Pension Industry

Jim Shannon Excerpts

Tuesday 21st February 2012 Commons Chamber

[David Mowat]

I agree. The key word that the hon. Gentleman used in that intervention was “transparency”. If the market is to work, there must be transparency and comparability, but it seems to me that there are people in the industry who do not want the market to work. The market might work better if independent advice were freely available, but in the past the industry has effectively controlled advisers by treating them as paid intermediaries with a commission structure that compromised their independence, and between 2002 and 2007 its payments to such intermediaries for their advice rose by 50%. Hopefully the RDR—the retail distribution review will deal with the problem, and I give the Government credit for that.

[Jim Shannon (Strangford) (DUP)]

I congratulate the hon. Gentleman on raising this matter tonight. My hon. Friend the Member for North Antrim (Ian Paisley) mentioned people who have taken out small pensions and who also fall into a tax bracket. Does the hon. Gentleman agree that their position should also be reviewed by the Government?

[David Mowat]

I shall be making a number of suggestions to the Minister later, and I certainly agree with what the hon. Gentleman has said.

I also give the Government—in fact, the last Government —credit for setting up the National Employment Savings Trust, without which auto-enrolment would be entirely untenable. Given its low charges and what appears to be a sensible investment policy, the organisation has an important contribution to make. However, as I shall make clear later, I think that the Government could be more radical about what NEST can achieve.

Let me summarise the position by saying that the fund management part of the industry has evolved into a mess. The market has failed owing to asymmetry of information and lack of transparency, and we are about to impose auto-enrolment on top of that mess. The £35 billion of tax subsidy that is currently provided will increase, and will be supplemented by employer and employee contributions which will also run into the billions. Those cash flows ought to be finding their way into better pensions rather than into the Chelsea property market.

I ask the Minister to assure us that before any of this happens, he will take the following steps. First, there should be a template for charge structures that will facilitate transparency, comparability and reporting. An analogous debate is taking place in the Department of Energy and Climate Change about energy suppliers, who are being required to introduce tariffs that allow comparison. Exactly the same should happen in this industry: indeed, it is more important for it to happen in this industry than in energy.

Secondly, there should be a charges cap on any supplier who becomes involved in auto-enrolment. I was staggered to read in a written answer that the Minister did not consider that necessary. A 1% cap was applied to stakeholder pensions, and the same should apply in this case.

Thirdly, some of the restrictions on NEST should be removed. The philosophical basis of the contribution limit of £4,400 and the restrictions on transfers in and out was that the purpose of NEST was not to compete with the market, but to operate in the parts of the market in which organisations do not wish to operate. That is an inadequate approach, and I think that the Government should be more proactive. Finally, the Government must ensure that there is no further slippage in the introduction of the RDR. Unbiased investment advice is sorely needed, and needed soon.

I fear that unless those measures are adopted, auto-enrolment will compound a failure that could easily become our next mis-selling scandal.

Let me now say something about annuities. It is possible for people to take their pension pots and then purchase annuities that will support them for the rest of their lives. However, the background is already tough—quantitative easing and life expectancy have driven down annuity rates—and the solvency II requirements may make the position even worse. It is clearly critical that the public obtain the best value possible. This means shopping around, but that is exactly what the big players in the industry do not want to happen. They want to stop it because it is their belief that they “own” that customer relationship, and they want to turn that ownership into more profit using two techniques. The first is the attempt to make the transition from savings into annuity seamless. That means putting an application form in with the final pension statements along with their own quotes. This, combined with a relationship sometimes developed over decades, is often enough to trap retirees into unsuitable and inadequate products. The second technique is using the asymmetry of information that we have seen in other areas to ensure that the retiree would need a maths qualification and a lot of intellectual self-confidence to sort out a better deal.

I have mentioned complexity, and I found the following sorts of annuities on the web—enhanced, fixed, guaranteed, immediate needs, impaired, income, index-linked, joint life, lifetime, lump sum, protected rights, purchase life, single life, variable life, with profits and smokers. For the average punter to work out intelligently what is best for him and his family using that lot is very tough indeed. The fundamental business objective is simple, but that is not how the market has evolved. The consequence has been mis-selling on an epic scale. A recent report from the CASS business school mentioned an existing provider offering £3,600 for an annuity pot and then a subsequent provider offering £26,000. That may be an outlier, but the facts are that 90% of retirees buy pensions from their existing fund manager and a very high number of those get below what the open market would offer. This matters to the Government—or it should do—because those massive profits siphoned off by the industry are resulting in hardship and an increased reliance on state benefits.

What should we do? I have five suggestions for the Minister. First, the Government should consider setting up an equivalent of NEST, specialising in the low cost provision of annuities. The IT and business process challenges around annuity provision are easier, as the cash does not need to be collected. At a stroke, the Government could provide an organisation that was a hallmark for fairness and best practice. Lord Myners has suggested that the Government allow people to purchase Treasury bonds direct, which would fit in with my proposal.

Secondly, the Government should consider making it illegal for the organisation that administers the saving regime to also provide an annuity. The advantage of this is that it keeps the Government out altogether while helping to make the market work. At a stroke, we would get new entrants to the market who are likely to be smaller, hungrier and more efficient. There are many precedents for this in the private sector. I used to work in the IT industry and it was not uncommon for those who designed an application to be forbidden to bid for implementation, because the procurement people wanted to ensure that the relationship advantage that had developed did not affect the pricing for the final step.

Thirdly, if the Government continue the existing system, in which providers attempt this seamless transition, there should be a rule that an annuity provided should be signed off by an independent financial adviser. That is a simple step and would ensure that the lethal combination of asymmetry of information and “relationship abuse” do not combine to rip off the retiree.

The fourth measure is a similar regime for annuities as I have suggested for charges for investment funds. We should insist on a few, relatively simple categories, and that would force transparency and comparability, also forcing the market to work properly. I believe in the market, but in this industry it has not worked. The industry will say that standardisation will limit choice, but they would say that, wouldn’t they? This is a simple transaction that needs to be made easier.

Finally, the Government should implement a system in which retirees approaching the annuity purchase point are much better informed about their options. They should be able to go to the open market and it should be forbidden for application forms to be put in with the actual pension round-up statement. The National Association of Pension Funds has a number of sensible measures in this regard, but I am of the view that that fifth one, on its own, is not enough.

In summary, it is vital that our people in our country save more than they are saving at the moment, but we do not wish to continue saving if the tax relief on that is channelled off for the property market in Chelsea and does not go to the savers themselves. Ordinary families continue to be penalised by an industry that has made supranormal profits by creating and exploiting a market failure, and the Government need to address that. If the Minister allows auto-enrolment to go ahead without reform, we are setting the scene for the next mis-selling scandal. I understand that it is tough for him to resist the lobbyists, who will be all over him on this, but self-regulation is not enough and the time to act is now.