My Lords, that is what we are hoping to achieve, so that everybody is working on the same basis. In making the announcement yesterday, the FCA demonstrated that it has listened to the many representations it has received directly, and to debates in your Lordships’ House. I am pleased that it has. In the light of that announcement, I hope that the noble Lord will feel able to withdraw the amendment.
Lord Bradley
I am very grateful to the Minister for that reply. I thank my noble friends Lady Drake and Lord Hutton, and the noble Baroness, Lady Greengross, for their support for this amendment.
The Minister responded well to the three questions I raised. While I accept that he is not a betting man, I also accept that his assurances that the board will approve these proposals, that they are not temporary, and that the DWP will bring in a similar, parallel policy for trust-based schemes are all welcome and reassuring to the House. I believe that this is a real victory for all those who have campaigned, both inside this House and outside Parliament, for a second line of defence to give added protection to people making decisions about the pension pots and retirement income. As we said, that is perhaps the most important financial decision they will make in their lives.
Lord German
I also support the letter from the FCA. It is very welcome. The bottom of the first page of the letter says, in absolute terms, that,
“the FCA has also decided to bring the ABI retirement code into our rules”.
Would the noble Lord agree that that is very welcome, given that the ABI retirement code lays out in great detail the journey through which the customer will travel? The letter makes it very clear that that will happen.
Lord Bradley
I am grateful to the noble Lord, Lord German. That is in the letter and, as I said, we welcome its contents. It reinforces the points that we made about the second line of defence and the future adequacy of that provision. That is clearly welcome.
In conclusion, we will closely monitor the way that the policy and the implementation fall, to ensure that consumer rights are properly protected in the way that everyone in this House expects. With that, I beg to ask leave of the House to withdraw the amendment.
Lord Bradley
I am grateful to the Minister for the explanation of the amendments, which are fine for the Bill, particularly the clarification around the amendment that we moved in Committee on the issues of appropriate independent advice and authorised independent adviser. That is very helpful, and I am pleased that the amendments are now being made.
Pension Schemes Bill
Lord Bradley Excerpts(9 years, 3 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.
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 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
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.
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 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.
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.
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.
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.
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.
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.
Pension Schemes Bill
Lord Bradley Excerpts(9 years, 3 months ago)
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Lord Bradley
“Guidance guarantee: annual review
The Secretary of State must each year produce a report on the effectiveness of the guidance under Schedule 3, and that guidance must include—(a) the number of people who have taken up the guidance;(b) the number of people eligible to take up the guidance who did not do so;(c) the effectiveness of the guidance in preventing instances of consumer detriment through the purchasing of inappropriate products.”
Lord Bradley (Lab)
My Lords, I beg to move Amendment 30. At the start of our deliberations, it is worth reminding the Committee that at Second Reading we took two pension Bills together: the Pension Schemes Bill and the then Taxation of Pensions Bill. We did so because it was recognised that the two Bills were interrelated and that the issues to be scrutinised and debated were inextricably linked between them. While there was no debate in this House on the Taxation of Pensions Bill, as it was a money Bill, it would be impossible not to refer to these interrelationships in our deliberations today on such matters as pension guarantee, guidance guarantee, product development and the financial and economic consequences of the Bills.
Furthermore, we will continue the theme that we developed on day 1 in Committee: since so much of the Pension Schemes Bill relies on regulation—to date such regulations have not seen the light of day—we will continue to press the Government for far more information on the regulations, to try to make as much sense as possible of how the proposals in the Bill, and the Bills, will be implemented.
Similarly, we have highlighted the speed at which this legislation is being brought to the statute book, which further hinders scrutiny not only inside Parliament but by key stakeholders. These include those who will be responsible for delivering the crucial guidance guarantee—particularly Citizens Advice and the Pensions Advisory Service—and the pensions industry and its representative bodies, who will need to respond to the effects of the policy changes, some of which come into force in barely three months’ time.
As we have made clear throughout our deliberations, the overriding objective is broadly to support the freedoms and flexibilities in the Bill and to ensure that the public have all the information they need and the guidance they seek to ensure their interests are protected, and that they receive the best outcomes for their retirement without the fear of the scandal, for example, of mis-selling, which the public encountered some years ago.
One example of what I am alluding to emerged only today with the revelation from the Government that only 45% of new pensioners will be entitled to the full new flat-rate state pension in the first five years of the system. That is 2 million people who will not get the full amount. Certainty of the amount of the new pension will be critical in the decisions people may make about how they plan their retirement income or draw down cash immediately after April. I know that the Minister will want to clarify the situation when he responds.
It is in that spirit that I move Amendment 30. At the heart of the amendment is our wish to ensure that the Bill works in the way that it is intended, and that the guidance will be both taken up and prove effective in helping people to choose the right products to fund their retirement or to make the right decisions about lump sums or other retirement income. We believe that guidance is needed but we are concerned that this House has, to date, been provided with too little information about what guidance will be offered. Additionally, will the quality of this guidance ensure that people make the right decisions for themselves and their families, now and in their later years?
I welcome the fact that more information about the guidance has been produced today and I thank the Minister for providing the Committee with it. In particular, we now have the title of the service, ‘Pension Wise’, and the branding, “Your Money. Your Choice”. However, I stress that at this point we are talking about guidance and not advice. We have made this point on a number of occasions during our deliberations and it is important to keep in mind the distinction between guidance and advice on which people rely.
I know it is intended that the guidance should be comprehensive—that has been elaborated on today in the announcement from the Treasury—which, to some extent, is reassuring. The assumption is part-based on the discussions in the Public Bill Committee in the House of Commons, especially the interchange between the Minister for Pensions, Steve Webb, and the shadow Minister, Gregg McClymont. The Minister said in the other place:
“Guidance will discuss the pros and cons of different financial products and services”.—[Official Report, Commons, Pension Schemes Bill Committee, 4/11/14; col. 283.]
He quoted the Financial Conduct Authority, saying that,
“guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement options”.
The FCA also thinks guidance should include information on tax matters. This is clearly an important consideration. The Minister responsible in the other place went on to say that a guidance session has to be person-specific and that he was consulting for opinions, attitudes and expectations on what is needed in good guidance.
I realise that the Treasury is taking this matter forward and leads on this. Again, I further welcome the information that has been provided in the guidance guarantee today. We have to ensure that we can digest the contents of that information that I received at lunchtime today, so that we can further consider the matters within it. That may lead to further consideration of the detail on Report.
It is reassuring to know that the Minister envisages guidance sessions to be comprehensive, but it raises the question of how much it will cost and how those costs will be met. The National Association of Pension Funds estimates the cost of advice for people seeking an annuity under the current system to be £681 million—I mean £681 per session. It does not go quite as far as millions; we might get to that at some later stage. That is hardly a simple assessment but it is not such a comprehensive session, in many ways, as the far-reaching guidance envisaged by Steve Webb, the Minister, and the Financial Conduct Authority.
At £681 per session, it will cost £480 million to provide those 600,000 people retiring in 2015-16 with guidance. But how many people will, in practice, seek guidance? It is safe to assume that some will not choose to take it up, perhaps because their pension pot is too small—maybe less than £10,000, although it could be argued that this group is the very one that will need the best advice. Others will pay an independent financial adviser. The Legal & General group helpfully undertook a trial of free advice to some 9,000 people. It reports that only 2.5% took up the offer. This would cost £154,000 at £681 per session. The Chartered Insurance Institute estimates a 90% take-up. This would cost £368 million. Which do the Government think most likely to be correct? Have the Government risk-assessed this? If so, can this information be available to the Committee? I note that the Treasury has today estimated a cost of the service at £35 million for 2015-16. I would therefore be grateful if the Minister would tell the Committee how this amount has been calculated.
The Minister also told the Public Bill Committee, on 4 November in the other place, that guidance providers will not be subject to FCA regulation. Instead, the FCA must put in place standards that designated providers must work within. Designated providers must be chosen and approved by the Treasury and the list will be available to the public. The FCA will have a duty to monitor compliance and the Treasury will take responsibility for ensuring that the FCA framework is sound enough. Is that sufficient? Monitoring may be comprehensive but fall short of regulation. Perhaps the Minister can assure us on how this compliance will work. As the Minister may imagine, at the heart of my concern is a strong desire to avoid another mis-selling scandal, which would put the guarantee for savers at risk, with savers therefore failing to get the retirement income they need and deserve.
The current designated partners, the Pensions Advisory Service and Citizens Advice, are very credible providers of advice and guidance generally. I am sure that Citizens Advice will ensure that all 380 independent bureaux, which will deliver that advice, have all the necessary public liability insurance in place to protect them from claims arising from the guidance tipping into advice and then being acted on. But is it right not to regulate this market? Will others seek to enter the market with far less credible track records than these two esteemed bodies? For example, will people selling products be able to offer guidance via the designated lists in the future? Furthermore, could the Minister explain what redress people will have in practice? With 600,000 people entitled to free advice, it is inconceivable that something will not go wrong. The fact that it is guidance, not advice, could prove to be an inadequate veil to hide behind. The Minister in the other place seemed to think that few people would seek redress. However, I remain concerned, and the implications could be huge.
Lord Newby
My Lords, we are keen to make sure that by the time people have been through the guidance process, they are able to make the best decisions for themselves. As I say, we hope that that will be possible in the vast bulk of cases first time around.
I think that what will happen in giving guidance in this area, as happens elsewhere, is that there will be a number of very special cases, but the vast bulk of people will have the same issues as others. The CAB, which after all has to give advice on the whole benefits system, which if anything is even more complicated than the pensions system, has a proven track record of developing the skills of people, and is very good at this—while this is, of course, what the Pensions Advisory Service does.
So we are confident that there are going to be well qualified people. We are building flexibility into the system—partly by having three ways of accessing it and partly, as I say, by, in exceptional circumstances or in a minority of circumstances, allowing people to go back—and we hope we are going to make sure that at the end of the day people will all have the degree of guidance that they need, relevant to their needs, to enable them to make well informed decisions.
Lord Bradley
I thank the Minister for his comprehensive reply, particularly when he said that the Treasury would be keeping its mitts all over the service. I assume that that was meant to be reassuring.
I note that he said that he thought the BBC had got the story wrong today about flat-rate pensions, and I listened with great care to his explanation, which we will need to reflect on very carefully. It is vital that people are clear about what their pension income will be when they are making plans about their whole-pot retirement income. I hope that when I read his response, it will be clear that that information will be available to people well in advance of them taking advice from the CAB, the Pensions Advisory Service or whatever source they may choose, so that they can rely on the figures provided to them by the Pension Service.
Lord Bradley
“Pensions flexibility: impact on government revenues
(1) The Chancellor of the Exchequer shall, within a period of 2 years from 6 April 2015, publish and lay before both Houses of Parliament a review of the impact of pension flexibility on government revenue, with particular reference to opportunities for tax and national insurance contributions avoidance.
(2) The information published under subsection (1) should include an assessment of the impact on—
(a) the use of salary sacrifice arrangements;(b) income tax receipts; and(c) national insurance contributions.”
Lord Bradley
My Lords, the two amendments in this group are intended to ensure that the effects of the pension flexibilities on the public finances and savers are adequately monitored by the Government. Their purpose is to ensure the publication and proper analysis of the information and that it is placed in the public domain to ensure transparency.
I shall speak first to Amendment 30B, which requires the Treasury to produce a review of the effects of the pension flexibilities 18 months after they are introduced. This reflects the question we need to consider around the guidance guarantee and wider issues of pensions flexibility. We support the introduction of pension freedoms and flexibilities, but we want to ensure that they are done in the right way and that consumers are adequately protected. However, the pace at which the reforms are being brought forward leaves open considerable concern about the effects of the rollout. On Report in the other place, the Minister said:
“The Bill was originally much shorter and obtaining the approval of, originally, the Government to bring it forward took place before the Budget … as we are in the final Session of a Parliament, everything has been on an accelerated timetable”.—[Official Report, Commons, 25/11/14; col. 804.]
The pace at which the wider pension flexibilities provided for in this Bill and in the Taxation of Pensions Act are being brought forward have also led to concerns among a number of other interested parties about whether the Government have fully bottomed out the policy and whether the rollout will go exactly as they are planning. A recent report in the Financial Times said that a lack of detail about the reforms has left the industry concerned that they were at risk of failure. The chairman of the National Association of Pension Funds said:
“There are 4.2 million savers over the age of 55 who from next April will have the right to ‘choose’ how they take their retirement savings”.
He also said that,
“this lack of detail—this lack of clarity—is severely limiting our opportunity to get things right for our members … and it’s increasing the risk of failure”.
I point this out by way of background to show that, come April, there will still be a lot of work to do in reviewing the effects of the changes. The details of this amendment enable the Government to do just that. Conveniently, they will be along the lines of the test that we have already set out for these reforms: they should be fair; there should be decent products for low and middle-income savers; and the reforms should not result in extra pressures on the public finances.
The ongoing position of annuities is one such matter that needs to be considered. For some people, annuities will remain an attractive product because of the security they provide. The Treasury have recognised that this is the case. Therefore, if the market for annuities were to suffer some major change, and perhaps products that were good value in the first place were no longer then available, that would be something for this House to consider carefully. This is why the amendment requires a review to consider that matter.
Noble Lords will also be able to see that a review would be required to conduct an analysis of the cumulative effect on the revenues of the Treasury. Our other amendment on this point is focussed on the potential effects of salary sacrifice arrangements. It is also important to consider the possible costs in what the state may end up having to provide. I am not aware of any Treasury analysis of this. The Minister may well want to correct me on this and I am happy for him to do so.
Further, we still do not know how this will interact with changes to social care. In its written evidence to the Committee on the Taxation of Pensions Bill, the Association of British Insurers expressed concern that,
“a continued focus on early access at the age of 55 means that there may be barely enough in the pension pots of some savers to cover their near-term retirement income needs, let alone enough left to stretch to care costs in older age”.
We have also seen a recent report in which it is anticipated that pension withdrawals of this nature are set to rise by £6 billion above what the Government currently estimate. The charity Age UK warned last week that significant numbers of people could run out of cash in later life by withdrawing funds under the new plans unless tougher safeguards are in place.
We do not believe that the Government have conducted sufficient analysis of the potential impact on the social care landscape. We also believe that there has been a disproportionate focus on the new freedom to access pensions early, and to take money out, which was not previously possible, as I have just alluded to. That is why we are calling on the Government to publish a review setting out the distributional impact by income decile of the reforms in the Bill. It is also unclear what effect having access to flexi-access pensions will have on means-testing for social care. I am not sure that the Government have the answer to this yet, but I would be grateful if the Minister could tell us what effect an amount of money that exceeds the means test level in a flexi-access draw-down account would have on the individual’s liability. As I have already pointed out, that money may be expected to last until death, as an annuity would have, but it may be accessible in a way that capital sitting in a bank is. Will that meet the means-test criteria or not?
Just a few months from the changes coming into effect, there are clearly still a number of unanswered questions. That is why our amendment also covers a proper behavioural analysis of consumers in the light of the new freedoms and flexibility. At this point, may I also ask the Minister a question about access to funds? Is the report in the Sunday Times correct that the Minister in the other place is considering whether someone who has already taken an annuity may be able to buy themselves out of that so that they can be included in the new flexibilities and freedoms?
The other amendment in this group requires the Secretary of State to produce a report on the revenue impact of the changes contained in the Bill and the Taxation of Pensions Act. Taken together, there is the potential for the Government to lose a great deal of revenue. As a result, we want to probe the impact that this is likely to have on the figures that the Government have presented in the Budget and in subsequent reanalysis. The main issue at the core of this is so-called salary sacrifice, a potential tax effect first highlighted by John Greenwood in the Telegraph, whereby someone over 55 pays a large part of their salary into their pension pot to avoid paying national insurance and income tax. The Budget freedoms would then make it possible for them to flexibly access their money through their pension fund, saving them and their employer a potentially large amount of national insurance. Some 25% of what they access will be tax-free and the rest will be charged at their marginal rate of income tax. This does not appear to have been the Government’s intention, and steps have been taken to try to prevent this. An annual contribution allowance of £10,000 a year for anyone who is accessing pension benefit restricts the possible tax leakage but does not prevent it. The reduced £10,000 limit is activated only after the pension has been flexibly accessed for the first time. As explained by the Association of Accounting Technicians:
“In the first year, before the £40,000 allowance is lost, individuals over the age of 55 will still have the scope to save … NI on the full £40,000, provided they have the necessary earnings, less their existing pension contributions. Where an individual flushes (passes) an extra £30,000 through pension rather than drawing salary they will achieve a saving of £3,600 in employee NI, more than £1,500 in income tax and, also, £4,140 in employer NI (13.8%) in the first year. A total loss to the public purse of £9,240. The ‘Freedom and choice in pensions’ rules mean this money can be withdrawn immediately if an individual is over 55. This fact means that there will not be clear distinction between salary and pension for this age group”.
Questions remain for the Minister to answer over, first, whether that possibility was adequately taken into account before the change was announced and, secondly, whether the revisions made since then are sufficient. For instance, the Government’s revised figures that take into account the changes made since the Budget forecast a loss of £35 million in the first year, and then £25 million for years after that. However, if we are to assume that the annual allowance reduces the potential for tax leakage, why do the revisions forecast a loss? The only conclusion I can draw is that the initial figures did not take into account the potential for salary sacrifice. Can the Minister confirm that this is the case?
It may be the Government’s intention to introduce a more stringent allowance, in which case the £10,000 annual allowance was in fact a relaxation of the rules. However, that would appear to conflict with the Government’s statement that salary sacrifice was not intended to be part of the reforms. If the intent was an annual allowance of zero once the pension has been accessed, what analysis did the Government conduct that persuaded them to change it to £10,000, and can they provide it to Members of this House before Report? It is therefore an issue that needs to be kept under active review, and the Government should report to Parliament on the effect of this matter.
As I have said, the purpose of our two amendments is to create clarity and transparency. As my honourable friend Cathy Jamieson said in the other House:
“It is fair and sensible for us to ask that the new clause is included in the Bill because it would ensure that the Government did not simply monitor quietly in the background, waiting for something to go wrong, but proactively looked at all these areas and then brought further information to Parliament so that we could consider how best to do things in the future and remedy any unintended consequences or loopholes”.—[Official Report, Commons, Taxation of Pensions Bill Committee, 20/11/14; col. 123.]
That is the purpose behind our review, and I hope that the Government will accept the amendment. I beg to move.
Lord Newby
My Lords, the two amendments in this group would require the Government to publish two reviews of the impact of pensions flexibility. I start by completely agreeing with the noble Lord, Lord Hutton, that these changes are welcome freedoms and flexibilities but, like all freedoms, they bring some risks that I hope, in a variety of ways, we shall be effective at mitigating.
Noble Lords will not be desperately surprised to hear that I do not believe that these amendments are necessary. First, when considering new Clause 1 and the parts of new Clause 2 which relate to Exchequer revenues, it is important to note that in 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. The total impact of these decisions was set out in table 2.1 of the Autumn Statement document.
To ensure that the Government were being sufficiently transparent, the Financial Secretary to the Treasury wrote to members of the former Taxation of Pensions Bill Committee setting out these costings. I will now outline them for the benefit of the Committee. Further detail on how these costs were calculated is set out in the policy costings document published alongside the Autumn Statement. However, in the letter sent by the Financial Secretary to the Treasury to the members of the former Taxation of Pensions Bill Committee, it was also explained that the costings published as part of the Autumn Statement were based on the same central assumptions that underpinned the costings published at the Budget. Since the Budget, the Government have explored in more detail two aspects of the policy that affect this costing, which takes us to a point made by the noble Lord, Lord Bradley, about the increased cost of salary sacrifice and the increased cost of welfare as a result of the reforms. The Government have produced costings for these, which have been scrutinised by the OBR. In line with standard practice, these are accounted for as changes to the forecast and are not therefore outlined in table 2.1 of the Autumn Statement document.
Given the concern that noble Lords have expressed, it may be helpful if I detail what those figures are. The revisions to the forecast to account for salary sacrifice, which take account of further discussions and considerations since the Budget, are £35 million in 2015-16, £30 million in 2016-17, and £25 million in each of the following three years. When the forecast was revised to account for the increased cost of welfare, the figures rose from £15 million in 2016-17 to £25 million in 2018-19 and 2019-20. The Government have therefore already published the information that these two new clauses are seeking on the Exchequer impacts of various aspects of flexibility, all of which have been certified by the independent OBR. The Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts at future fiscal events and the Government of course keep tax policy under continuous review. Therefore, 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.
Lord Bradley
I am grateful to the Minister and thank him for his explanation of the figures. I want to be absolutely clear that my example of a person who transfers his salary into his pension pot and saves national insurance in the way that I have described has been fully taken into account in these figures.
Lord Newby
My Lords, I believe absolutely that they have. If I am wrong in that, obviously I will write to the noble Lord; but that is the purpose of having initially produced the figures on salary sacrifice and subsequently revised them.
I turn to the other elements of the amendments. Amendment 30B also 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 of the Taxation of Pensions Act, pensions flexibility does not have a direct consequential impact on household incomes. Distributional effects will be driven by the choices that individuals make about how and when to take their pensions. 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.
Additionally, Amendment 30B would require the Government to publish behavioural analysis. The costing of tax policies often involves an assessment of the behavioural impact of the measure and, in some cases, the capacity for additional tax planning and avoidance behaviour. These assumptions and methodologies are, of course, certified by the independent OBR. However, as a matter of policy, the Treasury considers that making these detailed behavioural assumptions public can have the potential to affect the behaviour they relate to, and as such can be potentially detrimental to policy-making. The policy costing note published alongside the Autumn Statement explains how the costings have been calculated. This is in line with the principles outlined in the government document Tax Policy Making: A New Approach, which was published alongside the June Budget in 2010.
Amendment 30B would also require the Government to review any impact that pensions flexibility might have on the volume of annuity purchases. Data on the sales of annuities will continue to be available through other channels, such as the data published by trade bodies such as the ABI and publications by individual firms. Therefore we do not think that there is going to be any lack of this information being publicly available, so there is no need for a requirement in the Bill to achieve that.
Lord Newby
My Lords, one thing I have not responded adequately to—and I am not sure whether what I am going to say will adequately answer the noble Lord’s point, but I will write to him if I do not—is about salary sacrifice and the question about the £10,000 allowance, which the noble Lord, Lord Bradley, and others, referred to.
The £10,000 allowance is, we think, a sensible middle way to allow the majority of people the flexibility to withdraw or contribute to their pension as they choose from age 55, while also ensuring that individuals do not use the new flexibility to avoid paying tax on their current earnings. However, there are clearly circumstances in which it will be in an individual’s best interests to gain access to part of the pension pot early—at 55 or 56—while by the time they are 60 their circumstances have changed and they can then start contributing again to a pension. We did not want to deny that entirely. Equally, as noble Lords have said, we did not want individuals recycling money out of pension pots just in order to avoid tax. It is therefore a pragmatic compromise figure which we think strikes the right balance.
Lord Bradley
I again thank the Minister for his detailed response. In relation to buying out annuities, the Minister is right—the article in the Sunday Times did state that Steve Webb was a Liberal Democrat. However, it also stated that he was the Pensions Minister. I am sure that this is part of the tensions of coalition as we head towards the general election.
I am grateful for the support for this amendment from the noble Lords, Lord Hutton and Lord McKenzie, both of whom are experts in this field and bring great value to our deliberations. I am grateful to the Minister for clarifying some of the points regarding social care, although again I suspect that there may be further devil in the detail that we may debate further this afternoon.
The Minister’s response made the most compelling case for why we need the review brought back to Parliament with all the information gathered in a coherent and digestible way. In his response to our amendment he identified various sources of information in various departments, and it would take great expertise to beaver away and gather all that information into a form that enables enlightened and informed debate, not only in this House but in Parliament generally, and—in terms of transparency—for the public to understand fully the implications of these amendments.
We need to look carefully at the way in which information is gathered, disseminated and presented to Parliament. This amendment was a very good start for the revolution that is likely to take place in pension provision and how freedoms and flexibilities are used by the public. For today, however, I beg leave to withdraw the amendment.
Pension Schemes Bill
Lord Bradley Excerpts(9 years, 3 months ago)
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Lord Bradley
“( ) must be sufficient to ensure that the body is capable of carrying out its functions under section 333C(1).”
Lord Bradley
My Lords, I will be brief because we covered a significant amount of the areas to which this amendment relates earlier in our deliberations. I would like to probe the Government just a little further on the arrangements with the citizens advice bureaux. Specifically, I am seeking assurance that the CABs are capable of delivering the guidance, that they have sufficient start-up costs and that they will be properly funded to deliver face-to-face guidance through the proposed levy. I do not make any apology for repeating arguments that we have already made earlier in our deliberations, because, again, all we are trying to do with this amendment is to give a belt-and-braces assurance to the public that the guidance guarantee for face-to-face interviews will be delivered.
Let me say at the outset that I am not questioning the CABs and the wonderful work that they do, but pensions advice and guidance is not currently one of the services that they routinely provide. CABs work with 2.1 million people a year and they offer advice in England through 338 independent centres. Impressive though that number is, next year we know that around 600,000 additional people will reach retirement age and may seek—and under this Bill be entitled to— guidance. This high number carries on for a number of years because of the post-war baby boom. This is some scaling-up for the CABs and they will need to achieve this in order to deliver the high-quality guidance.
Relevant to this guidance, CABs offer financial and debt advice; over the past 10 years or so, they have been developing interesting financial capability programmes. It is good work and this experience might be particularly relevant to people who are being encouraged to draw down their pension pots at 55—for example, to settle debt. Pension advice to people retiring with pots of £20,000 to £30,000 probably takes the CABs into new areas and a largely new client base. We should remember that the enactment date is less than three months away and we have not had any sight of the regulations, while the FCA is developing a standard framework within which guidance will be offered—some of which we have had further information about today. There is still more information to come: information that, again, the CABs will rely on. Clearly, it is not the intention to set up CABs or any other provider to fail. If CABs are to deliver a service from April 2015, they perhaps should have had their guidance and information framework well in place before now. CABs produce high-quality information that underpins their advice work, and they know how long it takes to develop such information. Although the issue is not caught by my amendment, the Minister could perhaps assure the House that high-quality guidance will be delivered to 300,000 people whom we anticipate will retire and need guidance before September 2015.
The CABs’ excellent work is a lifeline for some of the poorest people in our society, often the most vulnerable people at vulnerable times in their lives, such as during divorce or separation. This is why—and despite often swingeing cuts—local authorities continue to fund local bureaux, albeit now often at a lower level of service. I am worried that the time of local bureaux will be diverted from their core work, and their service users will have nowhere else to go, particularly—to compound the problem—because legal aid is now hardly available for this group of people. Frankly, local authorities should not, in future, find themselves in a position where they will be picking up the tab for a poorly funded pensions advice service delivered through the citizens advice bureaux. The Minister has given us some assurances on this point, but I seek that further assurance again today. Can we also be assured that the core grant that citizens advice bureaux currently have for their services will not be deflected at all by the money available for this specific service—that there is no overlap between the services in terms of funding streams?
Finally, we know that CABs will be funded by the Treasury for the first two years, and after that through a levy on the industry. Again, I seek an assurance that, with this levy, it will not be necessary for CABs to move money between their funding streams to support their current wide range of services in order to deliver the essential pensions guidance that is coming forward. We know that these are complex matters for people who will be seeking CABs’ advice. We want to ensure the highest quality of that service, but we also want to make sure that the other range of activities that are essential in local communities are not undermined by the emphasis on the new service. I beg to move.
Lord Newby
My Lords, the noble Lord, Lord Bradley, sought a number of assurances about the funding of the guidance and the knock-on effects that this will have on CABs. The Treasury is committed to the provision of high-quality guidance from the start. It has the power in line 12 of page 65, in proposed new Section 333B:
“The Treasury must take such steps as they consider appropriate to ensure that people have access to pensions guidance”.
Given that when we say “pensions guidance” we mean high-quality pensions guidance, that means that there is a legal requirement on the Treasury to will the means as well as the ends.
In terms of the scale of the challenge ahead, we estimate that approximately 300 guidance providers are going to be required, including the CABs, the telephone appointments and the website, and we are actively recruiting them. The funding that the CABs are getting is the subject of continuous discussions between the Treasury and the CABs. I gather that, for the moment at least, the CABs feel that that they are getting the resources they need to do the job that they have been asked to do without any deflection of their core grant and without there being any requirement to fund this from other sources of income that they receive. That is very much the Treasury’s intention behind the whole approach to the scheme.
There has been start-up funding, which the CABs and the other guidance providers have been receiving. The £20 million development fund was announced in the Budget, of which a £10 million advance was approved by Parliament last July to cover preparatory work, most of which is taking the form of grants to the delivery partners. As I said earlier this afternoon, we estimate that there will be a cost of £35 million in the next financial year, and the Treasury is committed to increasing the amount that is made available if the demand for the service warrants it. I hope that, with those assurances, the noble Lord will feel able to withdraw his amendment.
Lord Bradley
I am grateful to the Minister for his response. I certainly would have liked to be a fly on the wall in the negotiations between the CABs and the Treasury to see where they were both coming from as their starting point, let alone where they ended up. I am grateful for the assurances that the Minister has given regarding other funding streams for the CABs and the funding for this service. Clearly, none of us wants to get into a situation where the CABs have to prop up the service by use of their invaluable volunteers, who do excellent work within citizens advice bureaux but obviously would not have the expertise, knowledge or training to undertake this work. It is therefore crucial that the activities are separated in that way. However, with those assurances from the Minister, I beg leave to withdraw the amendment.
Lord Bradley
“( ) The FCA must secure an appropriate degree of protection for consumers whether they have used pensions guidance or otherwise throughout the decision-making and purchasing process, including safeguards to actively inform consumers of key risks and benefits.”
Lord Bradley
My Lords, this amendment is on the specific issue of second line of defence. We have had some debate on this matter, including the excellent contribution from the noble Baroness, Lady Greengross, on her amendments. However, this amendment places a specific requirement on pension providers to make an active intervention to ensure that they help savers when accessing their DC pension pots to ensure that they get the advice or guidance they need, check that the products are appropriate for them, and have taken into account the tax implications, their partners, lifespan and other matters relevant to planning for their retirement. As we have heard, this has been called the second line of defence.
The need for it has been identified by the Financial Conduct Authority, which released two long-awaited reports—its thematic review of annuity sales practices and Retirement Income Market Study: Interim Report. The reports show continued failure in defined contribution pension providers’ treatment of existing customers, even after three separate investigations between 2006 and 2014. It is time for the FCA to take action before the “freedom and choice” reforms go live in April this year. The findings of the reports make unhappy reading. Perhaps my noble friends will not be surprised by this because we have been there before. It is worth summarising the key findings, which make the case for our amendment.
The thematic review updates the analysis in the FCA’s February 2014 report. Its key findings are, first, that, 60% of retirees,
“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”.
Lastly, the study found non-adherence by pension providers to the ABI code of practice. The FCA concludes that its findings clearly highlight that firms need to make improvements in relation to how consumers are informed about shopping around for enhanced annuities.
The key findings of the interim Retirement Income Market Study are that,
“competition in the retirement income market is not working well for consumers … many consumers are missing out on a higher income by not shopping around for an annuity, and some do not purchase the best annuity for their circumstances”.
The FCA economic analysis shows that,
“for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies”.
It also found that:
“Consumers’ tendency to buy from their existing pension provider weakens”,
competition. The FCA’s consumer research confirms that,
“pension savers display well-known biases, such as a tendency to under-estimate longevity, inflation and investment risk”,
which make them vulnerable to being sold products that do not best meet their best interests. This research also finds that the choices that savers make are highly sensitive to “framing”, and how options are presented will affect decisions they make. The introduction of greater choice and potentially more complex products will,
“reduce consumers’ confidence and appetite to shop around”,
and thus weaken the competitive pressure on providers to offer good value in this market.
What should be the remedies and next steps? The FCA is continuing to monitor the market and is expected to publish a final market study report in the first quarter of this year. It is also seeking views on five proposals it hopes to take forward in 2015. These are to: first, require providers to show how their quotes compare relative to other providers on the open market, including quote comparison; secondly, develop plain-English pensions guidance services and tools to support consumers’ decision-making; and thirdly, develop an alternative to the current pre-retirement “wake-up” packs sent by pension providers to their customers in the run-up to their stated retirement date. They are,
“too long, difficult to navigate and full of jargon”.
Next, the FCA proposes in the longer term, to develop a “Pensions Dashboard” to,
“enable consumers to view all of their lifetime … savings … (including the state pension entitlement) in one place”.
Finally, the FCA proposes to,
“continue to monitor the market as it evolves using a combination of consumer research, market data and”,
ongoing regulatory supervision. This will need to monitor for the likelihood of “pensions liberation” and other scams targeting consumers at retirement.
We have in this Chamber on too many occasions examined how the FCA and other bodies are attempting to drag this financial sector kicking and screaming to act in the best interests of its savers rather than those of their shareholders. The two FCA reports are a further damning indictment of the industry. The FCA proposals, in my view and that of my noble friend Lord McAvoy, help to support the amendment but in themselves are not enough.
In Committee in the Commons, expert witnesses including Dr Ros Altmann, consumer advocates from Age UK and the Financial Services Consumer Panel, and ABI representatives all called for the FCA to introduce a second line of defence, as did other reputable bodies such as Just Retirement. We are persuaded that this is the right course of action. Our amendment will require pension providers to actively ask savers seeking to access their pension savings whether they have considered the most important risks. This could typically include whether their decisions will mean they increase their income tax, outlive assets or run out of money, miss out on guaranteed annuity rates from the existing company, provide benefits for a spouse or other persons on death, miss out on additional income resulting from medical conditions or lifestyle factors, protect savings and income from inflation, purchase an uncompetitive product, or pay an exit charge that could be avoided. All these are crucial matters that need to be properly regulated, and they are part of the amendment for our second line of defence. The FCA could incorporate this through the introduction of a conduct regulation or by issuing FCA conduct guidance for providers to specify their responsibility for actively raising the risks that I have just outlined.
If we do not take this opportunity to act on the evidence contained in these two FCA reports and require changes to be made, we will further undermine consumer confidence in the pensions financial sector and the principles upon which this series of pension reforms are based will be undermined. We will not encourage people to save for their old age; we will not achieve fairness across generations; and it will lead to increased cost to the taxpayer. For all these reasons I commend this amendment to the House.
Lord Bradley
First, I thank my noble friends Lady Drake and Lord McKenzie for their excellent contributions, which are welcomed on both sides of the Committee. There is a strong feeling that it is very important that the second line of defence, as put forward in our amendment, is part of the Bill.
While I am grateful to the Minister for his comments, I feel that there is a degree of complacency in his response. We obviously recognise that the FCA is a new body and that its work is unfolding. However, there is a rather greater degree of urgency about the matters that we have placed before the Committee in the light of the fact that these new provisions for freedom and flexibility come into force in just a few weeks’ time. We do not want to be in the position where there is not complete confidence in the market and where all the relevant matters have not been taken into account with guidance and, through our amendment, a second line of defence to give absolute certainty to the public that the market which they will be moving into is operating in their best interests.
We need to reflect very carefully on what the Minister has said and on the fact that the public seek those assurances and want that second line of defence in legislation to underpin that confidence. For now, I beg leave to withdraw the amendment, although we may well return to this matter at a later stage.
Lord Bradley
Lord Bradley
In moving this amendment to Clause 48, I will soon be moving back to government Amendments 45 and—
The Deputy Chairman of Committees (Baroness Fookes) (Con)
Perhaps I may interpolate. The groupings list is slightly in the wrong order. I have been following the correct order as it appears in the Marshalled List.
Lord Bradley
I am grateful for that clarification as, I am sure, is the whole Committee. In moving Amendment 44A I shall speak also to Amendments 47 and 48.
At this Committee stage, we have tabled amendments on all the recommendations of the Delegated Powers Committee. The Government will either accept the recommendations of that committee or put on record why they do not believe that the delegated power in question requires the affirmative procedure. That is what our amendments in this group do. The Delegated Powers Committee recommended that the power in Clause 48(3) be subject to the affirmative procedure as the power contained in it is, to quote from the report, “very significant”, not only in the context of Clause 48 but for the purpose of Chapter 2 of Part 4 as a whole. That is a very fair summary. The power enables the Secretary of State to provide for exceptions from the need to seek independent advice, which is central to ensuring that someone in a defined benefits scheme, for instance, is adequately informed of the risks and rewards of transferring out in order to access their pensions.
The power in Clause 48(7) is equally fundamental, giving as it does the Secretary of State the power to define what counts as “appropriate independent advice”. Our amendment is designed to probe exactly what would be meant by “appropriate independent advice”. Will the scheme trustees or managers be required to assess the appropriateness of the advice received—that in the circumstances of the particular scheme member the recommendation is the right one and transferring out will not harm their chances of having a good requirement income? The alternative is that the scheme trustees or managers will have to check that the advice received by the scheme member comes from someone appropriate who is regulated by the FCA. Our amendment gives the Government the chance to clarify that point. The difference in responsibility and cost is obviously significant.
I acknowledge that the Minister has already been kind enough to write to me, for which I am grateful, and the Government’s response to the Delegated Powers Committee has made it clear that the definition of “appropriate independent advice” will be through a regulation that is subject to the affirmative procedure, although as a consequence not directly part of the primary legislation in this Bill. None the less, it would be very helpful if the Minister could put on record the likely content of the regulation and give as many details as he is able to about it so that it addresses the issues I have raised in the amendments.
Can the Minister also give the Committee an update on the likely timing of that regulation? The response to the Delegated Powers Committee on 6 January says that it is likely to be “in the new year”. Given that it also says that it has to be in place by April, we are safe to assume that the new year does not mean January 2016. However, it would be helpful if the Minister could say when that regulation is likely to be laid so that there can be proper scrutiny of it. I beg to move.
Baroness Drake
My Lords, I had not intended to speak on this amendment but I should like to support my noble friend in his probing. As a pension trustee, I deal with these requests for transfers for a cash equivalent value from DB to DC schemes. I think I dealt with two this morning. As someone with a fiduciary duty—when I see the scale of what can be transferred—they keep me awake at night. What I had to sign off this morning made me think that I should take the opportunity to reinforce my noble friend’s concern.
I am sure that demand for these transfers is already rising in anticipation of the new freedoms that will flow from April 2015. I am concerned. We have already seen problems such as pensions liberation. We can talk about the FCA and the regulated industry, but what unregulated charlatans and scoundrels are waiting in the wings to encourage people to transfer their funds and access their freedoms? As someone who has been a trustee for about 27 years—dreadful I know—I have seen the personal pensions problem, the cash accounts transfer values and the pension liberation scams. I have watched these things from the perspective of a trustee. I have a real fear that this is a car crash waiting to happen unless it is properly regulated.
Two adjectives go with advice: “independent” and “appropriate”. Independence is easy to define, in a way, because it has a regulatory definition. What is really important is what is appropriate. As a trustee I would want to know what the Government think is the appropriateness of the advice people have received when they make applications to the schemes of which I am a trustee for such a transfer.
I read the response to my noble friend Lord Bradley on the Delegated Powers and Regulatory Reform Committee’s report and my reading of that letter is that the Government are on the case. That would be great, and if they are I want to say positive things and encourage the Minister to deal with this robustly, because it is a car crash waiting to happen. It is not just a matter of the big defined benefit pots. If you are on quite a modest income and are lucky enough to have a DB scheme, then even if your pension is going to be about £4,000 a year that will translate into a really big pot of cash—a pot of cash such as you may not have seen before—leaving you quite vulnerable. I can see from the letter to my noble friend Lord Bradley that the Government are on the case. I urge them to stay on the case.
Lord Bradley
I am grateful to the Minister for that detailed and rapid response to the amendments. It will require careful reading to ensure that we fully appreciate all the issues that he has laid out to the Committee. The key element I should be pleased about is that Amendment 44A will be reflected upon by the Government as they devise their own amendments to be brought back on Report, which I understand is currently scheduled to be within a couple of weeks or so. There is some urgency that there is that clarification. However, with that assurance and in the light of being able to look at that within the context of the other matters raised in the amendments, I beg leave to withdraw the amendment.
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
My Lords, having listened to the Government’s amendments, I am tempted to say that this one is minor and technical and hope it will slip through on the back of that. However, it is not. On the first day in Committee, our first amendment on decumulation was an attempt to ensure that the Government did not lose focus on ensuring that all pension savers obtain a good deal when they look to turn their pension pot into a retirement income. In that instance, we wanted to protect savers from being defaulted into an annuity without a recommendation from an independent broker.
This amendment asks the Government not to lose sight of progress that has been made in getting a better deal for pension savers, despite the sweeping changes enabling freedom of flexibility in accessing pensions that will come into force this April. The cap that has been introduced on charges for work-based pension schemes of 0.75% a year has no equivalent in draw-down products, but from April a great many more savers—perhaps an estimated 320,000—will be using these products to get a retirement income. They should be protected from unfair charges. I repeat: they should be protected from unfair charges. It is welcome that NEST, the National Employment Savings Trust, has launched a consultation on draw-down products and how to ensure that middle and low-income earners have suitable and good-value products available to them. As the consultation rightly says:
“The solutions we as an industry develop over the next few years could determine 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”.
We have been clear throughout that welcoming the Budget freedoms is predicated on good solutions being available for savers in those income brackets, which we hope will happen. 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.
What is the evidence that this may happen in the decumulation stage for draw-down products? We already know that charges can be varied and opaque. The report from Which?, The Future of Retirement Income, points 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%”.
Our amendment would give the Secretary of State the power to address this. The report goes on to point out that the costs are not always clear to the consumer:
“There are also hidden costs, including bid-offer spreads, the cost of sub-funds within the main fund, platform charges etc. Where an actively managed fund is selected, there is a risk that high turnover (churning) would add significantly to the total cost due to the transaction costs involved”.
Remember, this is about a product that is likely to become a great deal more widespread from April. The report therefore recommends that the Government should consider the introduction of a charge cap on the DC decumulation market at the same time as this is made a requirement for auto-enrolment DC schemes.
No one can be quite sure how the market will develop after April, but if the Government do not want to put this in place now, accepting our amendment would give them the power to take action to prevent consumer detriment in a new market in an area that has not always served savers as well as it should. This seems to me to be a sensible step that will protect consumers and ensure that they are not subject to rip-off charges. In that spirit, I hope that the Government will accept this amendment.
Baroness Drake
My Lords, from April 2015, when people reach the age of 55, they will be able to access their defined contribution pension savings as they wish. That will essentially leave them with four choices: full withdrawal of cash, taxed at their marginal rate, less a 25% tax-free lump sum; some kind of income draw-down product, drawing down cash while leaving the remainder invested; taking uncrystallised funds pension lump sums; an annuity purchase; or any combination of the four.
We do not know how the market will evolve in light of the new unprecedented options for pension savers in terms of the retirement products that will be available and what their charges will be. However, we do know that the FCA thinks, first, that the new freedoms could weaken the competitive pressure on providers to offer good value, because people display even more inertia in the face of complexity; and, secondly, that providers have been struggling to complete proper due diligence testing on new products because of the tight timetable. We do not have clarity as to the Government’s thinking on the charges, quality standards and transparency requirements for retirement income products going forward.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord Bradley, for moving the amendment and the noble Baroness, Lady Drake, for her contribution.
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. The Government’s announcement of a charge cap on default funds in pension schemes used for automatic enrolment—which, subject to the approval of noble Lords, will come into effect in April—amply demonstrates that commitment to act. However, I am pleased to be able to reassure noble Lords that this amendment is not necessary. 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.
Similarly, the Financial Services and Markets Act 2012 gave the Financial Conduct Authority wide-ranging product intervention powers. Under these powers, the Financial Conduct Authority also has the ability to cap charges on draw-down products, including flexi-access draw-down funds where these are offered by insurance companies. These existing powers cover all the institutions which could offer such draw-down arrangements.
I also reassure noble Lords that the Government and regulators are, as has been indicated, monitoring the development of new retirement income products, including the next generation of draw-down products, very closely indeed. In the publication of provisional findings from its retirement income market study, the Financial Conduct Authority has specifically committed to monitor how the retirement income market develops and to take action where appropriate if it sees sources of consumer detriment arising or if competition is not working properly in the market. In addition, again as mentioned earlier, the Financial Conduct Authority has also committed to undertake a full review of its rules in relation to the retirement income market which will commence in the first half of this year.
Therefore, while the Government share the concerns that have been expressed about member-borne charges, we believe that this amendment is not required. I therefore hope that the noble Lord will withdraw this amendment.
Lord Bradley
I thank the Minister for his response and the noble Baroness, Lady Drake, for her very important contribution to this debate. I am pleased that the Government recognise that this is an issue and that the purpose of this amendment is entirely to protect the consumer in this matter. I hear the Government’s assurance that the powers to act already exist. What we all want to ensure is that the Government do actually act if it does turn out to be the case that excessive charges above what would be a reasonable capped level of such charges actually come into existence as new products come on to the market.
If the Government are right that this amendment is not necessary, the test will be that they actually act in the interests of consumers in a timely way to ensure that they do not suffer the rip-offs that they have in the past in other circumstances. With those assurances, I beg leave to withdraw the amendment.
Pension Schemes Bill
Lord Bradley Excerpts(9 years, 4 months ago)
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Lord Bradley (Lab)
My Lords, I begin by adding my own tribute to the distinguished career of the noble Lord, Lord Jenkin of Roding. As we have heard, he has given huge service to Parliament in both Houses over 50 years and held many of the great offices of state—even if he did not get on to the front row of the photograph. His contribution today is further testimony to his massive wit, wisdom and insight into both Houses of Parliament. I wish him a very happy and healthy retirement.
We have heard a wide-ranging and high-quality debate. I thank the Minister for his detailed introduction of the Pension Schemes Bill which we will explore in great detail in Committee and at other stages in this House. I thank all noble Lords for their excellent contributions to the debate. A theme that has run through it is that, although we are taking the two Bills together, they do not necessarily fit together quite as well or as coherently as the Minister argued when introducing them, just as the four pensions Bills introduced during this Parliament belie the proposition of the Minister for Pensions, Steve Webb, that, overall, this is a coherent set of reforms.
My noble friends Lady Drake, Lord Hutton of Furness and Lord McKenzie of Luton made clear in their excellent speeches that how the new freedoms and flexibilities in assessing pensions, introduced through the Taxation of Pensions Bill, and the provisions to allow the creation of collective defined contribution and shared-risk schemes, sitting between defined benefit and defined contribution schemes, will impact on each other has not been fully worked out. I am sure that, as we go into Committee, the Minister will provide further details about the new pension freedoms and how they will impact on the types of shared-risk schemes that may be created following the changes in the Pension Schemes Bill. We want to explore the potential tension between guidance, help and encouragement to build up a pension pot, particularly following auto-enrolment, and flexibility and choice in turning this into an adequate retirement income.
As my noble friend Lord Davies made clear, we support freedom and flexibility in accessing pensions but want to ensure that three tests are met: savers should get the right guidance—I stress that we are talking about guidance, which is different from advice; the system should be fair to low and middle-income savers; and the reforms must not lead to additional burdens on the state. These principles will steer the questions we ask when we look closely at the guidance guarantee in the Pension Schemes Bill. For example, will the guidance be of sufficiently high quality and impartiality to help people with perhaps the most complex financial decision that they will ever have to make? Will take-up be sufficient to ensure that people are not left unequipped to deal with this decision? Will those who receive an annuity or are defaulted into one still be able to access a good-value product?
The Government clearly understand how important it is that the guidance guarantee—or whatever it is eventually called—meets the substantial challenge of equipping people to navigate what can be a very difficult market. This reflects another tension between the different strands of the Government’s pensions reforms. Auto-enrolment is based on the idea that consumers do not always make the best decisions in a complex market and, instead, may end up doing nothing. The pensions freedoms are predicated on those same consumers becoming highly engaged with the decision in front of them when they reach retirement. The guidance guarantee is the bridge over which they attempt to cross that fault line between different reforms, and it will need to be up to the job. We will address this issue in Committee when we look at that aspect in the detail that the noble Lord, Lord German, set out.
Those difficulties are possibly made more pronounced by the pace at which we need these reforms to be implemented and the pace at which the Government are pressing through this legislation in this House, as the noble Baroness, Lady Greengross, clearly pointed out in her excellent contribution. In the case of citizens advice bureaux, for example, it comes on top of an already challenging set of circumstances for people who rely on that service. I hope that the Minister will be able to reassure the House that all the organisations that will be responsible for giving guidance, including the Pensions Advisory Service, will be adequately resourced to do what they are being asked to do. That is especially important given the disparate estimates that have been made of the take-up of that guidance, as came out clearly in Committee in the other place. As we heard from my noble friend Lord McKenzie, Legal & General has said that following its own pilot a mere 225 out of 9,000 contacted took up the offer of guidance. Therefore, take-up could be very low. TPAS has estimated that it will be 25% but I accept that others have made higher estimates. However, take-up will be crucial if the guidance is to be meaningful for the people who rely on it.
Questions remain unanswered about how the new flexibility that has been announced will affect the way that pension savings are treated. If they can be accessed at 55, can a creditor demand that money be drawn down to cover debts? Currently, the fact that pension savings are put aside for purchasing an annuity prevent them being accessed and treated as free money. There are concerns that the pace at which these changes are being rolled out means that the Government have not ironed out all the details of such important matters for individuals reaching that age.
The other principal change to the legislation ahead of us is the outlining of new definitions of the different kinds of pension schemes, moving beyond the general money purchase and non-money purchase definitions in the legislation to make it possible to create shared-risk schemes. We support the changes and in fact earlier this year we called for these changes to create CDCs. Their benefits have been laid out by other noble Lords. They have the potential to offer a more stable retirement income than individual DC schemes. Modelling for the DWP showed that a collective pension would have outperformed an individual one by an average of 33%, according to historic data, and, just as importantly, would have performed more consistently. We need to look carefully at those outcomes. However, there is obviously the potential in collective shared schemes to achieve that stability and longevity in retirement income.
There can also be benefits from not having to divest from relatively riskier assets into safer ones with a lower return as the saver reaches retirement age, as is often the case with individual DC schemes. They can also have lower administrative costs. As a result, IPPR work from last year showed that it was the most popular option for government reform, backed by a broad spectrum of the population. Clearly there are benefits to be had from collective schemes.
The Bill is light on detail. As the Minister intimated, it does not contain the detail of the kind of defined ambition and DC schemes the Government envisage will be arrived at. Nor is there much suggestion of how many collective schemes the Government envisage will be set up in the short to medium term. I hope that the Minister will provide some more detail on the DWP estimate for the number of employers likely to take up the option of a defined ambition scheme. I hope that we will have details of that not only today but as the Bill passes through its stages in the House.
There are a number of missed opportunities in the Bill. There are steps that the Government could take to improve the market that would fit well with these reforms, such as changing the legislation so that pension schemes are required to have a board of independent trustees with a fiduciary duty owed to scheme members over and above that owed to shareholders. That was clearly identified by my noble friend Lady Drake. The OFT has shown that the contract-based market is not getting value for money for savers. As we have heard, international evidence shows that if the Government were to move in that direction it is likely to lead to better governance and transparency. We look forward in Committee to laying out the evidence on how trust-based governance can improve dysfunctional markets.
With this there is also the chance to build up scale in a way that would drive efficiencies and build up those economies of scale, which we again know from inter -national evidence can improve administration. It would mean that fewer trustees could cover more of the market and lead to the lower transaction costs through intermediation as recommended by the economist, John Kay. Two hundred thousand schemes are too many, so it would be helpful if the Minister could outline what is being done to encourage scale.
There is also a missed opportunity to build on the good work that NEST has already done by lifting the restrictions placed on it in the light of the European Commission’s confirmation that doing so would not breach state aid rules, as the Government previously argued it would. For NEST to remain influential in the marketplace, it needs to be able to grow to reach more employers and attract more savers. We will be exploring that possibility in Committee.
It is also crucial that, in the excitement of the new flexibilities being rolled out this April, we do not forget about reforming the other parts of the market that have not worked well for consumers but which provide the types of product for which there may still be demand. The Financial Conduct Authority’s interim report on the retirement income market published last week showed that the market is still not working well, and we know that of the 40% of people who get an annuity with their existing provider, 80% were not aware of the option to shop around. Others were not practically aware of how to go about this, or did not think it worth shopping around in the first place. In fact, it can make a substantial difference to people’s retirement income. The National Association of Pension Funds estimates that not shopping around can cost up to 20% of retirement income. It would therefore be of great benefit to the consumer to require an independent broker’s recommendation before it is possible to sell an annuity to someone who has saved with the scheme they are purchasing the annuity from.
We also urge the Government to take action to prevent people who are taking advantage of the new flexibilities being subject to similar examples of consumer detriment, albeit perhaps through a different product. It is concerning that the Government’s plans to address rip-off pensions do not include income drawdown, despite the fact that 320,000 people are likely to be looking to access these products after April. If charges equivalent to many of today’s drawdown products were to apply then, someone investing a pension pot of £30,000 could see 27% of their savings taken away in charges. Given that the median annuity in 2013 was purchased with a pot of £20,000, these charges could be significant.
As we have heard from other noble Lords, this Bill is more a framework than a completed piece of legislation, enabling rather than fully formed. It will be difficult to scrutinise without further details from the Minister about the likely content of regulations and the timetable for when these regulations will be laid. It is essential for this House to have sight of those regulations so that we can look across the piece of the primary legislation and the regulations to be absolutely sure that we are scrutinising effectively the impact of the Bill on future incomes in retirement. However, the number of amendments that the Government introduced as it progressed through the other place, and the number that we are likely to see as it progresses through this House, means that it is vital that these proposals are adequately tested here. We may therefore look at whether clauses should stand part of the Bill when we come to Committee stage to enable us to debate the crucial issues that have been identified by many noble Lords this afternoon.
We want a pension market that protects consumers and provides them with what they need in retirement. That is precisely what we will attempt to achieve as the Bill passes through this House.