Pension Plan Charges

Gregg McClymont Excerpts

Wednesday 7th December 2011 Westminster Hall

[Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)]

I congratulate the hon. Member for Great Yarmouth (Brandon Lewis) on calling the debate. There is no doubt that costs and charges are one of the biggest issues in pensions. I welcome the fact that the National Association of Pension Funds called an industry summit on 23 November, to discuss transparency. However, as the speeches of the hon. Members for Cardiff Central (Jenny Willott) and for Warrington South (David Mowat) suggested, it is not clear that transparency in itself will be sufficient to tackle excessive costs and charges. In the past month and a half, I have spoken to many stakeholders in the pension sector, and I am grateful to them for the time and effort that they have put into those meetings. I am also grateful to them for the candour with which they described the industry’s situation.

The hon. Member for Great Yarmouth rightly raised the question of complexity. The focus on transparency is important; but I want to pose two or three questions or observations about whether transparency will be sufficient. First—I think that this was touched on by the hon. Member for Warrington South—even with greater transparency, some pensions are inherently complex. We might even say that they are brain-numbing. There is a complexity to them that is not apparent in some other financial services. It is worth emphasising the extent of the challenge that the Minister, the Government and the country face with pensions. Some of the figures have been mentioned already, and without going into the specifics, I think that we can say pretty straightforwardly that many people—more than 40%—are not saving anything at all. Of the rest—those who are saving—many are not saving enough, related to which is something that was mentioned a moment ago by the hon. Member for Warrington South: annuities. Annuity rates are pretty eye-boggling. We know the reasons for that: the downward pressure on bond yields and gilt markets, in particular, and longevity. However, when those issues are taken together, it becomes clear that the country faces a huge challenge in the pensions sector.

We know from the findings of Lord McFall’s workplace retirement income commission that there is poor transparency about costs and charges. Worryingly, Lord McFall found:

“Disclosure around costs and charges remains inconsistent across schemes and providers. What is consistent, though, is the opacity of that disclosure.”

I can only endorse the report’s recommendation. Lord McFall suggests:

“All schemes should be required to disclose costs and charges in a way that is transparent for consumers and which shows the cash impact of charges on the pension pot. The industry should develop a code of good practice on this issue and the government should monitor this and consider taking regulatory action if standards are not improved.”

So far, so good. I have in my mind the market failure emphasised by the hon. Member for Warrington South. The issue arises whether, as we go on, market failure will be solved even by something as worth while as a code of conduct.

The hon. Member for Great Yarmouth also mentioned active member discounts, and transparency about them would be beneficial. As he said, those discounts can better be described as deferred member penalties. Given the reality of the modern British labour market, in which according to Department for Work and Pensions figures the average person has 11 different jobs during their working life, the size of penalties imposed on deferred members is a key piece of information. The proposed costs should be highlighted and made clear. The consumer organisation Which? tells me that past and deferred employees may face charges up to three times higher than those for active members. In its estimation, that could reduce the value of those pensions by up to 25%. I accept that there is an administrative cost to pensions to which deferred members no longer actively contribute, but it is far from clear to me that the costs should be as high as they can sometimes be—for example, a recurring charge of 1.5%.

Transparency is clearly important in the context of auto-enrolment, because fees and charges will be critical if auto-enrolment is to be a success. The Minister knows that I am disappointed at the delaying of the timetable for auto-enrolment for small businesses. I look forward to hearing, sooner rather than later, what is to happen to businesses of between 50 and 300 employees.

There is a simple, wider point to make about the national employment savings trust and auto-enrolment: many employers that are engaging with auto-enrolment will be new to pensions and need clear and straightforward information if they are to pick the best value pension for their staff. In that context, I back another recommendation of Lord McFall’s workplace retirement income commission; this point relates precisely to something that the hon. Member for Warrington South said. Charge caps should apply to all schemes that will be eligible for auto-enrolment. The Government must not wait on market failure to act. It is simply too important that auto-enrolment should succeed, because the country faces a huge range of pensions issues. We must ensure that auto-enrolment has every chance of succeeding, and a charge cap on all schemes is important in that respect.

Auto-enrolment is aimed at a low-earning work force who have, largely, not so far contributed to pensions. As other hon. Members have suggested, that is partly because of a lack of confidence in pension products altogether. If we permit confidence to be damaged, because auto-enrolment does not succeed, many people could opt out, which would jeopardise auto-enrolment. There was some consensus about that from the hon. Member for Cardiff Central and the hon. Member for Warrington South. Once that opt-out happens, it is difficult to put the genie back in the bottle.

Greater transparency is an ambition on which everyone seems to agree, but I do not share the view of the hon. Member for Great Yarmouth—I hope I am not misrepresenting it—that transparency will be enough to ensure a fit-for-purpose pensions industry. There is some consensus that a long-standing industry in which the market has not already required transparency of market providers is likely to have a structural problem. The absence of transparency in our pension costs and charges is likely to be a symptom of the problem, not its cause. First, we have inherent complexity, even with transparency. Secondly, we face a challenge in relation to the number of people who do not save and the even larger number who do not save enough. Thirdly, and more widely, returns on pension contributions are an issue.

The hon. Member for Cardiff Central has emphasised the importance of financial literacy. I have had many discussions with the industry and stakeholders, who emphasise that such literacy is beneficial. I cannot imagine that anyone is against greater financial literacy, but I reiterate that, even with financial literacy, pensions remain complex. It is worth conducting a thought experiment: what would an enlightened and informed British consumer and voter observe of the UK pensions world? I suggest that they would observe that there is a big difference in costs and outcomes between UK defined benefit schemes and defined contribution schemes, even where the sums paid in by employer and employee are comparable. Historically, that may have mattered less when DB schemes were in the ascendancy. It matters much more now that DC and, in particular, contract-based DC schemes are becoming such a significant part of provision.

If the enlightened and informed consumer—this point has already been touched on—were to look around the European Union as a single market, as it encourages us to do so, he or she might be surprised to find that annual charges could be as low as 0.04% a year for an occupational pension provided by ATP in Denmark. The enlightened and informed consumer-voter could hardly fail to be pretty unhappy if he or she were contributing to a UK contract-based DC scheme in the knowledge that they could make the same contributions as someone else but receive thousands of pounds less per year in income than someone in the Danish scheme. I am told by some people that there is no issue concerning charges in the UK, because many are less than 1% per annum. That may be true, but there is a big difference on a compound basis between an annual charge of 0.3% and one of, say, 0.7%. Our very best practice is therefore still much worse than the Danish best practice.

The structure of the UK pensions industry impedes it from responding effectively to consumer unhappiness, and that unhappiness has been powerfully articulated by other Members. However much it might wish to do so, the industry cannot respond, because of the structure. Scale is important in that regard. We need a scaling up of the pensions industry, but there are two major impediments to acquiring scale in DC provision. It is worth pointing out that the UK has a striking number of pension fund providers compared with Europe as a whole and that disaggregation is significant in terms of structural impediments. The first major impediment is that the law impedes the creation of super-trusts or collective DC schemes. The second, I am sometimes told, is that employers and employees might be reluctant to move to collective DC schemes.

Defined contribution is where the action is increasingly at. There is a consensus, I think, more or less across the board that DB schemes, while still of great importance to those who are enrolled in them, will be of less significance than DC schemes in future. The question is about how to make DC work better.

The Government can remove the first impediment in relation to the creation of super-trusts and the legal framework. The Minister has talked favourably in the past about re-examining the case for super-trusts and collective DC schemes. I strongly encourage him to do so.

On the second impediment, some tell me that employers want to retain pension schemes that are clearly linked to each of them alone and are not shared—that is, not collective DC. That is not the view of the National Association of Pension Funds, which has supported super-trusts, nor is it mine. I am sceptical of the view that, if a firm has opted for a contract-based DC scheme, it will be opposed to collective DC. After all, it will already have opted to move away from maintaining a fiduciary relationship. In any event, that is an argument not against making collective DC or super-trusts available, but for ensuring that there are other options.

It has been suggested that employees would not be in favour of collective DCs, because they prefer schemes where they obviously do not share risk. Again, I am sceptical. I suspect that, on average, the informed and enlightened consumer, if invited to choose between the stone-cold certainty of losing a large chunk of his or her pension pot—as is often the case at the moment—and only possibly running the risk of losing some of it, would tend to prefer the latter. The largest known revision from target income from a collective DC scheme, as far as I am aware, occurred in the Netherlands and was roughly 6%. That is a lot lower than some of the figures suggested for losses to pots purely for being DC.

In summary, I welcome moves by the industry to make charges and transparency clearer, which is a good thing that I do not think anyone would oppose. These moves must succeed; otherwise the Government will have to act, given the scale of the challenges facing our country as we all look at saving for our retirement. On those who wish to make offers under auto-enrolment, some minimum standards on costs and charges should be set now, because we cannot afford any failures. Overall, I think that the transparency issues are symptomatic of an industry that is currently constrained by legal impediments from responding to potential demand. Simply put, at present, British law does not permit the creation of collective DC schemes. We should deal with that underlying impediment.

We should all share a sense of urgency. The Minister is well aware of this—I do not need to tell him—but I reiterate that the scale of the challenges that we face in the pensions field is enormous. If we do not get it right, starting with auto-enrolment, followed by lowering costs and charges in the pensions field, the burden will ultimately fall on the state. To avoid that burden, the Government have to act, and act quickly.