Pensions Bill
Lord Turner of Ecchinswell Excerpts(10 years, 9 months ago)
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Lord Turner of Ecchinswell (CB)
My Lords, we have before us this afternoon a series of interconnected issues —the one of aggregation versus pot follows members, the issue of charge caps and the issue of transparency of charges. They are all related, because they are all to do with the absolute importance of getting value for money for pensioners. When we did the work of the Pensions Commission some eight years ago, the commissioners had two main concerns about the existing system of private pension provision. The first was a low level of participation and savings, and the second was very poor value for money—the phenomenon of many people, particularly those working for small and medium-sized enterprises and on a lower income, who paid fees such that by the time they came to retirement 25%, 30% or even 40% of their entire pension pot had disappeared in the fees charged to them.
Auto-enrolment addresses the issue of participation and, to a degree, that of cost, because it has removed some of the selling costs involved. It is essential to address the other issues driving costs, of which one is the proliferation of pots and the administration cost that comes with it. Therefore, it is good that there is a strong consensus that we need some form of policy intervention to arrive at a better consolidation of pots. I would accept that it could be done either way—by pot follows member or by aggregators—but I have not been convinced by the arguments that pot follows member is the superior route.
Part of the logic originally put forward, as the noble Baroness, Lady Drake, has said, was I think completely false—the idea that, if we had aggregation, we had to limit the transfer of the pots to only £2,000 versus a much higher transfer amount that would be allowed for pot follows members. There was absolutely no logic to that assumption. Indeed, I stress the point that there is no logic in any limit on transfers at all. The logic put forward by the impact assessment is that we need to avoid too much concentration of provision in this industry, so that a cap on transfers makes sure that the business is shared around in a fair fashion for lots of different providers. But it is very clear from the OFT work that this is not a market in which market competition works well, and the aim is not to have competition for its own sake; having a large number of competitors for its own sake is not an end. Competition is a good thing if it produces better value for consumers. If it is the case that aggregation into a relatively small number of aggregators will result in lower costs to savers, that should be our preferred route—one that is best for customers, not one that tries to spread the business around as a form of fairness to those already providers in the market. As a very thoughtful paper produced by the Centre for Policy Studies put it:
“The proposed pot size limit on transfers serves no consumer purpose: it should be scrapped”.
If we accept the logic that we should be allowing full transfers of whatever amount people have to enable us to get to what the Secretary of State called one big fat pot, that highlights one of the real dangers in pot follows member and makes it even greater—the danger that people can see their funds transferred into a higher charge scheme. Suppose someone has been in a NEST-administered scheme with one employer, paying 50 basis points—0.5%—for a default fund investment and then changes jobs and moves to a new employer who has chosen a scheme with a higher charge rate—perhaps 75 or 100 basis points. They will have originally made a decision to accept auto-enrolment on the basis of one set of charges but now we decide, in an Act of Parliament, to transfer them to somewhere where they will face higher charges in a way which, as I highlighted earlier, has not just a marginal but a huge effect on the amount of money they pay in charges and, therefore, on their pension for the whole of their retirement.
If we were committed to having in place very robust rules on the charge cap—this is why the issues before us this afternoon are somewhat linked—so that, for instance, we were confident that, if you had pot follows member, you would be going from a 50 basis point fund in NEST to a 50 basis point fund in where you had been transferred to, I accept that the decision might be a bit more balanced, although I think the other arguments that the noble Baroness, Lady Drake, put forward would still apply. However, we do not have that robust commitment in relation to the principle of a charge cap, let alone that it should be set at something like 0.5%. In the absence of that, we should not preclude the option of aggregation, which may well prove a more effective route to get to the low costs that we require above all for savers.
Lord Hutton of Furness (Lab)
My Lords, I am happy to have the opportunity to make a brief contribution to the debate on this amendment. It is the first time that I have put my name to an amendment in this House. I have done so because I believe that this is a very important point in the progress of the Bill. Clause 33 is to be welcomed in principle. It is the first time that a Government have addressed the problem of the large number of small pension pots that are out there. We need a solution to that problem, so I absolutely welcome the Government’s attention to this policy. We all know that one of the by-products of auto-enrolment —it is a very good policy which clearly at this early stage is encouraging more people to save—is that we will see many more of these small pots created. It is certainly not in the interests of pension savers for these small pots simply to stay where they are.
I do not want to repeat the very able arguments put by my noble friend on the Front Bench, by my noble friend Lady Drake and, indeed, by my noble friend Lord Turner, but I will make a slightly different point. Your Lordships’ House has heard the technical arguments, which are complicated and difficult to digest. I come at this debate from a slightly different angle, having been a former Pensions Minister. There are many other former Ministers in this House and I hope that the international fraternity of former Ministers, who are represented so well in this House, will understand this point. There comes a moment in the gestation of any policy when it is necessary to take a step back to be sure about it and to satisfy yourself that the policy is the right one—particularly given the fact that, as my noble friend Lord Turner said, if we do not amend the Bill, we will make the transfer of these pension pots compulsory and run the risk that people could lose out. That is a real hazard of which we need to be aware. In my experience, the best time to take that pause is before you take that step; you should not to do so once you are committed to it, perhaps irrevocably, and when some people will lose out as a result.
I have been in this House and another place long enough to know the difference between a destructive amendment and a helpful one. I definitely would not have put my name to this amendment if I thought that it was in any way a torpedo below the waterline of the Government’s policy. It gives the Government the opportunity to take stock of the situation. There are serious concerns about the impact assessment undertaken to support the policy. Many others have spoken of their concerns about the impact assessment. It would be a misstep on the part of this House to take a decision on the basis of what we have been presented with. The impact assessment is simply not reliable enough.
All the amendment does is invite the Government to take another look at this policy. It does not rule out pot following member, if that is what the Government are committed to doing; it simply gives them the opportunity, without coming back to this place, to follow the path of aggregation. Many of us believe that the opportunities of aggregation have not been fairly and fully explored by the Government. We should look again at the issue of aggregation, but I do not want to mandate that as a policy for the Government. That would not be right, but it would be absolutely sensible and in the interests of millions of pension savers for us, at this very late hour, to take a step back—not to rule out the possibility that this might be the eventual path that we follow, but to allow us, and Ministers in particular, to take another look at the benefits of aggregation. I genuinely think that that would be the right course of action for Ministers to take at this moment, and I hope that the House agrees with that.
Lord Turner of Ecchinswell
My Lords, I will speak in favour both of transparency as per the amendment from the noble Lord, Lord Lawson, and the Government’s amendment and also in favour of a clear commitment to a clear cap on scheme charges in line with Amendment 29 which also bears my name.
As I have already said this afternoon, the issue of total charges is fundamental to what we are trying to achieve with this Bill. The Government’s paper on charges makes it clear how important they are. Figure 2 says that if you are a saver throughout your life and you pay a charge of 0.5% when you get to retirement you will have given up 13% of your pot in charges. If the charge is 1.5%—which to the ordinary person might not seem all that much higher—you give up 34%. The difference between paying charges of 0.5% and 1.5% is that you will be 20% worse off throughout the whole of your retirement. This is not minor, but absolutely fundamental to how we achieve good provision for people in retirement.
Viscount Eccles (Con)
Could the noble Lord be very kind and help me? Is he saying that the pot is a fixed figure and that therefore the percentage of charges has always to be related to the same end figure of the pot?
Lord Turner of Ecchinswell
Obviously, it is possible that with higher charges there might be a higher return, but many of the variations that we see in charges in the industry are for things that clearly will not produce a different return. One sees, for instance, a wide spread of charges for index funds, where one knows that there will be no difference. We also know that, on average, active management does not add a return above index funds: that is a very strong empirical result from a lot of analysis. While it is possible that with higher charges come higher return, in a great many cases that is not so. One thing pension savers would be wise to concentrate on is the charges they face, because that is one of the few things that they can definitively influence, whereas the gross return is a promise that may or may not be delivered.
Those are the reasons that led the Pensions Commission to focus very strongly on the issue of cost and the variation of cost. We noted, for instance, that many people employed in the UK are in large trust-based schemes and already enjoy, on defined contribution schemes, total fund management charges of 20 basis points, 0.2%, or less. For those 20 basis points, they get fund management at the gross level quite as good as people paying 1.5%. If you pay 0.2%, by the end of your savings life, you would have given up only around 4% or 5% of your savings in the charges, which is probably about as low as we can get it, given the fundamental things that have to be done. Again, that is confirmed in the Government’s own consultation paper on charging, which illustrates that 10% of trust-based firms have annual management charges of 0.19% or less. That is possible, provided we get economies of scale, without giving up a significant choice of range of funds. However, at the other end of the scale, we noticed many SMEs were paying 1.5% and therefore, as per the Government’s consultation paper, losing 34%; or 1%, at which point you lose 24%.
That is why, as I said earlier, the recommendations of the Pensions Commission covered not just auto-enrolment, to use the inertia power to get people to save, but the design of the scheme, to ensure that access at the sort of low costs already enjoyed by employees of large firms can be enjoyed by employees of small firms. That was the reason for the design of NEST, which was designed by looking at detailed cost analysis and working out at what level it ought to be possible to deliver a default fund and also at models from elsewhere, such as Sweden. We became convinced that it ought to be possible to deliver to all people the opportunity to invest in a default fund—probably an index fund—with all explicit end costs of 0.3%. A set of decisions were subsequently made that the cost would have to be 0.5%, which is what it went forward as in the NEST environment. That at least establishes a benchmark and means that people who invest in NEST are only giving up 13% of their end-of-life savings pot in charges.
It is important that that should be the benchmark and that we have a charge cap. We know from the OFT’s and other analysis that this is simply not a market where the operation of individual customer choice is effective in driving cost-efficient competition. If that were the case, we would never have had to have the recommendations of the Pensions Commission and the auto-enrolment to which we are now committed. If we do not impose a charge cap, we will leave many savers, in particular lower-income people working for SMEs, facing unnecessarily high costs. I think they are unnecessary if, for a default fund, we are above 50 basis points, or 0.5%. I am therefore concerned that the two options the Government were looking at in their consultation paper on charging were 0.75% and 1%. If we come forward with a cap of 1%, we are giving to the ordinary saver the extraordinary promise that, on their behalf, we have made sure that their loss of pot at the end of their life is only 24%. I do not think that is a very compelling promise to give to people. I therefore strongly believe that we should make a clear commitment, by a clear date, to get on with this and have a charge cap in place, and that 0.5% is the appropriate figure.
Although a price cap on explicit costs is important, it is not sufficient. That is why I strongly support the sentiment of the amendment of the noble Lord, Lord Lawson, which seeks to cover all the other costs which are not covered in explicit fund management charges. The issue of these other costs was also one with which the Pensions Commission was concerned. We were concerned that, beyond what you can see in an annual management charge for a fund, there are lots of other costs involved. These are precisely the sort of costs described in Amendment 28, in the name of the noble Lord, Lord Lawson, which inlcude,
“fees and performance fees paid to investment managers … commissions and bid-offer spreads paid … fees, revenue splits and bid-offer spreads paid to custodian banks”.
These are very significant but are not well understood.
On the Pensions Commission, we sought to see whether research had been done on how big these were. Interestingly, there was one piece of research, which was sponsored by the FSA back in 2000 and written, after a lot of research, by a man called Kevin James. It tried to work out just how large these other costs were in the UK and in the US. We called them implicit costs in addition to explicit costs. There is a box in the first Pensions Commission report which explains that piece of analysis and how big they are. His analysis, which we interpreted, suggested that some of these costs might be as high as 90 basis points, on top of the overt, explicit costs. We ended up, for the purposes of modelling, believing that if we were to try to understand what got lost between the gross return on equities that you see by looking at the FTSE All-Share Index every year and what the saver gets, we had to allow, in addition to the explicit asset management costs, for 65 basis points on average going in these implicit costs—more for actively managed funds, less for index funds.
It is possible that those costs have come down since that analysis was done and since we looked at it—there has, for instance, been some compression of bid-offer spreads—but they are sufficiently large that it is incredibly important to focus on them, pay attention to them and, as it were, bring the disinfectant of transparency to bear on this bit of the cost base. Let us suppose that they were 65 basis points. That means that if somebody thought that they were paying 0.85% on an explicit annual management charge, between the gross return on equities in the market and what they actually get, they would be paying 85 basis points plus 65 basis points, which takes us back to the 1.5% per annum, which is 34% of their pot disappearing.
The noble Lord, Lord Lawson, has put an immensely important issue on the table. I would encourage the Government to widen their focus even beyond pensions, because it is important not only in the pensions arena but for the other ways that people save, for instance with ISAs. When people save in ISAs, they are looking at an overt, explicit asset management charge, but sitting behind that is a set of other hidden costs. This is an issue where more information will help. It will not transform the situation—we are deluding ourselves if we believe that lots of individual savers are themselves, individually, going to pay attention to this—but as the noble Lord, Lord Lawson, has said, the press, including the specialist press, will pay attention to it and a wider debate about just how large these charges are is very important. It would, for instance, be very interesting to start seeing how much higher these hidden costs are for actively managed funds versus index-linked funds, because that is a piece of information that people ought to bear in mind when they make those decisions between different classes of assets.
I urge the Government, as they go forward with this idea, to look at whether that disclosure should in future apply not just to pensions but to a wider class of investments—to cast it, as the noble Lord, Lord Lawson, said, as widely as possible so that we capture all costs—and to see this as a start point of an extremely important debate in which we get a better handle on the total costs that are being imposed by the asset management and investment fund management industries.
I do not think that transparency is an alternative to a charge cap, which is why I have also put my name to Amendment 29, but it is a very valuable additional tool.
Baroness Drake
I do not intend to make my contribution because I do not think there is anything I can add to what the noble Lord, Lord Turner, has said. However, as I have never been a Minister I am not familiar with the dark art of crafting ministerial syntax, so perhaps I could take this opportunity to ask the Minister a question before he responds.
I have before me the Written Ministerial Statement, which says:
“Last year, we consulted on whether to cap charges in the default funds of schemes used for automatic enrolment, and the Government remains committed to seeing this policy through during the life of this Parliament”.—[Official Report, Commons, 24/2/14; col. 11WS.]
My simple question is: does the phrase,
“seeing this policy through during the life of this Parliament”,
mean that the Government will introduce a charge cap before the election in 2015? A simple yes or no answer would be helpful.
Pensions Bill
Lord Turner of Ecchinswell Excerpts(10 years, 11 months ago)
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Lord Turner of Ecchinswell (CB)
My Lords, I would like to speak in support of this amendment. When the Pensions Commission addressed the issue of private pensions eight years ago, we had two absolute priorities. The first was the use of inertia through auto-enrolment to increase the number of people involved in savings schemes. I think we all agree that the degree of support for that principle across society, industry and the political parties has been most heartening, and indeed we are now seeing auto-enrolment coming through with a considerable degree of success. Our other absolute priority followed from the first one because once you auto-enrol someone into a pension, you have to make sure that there is good value. It was to bring down the extremely high costs of pension provision for people on modest or low incomes in small and medium-sized enterprises. We observed that if people went through the private competitive system, by the time they retired, 25% or even more of their entire pension pot had disappeared in cumulative charges over the years. We believed that it ought to be possible to get that figure down to something like 5% or 10%, which makes an extraordinary difference to someone’s income throughout their retirement. We are talking about people living with incomes in retirement that are 20% or so higher than they would otherwise have been.
Those extremely high costs derived from the fundamental inefficiency of the market for private pension provision. It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well. We have heard already from the noble Baroness, Lady Sherlock, the quote from the Office of Fair Trading on that.
To get the costs down, it is important to ensure that there are low costs for active members in the scheme to which they are contributing, and it is also important that low charges are levied on those who have already accumulated pots, and on those pots derived from past employment. That requires two things. First, it requires measures to facilitate or require the consolidation of pots, thus removing the costs of multiple proliferation, which are of no benefit either to the industry or to the individual. Secondly, it requires measures to ensure low costs in the scheme into which we consolidate. Again, it is good that a consensus has emerged over the years on the importance of those objectives. I recognise that the pot following the member is proposed as being one way to that end, but I am concerned that while it achieves the first of the two crucial objectives of consolidation, it does not necessarily achieve the second. It does not necessarily achieve low cost in the scheme into which the person is being consolidated because there are dangers that PFM could involve people being consolidated into a scheme where they are paying higher charges than they were paying into the scheme they had been contributing to, and higher charges than necessary. I believe, therefore, that the aggregator option may be the better one and that it needs to be looked at carefully and fairly.
I agree that there are some trade-offs here, but I am not convinced that the impact assessment which has been put before us is a good and fair assessment of that trade-off. The key argument in the impact assessment is that if we go down the aggregated route, we would need to apply it only to “the smallest unprofitable pots” to ensure that the aggregator scheme did not monopolise the market. It states then that the department has interpreted that for the purposes of assessment by assuming that you would aggregate pots only up to a maximum of £2,000, because that was the figure which was suggested in discussions with providers. That compares with the £10,000 assumed when it looks at the pot follows members. Indeed, it is quite noticeable that when it looks at the PFM option, it gives us a set of impact assessments for a variety of options—£2,000, £5,000, £10,000 and £20,000—but when it turns to the aggregator model, it considers only the £2,000 maximum pot.
I accept that if it was really necessary and unavoidable that if we go down the aggregator route we apply it only to pots of up to £2,000, that might be a good argument for taking the PFM route. But I believe that there is no such necessity and that the logic in favour of it is invalid and needs to be challenged. The argument is that a higher level would interfere with the effectiveness of competition in the market and lead to dominant aggregators. However, the whole of the edifice of auto-enrolment, of NEST and of the regulations relating to value for money is based on the recognition that we are dealing with massive market failure and that we cannot rely on fair competition. We cannot therefore consider the argument that some dominant aggregators might emerge to be a valid argument against aggregation. Indeed, dominant aggregators will only emerge if they are lower cost, and that—to go back to my earlier point—is the absolutely central thing and the criteria above all on which we should focus. Will we get the costs down? Will we reduce the total reduction in yield?
I do not believe, therefore, that the danger that the aggregators may become relatively dominant in the market—which is really the only argument put forward against it in the impact assessment—is a valid argument against aggregation. I would urge that, to have a useful impact assessment, we should be considering a range of options with a higher maximum of £2,000 transfer. I see no inherent reason why we should consider having no limit; I certainly believe that if we are to have a fair comparison, we should be thinking about the same limit that applies to the PFM option. I believe, therefore, that this choice between PFM and aggregation should not be concluded at this point. It requires more flexibility and thought to enable further consideration. I am personally, in my gut, in favour of the aggregator limit option, and I think it will be favoured over time, but all that this amendment does is keep that flexibility open for future consideration without the need for later primary legislation. I certainly think that that is required.
Lord Stoneham of Droxford (LD)
My Lords, the previous two speakers have covered the main arguments that I was planning to raise, because there is concern—even from those close friends of the Minister, Steve Webb—on this issue. It is valid, therefore, to register that—there are certainly concerns in our group here this afternoon. The issues have been raised, including the issue of the inefficient market. The issue does not cover the consolidation of old pots. It considers the consolidation of the mobile or live pots. It does not raise the issue of what you do with those people in the labour force who are constantly changing jobs and the costs and the impact on their pension pots every time they do that. It also needs to address the fact that there is a smaller number of aggregators. I agree there is a problem with competition, but it is much easier to supervise them and make sure that the quality of those aggregators is adequate.
The final issue that needs to be raised is that there is a concern that without that supervision, people will be transferring into poor schemes or run the risk of doing so. They need to be protected. For all those reasons, it is right—and the noble Lord, Lord Turner, raised this point—that this is a time for reflection before we make any final decisions.