Occupational Pension Schemes (Charges and Governance) Regulations 2015

Baroness Sherlock Excerpts

Tuesday 17th March 2015 Grand Committee

Therefore, this is just a plea that we should be quite humble about some of the things that we do on pensions, as there is no proof whatever that this measure will be successful. The fact that the general issue has all-party agreement is a good thing, but we have a long, hard road to travel before anyone in this Room can say that it has been a success.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for his explanation of these regulations, my noble friend Lady Drake for a characteristically thorough interrogation of them, and my noble friend Lady Donaghy for highlighting some very important lessons from the past that should inform our discussions today. I remind the Committee of my registered interest as the senior independent director of the Financial Ombudsman Service.

We on these Benches welcome the fact that action is now being taken to address the problems with governance and excessive charges. Like my noble friend Lady Drake, I welcome action on the active member discounts, although her terminology may indeed be a fairer description of what happens there.

As the Minister indicated, 5 million people are already saving in schemes under auto-enrolment, and that figure will end up closer to 9 million or 10 million in due course. The point made by my noble friend Lady Donaghy is crucial here. If we are to cap the charges levied on pension savers in such schemes, we need to be sure that it works well because of the duty of care owed to those savers who have made no active choice about saving but who have been defaulted by their employer in particular or by the state in general into schemes which they have simply never chosen. It is critical that those who are auto-enrolled remain so and that we do not see a significant opt-out rate, but also that the highest possible retirement income is derived from the savings that individuals and their employers make. That is the context for these regulations, and the history lesson from my noble friend Lady Donaghy is very helpful. People need to know that their pension pots are not being siphoned off in unreasonable charges and that someone in whom they can have confidence is looking after their interests.

My noble friend Lady Drake asked a number of very important questions, and I will add just a few. First, on the charge cap, Labour has been campaigning for that, so it would be churlish not to welcome it—and I very much welcome it. However, can the Minister please tell the Committee why the Government chose 0.75% and what plans they have to reduce that further? The latest impact assessment suggests that, following the response to the consultation, the Government considered just two options: the one set out in these regulations, and doing nothing. I agree that of those two choices, acting to cap charges is definitely the right one, but the case for a lower figure is very strong. Certainly on these Benches we support capping charges at 0.75%, but with the aim of reducing it to 0.5% over the course of the next Parliament. Does the Minister agree that that is where we ought to end up?

Secondly, I would appreciate some clarification about how the cap will work. The Minister explained that it will be set at 0.75% of funds under management or an equivalent combination charge, but can he explain a bit more how the combination charge will be calculated? Regulation 5 seems to suggest that there will be three options: a funds-under-management charge, a combination of a funds-under-management charge and a contribution charge, or a combination of a funds-under-management charge and a flat-rate fee charged to the member.

Regulation 6 sets out the limits if one of the combination options is chosen. Can the Minister tell us a bit more about why these were fixed as they were? Is it the intention that a combination option cannot yield more than the equivalent of 0.75% of funds under management? If so, how can the saver be assured of that? If that is not the case, why are the Government giving the option to choose a charging structure that could yield more than the headline rate of 0.75% of funds under management?

Whatever figure is chosen, for controls on charging to bite, savers need to understand fully what charges are being levied. As we know, defining pension charges is not an easy job. The Minister indicated that transaction charges are not included in the cap. The biggest problem is that, as my honourable friend Gregg McClymont pointed out when the regulations were considered in another place, we do not yet know the full range of transactions attached to pension schemes. The only way to deal with that is through full disclosure of all transaction costs, which is long overdue and to which the Opposition are committed. I would be interested to know the Government’s position on that.

Will the Minister tell me a bit more about the compliance regime? Whose job is it to check that the cap is not breached and what will the penalties be for a breach? As for the minimum governance standards, they are welcome as far as they go, but again I would like to ask about compliance. Is the intention that the main or only compliance tool will now be the chair’s statement? Paragraph 7.34 of the Explanatory Memorandum says that the Pensions Regulator will have the power,

“to issue a fine against the Board of trustees or managers”,

in the event of failure to prepare a chair’s statement as required by the regulations. Will the Minister give some indication of the likely level of fines?

Of course, charges can take different forms, and the Government have made a welcome move in recognising this. For a while, they chose to focus primarily on the annual management charge, but these regulations acknowledge that that is only one part of the picture. My honourable friend Gregg McClymont highlighted the need to focus on the total expenses ratio, which includes custody, legal accounting and administration, and which consequently tends to be significantly higher than the AMC. Do the Government have any plans to evaluate the impact of the regulations on the total costs levied on affected pension schemes and savers?

We need urgently to address the range of challenges facing pensions at the moment if we are to be successful in persuading workers to save for their retirement at the rate that they need to do. My noble friend Lady Drake mentioned the draw-down products, but Labour will take a range of other, tougher steps to protect savers—for example, from new products that damage retirement income. Indeed, a Labour Government will begin immediate consultation on plans for a cap on fees and charges for income draw-down products, with a focus on products bought from the saver’s own pension provider. However, I welcome the progress that has been made and I very much look forward to the Minister’s reply to these and all the other questions that have been asked.

[Lord Bourne of Aberystwyth]

My Lords, I am grateful for the participation of noble Lords in this debate. Let me try to deal with the points that have been made while saying at the start that, over the next decade, the default fund charge cap should transfer around £200 million from the pensions industry to savers. That is an important point.

I very much take the points made by the noble Baroness, Lady Donaghy, about the historical perspective and the fact that, across the House, we are trying to ensure a fair regime relating to charges. We need a balance to make sure that the industry is properly and fairly rewarded for the services that it is providing and that, at the same time, savers are not overcharged for the services that they are receiving. That has very much been the thrust of the reform and it is why the figure of 0.75% has been chosen, which will represent for most people a fall in the amount that they are charged for the service, as I indicated.

Let me turn to the contributions made by noble Lords. I very much welcome the welcome in general terms from the noble Baroness, Lady Drake, for these regulations, which, as I say, bring in governance arrangements for the default automatic enrolment, as well as a cap on charges. I am pleased that we have universal welcome in general terms for the regulations. I welcome the support that we have had from around the Room in trying to get right the legislation and the consequential regulations.

The noble Baroness—and I apologise if my answers are not necessarily in the order of her questions—asked whether once a default always means a default. In general terms, the answer is yes. The regulations set out where an arrangement is designated as a default for a particular employer by virtue of meeting the tests in the regulations. It will continue to be designated as a default regardless of whether it continues to meet those tests. That is the general position. However, I will write to the noble Baroness on some of the specifics that she raised, because the devil is in the detail and I would not want to mislead her on specific examples, some of which I was a little blindsided by. I will, therefore, write to her about some of the specific examples she brought forward.

The noble Baroness also raised value-for-money issues. The regulations are designed to ensure that we get value for money and that there is transparency on the transaction costs—a matter also raised by the noble Baroness, Lady Sherlock. A transparency regime will come in as a result of these regulations that will enable us to look at value for money in relation to transaction costs. We are committed to looking at that in April 2017 to see whether we should bring it into the cap. That is the schedule. Therefore, at the same time as we are looking to ensure that we have an effective cap, in general terms, on auto-enrolment, we are also looking more widely at the transaction costs, to see whether it is appropriate to bring those into the cap in April 2017. We are already looking at that issue as we move forward from these regulations.

I turn now to the active member discount, or, as the noble Baroness, Lady Drake, phrased it—with some justification—the inactive member premium. There is no intention that we should stop a discount for active members unless it is the deferred members—the inactive members—who are paying for it. As the regulations make clear, there is nothing wrong with providing a discount for employees, provided it is not being subsidised by deferred members. That is the intention of the regulations, and I think that it is delivered by them. Again, however, if I am wrong about that, or there are exceptions to that general principle, I will write to the noble Baroness and copy my letter to other noble Lords who participated in this debate.

The noble Baroness also raised the issue of decumulation, which, as she rightly says, is not covered at this stage by these regulations. That does not mean that the Government are not looking at decumulation; it means that we are not looking at bringing it in at this stage. We are, however, keeping it under review, because, as we say, we want to ensure a fair regime: a fair amount paid—or a fair cap—so that the industry gets its fair return on what it is doing but savers are not ripped off, to use the vernacular. We have that under review.

The matter of the penalties regime was raised by the noble Baroness and also by the noble Baroness, Lady Sherlock. First, there are regulations that provide for a statement by the chair of trustees and a mandatory penalty of between £500 and £2,000 if such a statement is not produced. Trustees will have to demonstrate compliance with the governance and charges requirements in the chair’s statement. I am not sure of the precise sanctions that apply; I think it is under Section 43 and Schedule 18 of the Pensions Act 2014. I think that is right, in respect of the regime. However, I will write to noble Lords on the regime relating to non-compliance with the regulations and what the sanctions are.

Secondly, the contribution of the noble Baroness, Lady Donaghy, gave a very fair assessment of where we are. The noble Baroness made the very fair point that smaller schemes, generally speaking, do not represent such good value as larger schemes. It would not be fair to say that that is universally true, but it is probably generally true. Consolidation is happening—the figures show that—but it is right that we ensure that there is effective protection across the piece. That is, therefore, something that we need to keep under review. I made that clear as the Bill was going through the process of becoming an Act. It applies in general terms but it is a point well worth making.

I am trying to remember whether there were other points raised by the noble Baroness, Lady Sherlock, which I have not covered. If there were, perhaps she would remind me of them.

[Baroness Sherlock]

I thank the Minister. He has picked up most of them or has said that he will write to me about them. However, I asked how the combination charging options would work, whether the intention was that, if a combination option were chosen, it would be no more than the equivalent of 0.75% of funds under management, and how savers would know about that.

[Lord Bourne of Aberystwyth]

I am most grateful to the noble Baroness for reminding me of that. It is fair to say that generally, although not universally, that will be the case. I will write to her about the exemptions because there will be some situations where the charge will be higher, but in the majority of cases it will be the combination charge, which will certainly be no more than the 0.75% cap.

With that, I once again thank noble Lords for their support for the regulations. I undertake to write on the points that I have raised and on anything else that I have missed. I commend the regulations to the Committee.