Pensions Bill

Debate between Lord German and Baroness Donaghy

Monday 20th January 2014 Grand Committee

[Lord German (LD)]

My Lords, I am grateful to the noble Lords, Lord Browne and Lord Lawson, for raising these issues, because they allow us to examine the approaches which might be taken in the regulations which may follow and to ask the Government to describe which of these approaches, or what combination of these approaches, they might take. It is quite clear, in my view, that there are two separate approaches: one based on regulation and the other based on openness, transparency and disclosure. There is no reason why you cannot have some of one and some of the other; where the balance is drawn is a matter for debate and discussion. Ultimately, this matter goes to the heart of the success of our pensions industry for savers. The saver must have trust in a system which has a long tail behind it to understand that his or her money is being invested wisely and will return on that investment to provide a pension.

Auto-enrolment will, in the long run, be a success only if the schemes into which people are enrolled are well run and invest people’s savings responsibly. This is particularly important in DC schemes because, in the end in those schemes, the saver bears the investment risk of that complex decision process, which is more often than not made entirely without the saver’s knowledge or input. I was very interested in the chain described by the noble Lord, Lord Lawson, which stretched from Manchester to Monte Carlo. I dare say that if you started to plan these chains out around the world, you would probably find that these decisions were taken in all sorts of places and the connections very wide. That helps demonstrate the length of the chain in investment decisions, particularly if you start with the saver.

Of course, auto-enrolled savers do not choose their own pension provider. Poor pension companies might not become immediately evident to the saver. The best governance of the system would ensure robust oversight of savers’ interests and, most importantly, open communication with savers. It is not always obvious that those in the investment chain place the obligation to protect the best interests of savers at the heart of their decisions, particularly if they are in Monte Carlo. Fundamentally, that means improving transparency and promoting the disclosure of clear and relevant information to savers, as well as ways in which savers can easily find out information about their own savings.

I hope that the Government will tell us a little bit today about how they propose to deal with these very important issues and which approaches they intend to take that might guide the legislation that is to follow in regulations. Could my noble friend say something about how they intend to make the application of the UK stewardship code applicable to all pension schemes into which people are auto-enrolled?

[Baroness Donaghy (Lab)]

I just want to say a few words about the culture within the financial services companies and how difficult it is, given that culture, to have any compliance rules that staff will obey if their jobs depend on selling products. I think it was the whistleblower Dave Penny, who worked for Lloyds TSB, who gave a long list of tricks of the trade that he had tried to warn against. We all know the fines that that company had to pay for using those tricks in both PPI and bond selling. Mr Penny said:

“A supposedly strict compliance regime is meaningless if the management style is putting immense pressure on staff to sell, sell, sell. To keep their jobs, staff will always find ways around compliance”.

That has not gone away just because of the massive fines and compensation that these companies have paid. Only a couple of months ago, a woman in her 60s received a cheque from her son for £35,000. She planned to put that into a stock market investment. That same day that the money arrived in her current account, she was called by a Lloyds employee, who told her that the money could be at risk—an extraordinary claim to make about funds left in the care of a clearing bank. The Lloyds customer said, “The woman at the other end of the line said that my money might not be safe in my current account over the weekend and recommended that I transfer it to a savings account where it would be less easy to steal. I was naturally very worried about this and the bank did not really explain why my money would not be safe in my current account. The whole thing caused me a great deal of distress and eventually my husband intervened, and called the bank to say I did not want to transfer my money to a savings account and went ahead with my original investment plans”.

Of course, there is a financial incentive to place money in an investment account in a bank, no matter how low the interest rates compared with a current account, which is the sole reason why that employee made the effort to contact that person. I realise that that is not of direct relevance to these amendments, except to say that compliance will not work unless you deal with the issue of the culture in these companies. We will see all these tricks of the trade happening again, particularly as the Government are going on the pot-follows-member formula. This will give many more opportunities for companies to salami-slice their charges as each of these small pots is transferred.