Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013

Baroness Drake Excerpts

Wednesday 24th July 2013 Grand Committee

[Baroness Stowell of Beeston]

My Lords, I had just finished explaining why we were bringing forward the regulations and had started to explain the review that the department undertook between November last year and May this year.

The review found that consultancy charges were likely to be used to pay for employer compliance with the automatic enrolment obligation. This has been likened to expecting workers to pay for the steps that their employer takes to ensure compliance with health and safety law.

Over the course of the review, a broad consensus emerged that there was a significant risk of consumer detriment with consultancy charges; that is, individuals paying for a service from which they receive no individual benefit. With this risk came a wider risk to the reputation of pensions more generally at a critical stage in the rollout of automatic enrolment.

The review also found that consultancy charges can have a disproportionately negative impact on people who move jobs regularly, because they might repeatedly have to pay higher “initial” scheme set-up charges. In April, the Work and Pensions Select Committee raised concerns about consultancy charges and the ultimate impact on individuals’ income in retirement. The committee recommended that the Government ban consultancy charges in automatic enrolment schemes without delay.

A number of options were considered during the review, including restricting the use of consultancy charges through setting a cap, imposing decency limits and providing statutory guidelines. Our conclusion was that none of these options would protect consumers sufficiently or quickly enough. Even a low consultancy charge will have a detrimental effect on a member if they do not receive any tangible benefit from the advice that they are paying for. Our approach is the simplest rule to understand and enforce, and sends a clear message that we are protecting consumers.

While employers are free to get advice if they want it, the Government do not believe that the cost of seeking such advice should be passed on to the members of the pension scheme. Let us not forget that the Government have established NEST, a low-cost and simple scheme designed for automatic enrolment compliance, and joining that scheme requires no consultancy advice.

Banning consultancy charges in automatic enrolment schemes, which is essentially the effect of the draft regulations, will increase competition in the advice market. Advisers will compete on a more transparent fee basis and deliver value for money for employers. I therefore commend the regulations to the Committee and beg to move.

[Baroness Drake]

My Lords, the decision to prohibit consultancy charging for any scheme used for auto-enrolment and charges which arise from an amount paid to a third party under an agreement between a third party and an employer is very welcome, and I am pleased that the Government have taken this decision. The decision recognises the vulnerability of pension savers where they have not chosen the pension product but are automatically enrolled in the employer’s choice of scheme and where who has responsibility for protecting the best interests of the saver in contract-based pension provision is at best uncertain.

It is also welcome that the Government have called for evidence on standards of governance and quality in defined-contribution pension schemes. I hope that this decision on consultancy charging is the first of many by the Government which put the interests of the pension saver centre stage.

It is also important to reflect that consultancy charging was initially allowed by the FCA—previously the FSA—and its subsequent abolition, because it is quite clearly not in the saver’s interest, is compelling confirmation of the need for the two pensions regulators, the Pensions Regulator and the FCA, to co-ordinate very clearly on what is the appropriate framework of protection for pension savers in an auto-enrolment world where one has a mix of both trustee and contract-based pension provision and where, increasingly, the future looks as though it is contract based.

It is important to reiterate a point to which the Minister referred: Parliament having secured broad popular support for automatic enrolment—which is certainly manifest in the preliminary evidence of people not opting out from being auto-enrolled into a pension scheme—cannot afford to fail those millions of people who are allowing themselves to be auto-enrolled by not having a framework of protection that ensures that the interests of the saver are centre stage in any regulatory framework. Public confidence on this issue, once lost, will not be easily regained. This is a framework for auto-enrolment. I suspect that we have one chance at securing a rebuild of private pension saving in this country and we cannot afford to get too much of it wrong. I therefore welcome regulations but encourage the Government to be even bolder in forthcoming challenges.