Pension Industry

Lord Evans of Rainow Excerpts

Tuesday 21st February 2012 Commons Chamber

[David Mowat (Warrington South) (Con)]

I am delighted to have this opportunity to raise a number of emerging cost structure issues within the UK pension market. This is an area in which I continue to receive a high number of representations from constituents, and the recent debate over public sector pensions has highlighted yet again the vast disparity that continues to exist between public and private sector provision. My view is that we should now stop talking about public sector pensions and ensure that the vast majority of the work force who make up the private sector get a better deal. The prognosis is not good, however, because of the endemic mistrust within the industry. Indeed, a recent National Association of Pension Funds survey found that 48% of the population did not believe that pension provision was a suitable form of investment.

The timing of this debate is important for two reasons. The first is the imminent introduction of auto-enrolment which, for the first time, will introduce many millions of new and relatively unsophisticated consumers into the market. The second is the emerging evidence of a serious market failure in both the investment and annuity provision segments of the industry. That market failure is robbing ordinary families of tens of thousands of pounds and of their chance of a decent retirement.

Before we investigate the causes of the problems, I should like to indentify the three distinct segments of the market. The first involves those in the public sector, about whom we have talked many times in this place. They are well catered for in comparison to others. An illustration of that is the fact that a £10,000 pension taken at the age of 65, would, in the free market, require a pension pot of about £250,000 a year. That is what the private sector is competing with.

The second segment of the industry involves those in the private sector who have made some attempt to provide for themselves, either because they are in a final salary scheme or—more likely, given that nearly all final salary schemes are now closed—a money purchase scheme.

[Graham Evans (Weaver Vale) (Con)]

I congratulate my hon. Friend on securing this important debate. The strivers in this country who work hard and do the right thing in providing for their own pension in retirement are finding that their private sector final salary pensions disappeared 10 or 15 years ago, and that their endowment policies—remember those, from the 1980s?—are delivering half of what was promised. In the light of that, and of the Equitable Life scandal, does my hon. Friend agree that it is a 21st century scandal that the fund managers in the City are still getting paid and receiving bonuses?

[David Mowat]

I thank my colleague for that intervention. I was just about to say that the average pension pot for the people in the sector I mentioned is of the order of £35,000 a year. That is enough for a pension of about £1,500 a year.

The third segment of potential pensioners are those for whom no provision whatever has yet been made. The Government are correctly trying to reach them through auto-enrolment. This segment contains the most unsophisticated consumers who need the most protection.

It is right, as the industry says, for people to save more, but when their funds are eroded by unnecessary costs and when annuities provide such poor value, many people in these groups say, “why bother?”. Up to a point, they are right, but this is the tragedy: we must save more, yet the Government have not put in place the environment that is necessary for effective saving. What that means in policy terms is that the Government are inheriting under-pensioned retirees, with all that that means for social security, despite the fact that the Government spend £33 billion a year in pension tax relief. This tax relief that should be subsidising retirement prosperity is, frankly, being siphoned off to fund managers through investment and annuity overcharging. I shall talk first about the fund management industry and then about annuities.

The Financial Services Authority has recently published statistics estimating that 31% of pension pots go in charges or fees. Clearly, the decision on which pension to purchase is, along with buying a house and buying a car, one of biggest decisions in people’s lives, yet they do it from a position of ignorance. The reason why the market does not work is that there is a massive asymmetry of information between providers and buyers and therefore of buyer confidence.

The area is complex, but the whole problem is compounded by an opaque fee structure, which is indicated by the types of charges relating to pensions—entrance charges, platform charges, annual charges, exit charges and, indeed, churn charges. Some of these appear in published overall cost figures and some do not. For example, the churn charge is not included by pension fund managers in the cost structure of what they call the TCR—transitional corresponding relief—ratio of a fund. This can be responsible, according to Money Management, for changing a 31% figure into a staggering 53%. That means that 53% of the money going into pension funds goes in charges. If we examine the average degree of churn in a pension fund, we find a rate of 128%, meaning that every equity in it is churned every seven months. Warren Buffett takes the view that equity should be held for a lot longer than that. Frankly, holding it for something like seven months is simply not right.

Oral Answers to Questions

Lord Evans of Rainow Excerpts

Monday 18th July 2011 Commons Chamber

[Graham Evans (Weaver Vale) (Con)]

T3. One of my constituents living in Murdishaw, one of the most deprived estates in Runcorn, recently contacted me about the current housing benefit arrangements. My constituent believes that it is deeply unfair that people living on low incomes in areas such as Murdishaw are paying through their taxes for unemployed Londoners to live in multimillion pound houses in trendy parts of the capital. Will the Minister stand up for my constituents and ensure that housing benefit is capped at a fair level?

[Steve Webb]

My hon. Friend is right to highlight the fact that the Government do not want people in low-paid work put at a disadvantage relative to people who are unemployed. We believe that they should face no worse a situation. That is why we have introduced a housing benefit cap that will particularly affect central London and reduce the local housing allowance from the 50th to the 30th percentile—to make things fair between those who are on benefit and hard-working people in low-paid jobs.

Oral Answers to Questions

Lord Evans of Rainow Excerpts

Monday 13th June 2011 Commons Chamber

[Mr Duncan Smith]

The position on the benefit cap is very straightforward and simple: those who are on benefit should not receive more money than those who are working and paying their taxes. There are exemptions, of course, such as for those who are making the right efforts to get back to work—those on working tax credit, for instance—and those who are disabled, as well as for widows and war widows. They are exempted from this, but for the rest of them the following simple principle holds: “If you can, you should be helped into trying to work”, and £26,000 a year seems a reasonable sum of money to me.

[Graham Evans (Weaver Vale) (Con)]

T9. Many people are being tricked out of money by being offered lump sums, which turn out to be woefully inadequate, instead of their pension scheme. What steps are the Government taking on these incentivised transfers out of defined benefit pension schemes?

[Steve Webb]

I am grateful to my hon. Friend for raising that important issue. We are determined to drive out the bad practice whereby, as he says, people are given a bung of cash, sometimes a few weeks before Christmas, and are then given a value for their pension rights which is well below what they are actually worth to them. I met the pensions regulator and other interested groups a few weeks ago, and we are looking very hard at whether regulatory change is needed.

Oral Answers to Questions

Lord Evans of Rainow Excerpts

Monday 28th March 2011 Commons Chamber

[Chris Grayling]

It is important to say that we recognise the need to ensure that the universal credit works with self-employment. In the detailed design of the universal credit, we will ensure that it aligns with initiatives such as the new enterprise allowance, but more broadly we will make sure that self-employed people can also benefit from the support that the credit offers. They are a crucial part of our economic future.

[Graham Evans (Weaver Vale) (Con)]

How will my hon. Friend ensure that we harness the skills and expertise of business to help unemployed people get their own businesses up and running?

[Mr Speaker]

With reference to Merseyside.

Oral Answers to Questions

Lord Evans of Rainow Excerpts

Monday 18th October 2010 Commons Chamber

[Mr Duncan Smith]

I welcome the right hon. Gentleman to his position, although it would have been nice if he had risen at the Dispatch Box and first apologised for being part of a Government who left plans to cut the support to mortgage holders—[Interruption.] Yes, as the Minister of State, my hon. Friend the Member for Thornbury and Yate implies, they planned to slash the rate. So when the right hon. Member for Paisley and Renfrewshire South (Mr Alexander) next gets to the Dispatch Box, perhaps he will tell the world that he was going to do that, and apologise. We will give the support necessary and reform the system. As he knows, organisations and individuals, including a lot of very senior businessmen today, have said that our economy will grow, that they will provide the jobs and that therefore this Government will be right.

[Graham Evans (Weaver Vale) (Con)]

T3. Building business will create employment opportunities in my constituency of Weaver Vale. What support will the Government provide to help unemployed people into self-employment?

[The Minister of State, Department for Work and Pensions (Chris Grayling)]

I am delighted to tell my hon. Friend that we are looking to expand the support available to people in parts of the country that are particularly affected by unemployment and that have a small local private sector economy. We will provide enhanced support from early next year, including through more money than is currently on offer to help the self-employed and—this is particularly important—through mentoring for small businesses, to ensure that people have practical advice and guidance so that they not only set up small businesses, but those businesses survive, grow and flourish.