Lord Browne of Ladyton
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Pensions Bill
Lord Browne of Ladyton Excerpts(10 years, 11 months ago)
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“(2) In this section—
(a) “charges”; and(b) “transaction costs”,shall be defined in regulations by the Secretary of State.(3) Before making regulations under subsection (2), the Secretary of State must undertake a public consultation, which must include the views of—
(a) the Financial Conduct Authority; and(b) the Pensions Regulator.(4) With reference to subsection (2)(a), any public consultation must consider the different elements which comprise charges and not just the annual management charge.
(5) Such charges, together with any transaction costs incurred by the funds in which qualifying schemes are invested, shall be declared on an annual basis to the Pensions Regulator, which shall maintain a public register thereof.
(6) The Secretary of State shall by regulations set the standards by which pension schemes must declare charges and transaction costs for the purposes of the register and for declaration to their members and their members’ employers.
(7) The standards set out in regulations under subsection (6) shall be reviewed every three years.
(8) The Secretary of State shall have power to make regulations ordering other disclosure arrangements on administration charges.
(9) Regulations under this section may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament.”.
Lord Browne of Ladyton (Lab)
My Lords, I will also speak to Amendment 62H, which is again in my name and that of my noble friend Lady Sherlock. Amendment 62G would amend Clause 41, which is the statutory basis for the Secretary of State to make regulations to restrict charges or impose requirements on work-based pension schemes. The amendment would amend that clause to enable the Secretary of State, following a public consultation, to set the standard by which pension schemes must declare charges and transaction costs to their members and the members’ employers.
Amendment 62H would give effect to a DPRRC recommendation and prevent the Secretary of State from amending legislation “whenever made” and imposing requirements on certain work-based pension schemes by secondary legislation, thus bypassing full parliamentary scrutiny. The DPRRC made this recommendation because it was not persuaded adequately by the Government’s justification for granting themselves this power. We agree with the DPRRC. That is the simple basis for Amendment 62H.
While I am dealing with this group, the noble Lord, Lord Lawson, has two amendments in it. Amendment 63 would create a power to require disclosures at least annually of certain management and transaction charges incurred by administration and management of investment portfolios. Amendment 67 would create a power for regulations to be made requiring work-based pension schemes to disclose periodically certain costs and information relating to charges for management of investment portfolios. I shall return to these amendments later. However, by proposing them the noble Lord has made a powerful intervention into this debate and one I hope that his noble friends will treat with the respect it deserves.
Finally, there is government Amendment 70, which would give effect to a DPRRC recommendation that the first set of regulations under paragraph 1 of Schedule 17 should be subject to affirmative procedure. We support that.
In my noble friend Lady Sherlock’s excellent speech at Second Reading on 3 December 2013, in considering this part of the Bill she made the compelling point that the state owes a serious duty of care to the large numbers coming into auto-enrolment. It is crucial that every one of the 10 million auto-enrolled between 2012 and 2017 can be sure of getting value for money from that pension scheme. That necessity for value for money drives all the Labour amendments to Part 5 of the Bill, on private pensions.
In my noble friend’s Second Reading speech, she said:
“This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing”.—[Official Report, 3/12/13; col. 147.]
Her amendments are designed to address those issues. Amendment 62G argues for the full disclosure of all costs and charges, including the costs extracted by fund managers.
I am sure that all Members of your Lordships’ Committee agree that pension charges must be reasonable for people to have the necessary confidence to invest their hard-earned money in pension schemes. From the evidence available now, it is difficult to exaggerate how obscure the charging structure on pensions is. Pensions are pretty complicated to begin with because, in an occupational pension scheme, the employer—not the employee—is the person buying the pension. That pension schemes are then invested in asset classes by fund managers further complicates the challenge of understanding what is charged.
For reasons we have debated repeatedly in this Bill, the market cannot address this challenge. I regret that the Government have been slow to understand the depth of the problem in the pensions market. My right honourable friend Ed Miliband first raised this issue in July 2012. He identified pensions as the next big scandal, warned that savers must be protected from the scandal of hidden pension fees that can see people stripped of huge percentages of their savings, and called for a new regime imposing a clear charging structure on pension funds. He warned that fees need to be capped. He was accused by the Pensions Minister of being irresponsible. Regretfully, the Minister joined industry voices who were making accusations of scaremongering. The next day, the RSA published Seeing Through the British Pension System, which found that 21 out of 23 providers denied that there were any additional charges other than the annual management charge and administration costs. They failed to reveal what is charged for items such as audit, custodial costs and other costs such as taxes, lending fees and broking commissions.
Lord Bates
My Lords, this has been a useful debate with lots of high-quality and thoughtful interventions. I will try to follow that standard by putting some remarks on the noble Lord’s amendments on the record, and also on my noble friend Lord Freud’s Amendment 70.
As your Lordships will be aware, we launched our recent consultation on charging in October 2013, following on from the Office of Fair Trading’s September 2013 market study into defined contribution workplace pensions. That study raised concerns, which the Government share, about the weakness in the buyer side of the market—a point made powerfully by the noble Baroness, Lady Donaghy, in recounting those examples—the complexity of the product and a lack of transparency, which hinders consumers’ abilities to compare schemes. My noble friend Lord Lawson, a distinguished economist, mentioned the principal agent problem, which has at its heart, in an economic context, asymmetry of information. Transparency must therefore be part of the play which somehow levels the playing field between one side and the other.
Our consultation sought views on how the total cost of scheme membership, including transaction costs, might be captured, reported and managed. My noble friend Lord German rightly said that perhaps it was not an “either/or” solution, but more of an “and” solution. That was reflected in the consultation’s remit, which presented not just one idea but alternative measures to improve the transparency and disclosure charges, as referred to by my noble friend Lord Lawson with regard to his proposed new schedule: a cap on charges on default funds of defined contribution workplace pension schemes, a point made powerfully by the noble Lord, Lord Browne; a ban on active-member discounts and commission; and an extension of the ban on consultancy charges to all schemes used for automatic enrolment. Quite a wide-ranging consultation was launched.
By November last year we had 160 written responses from the evidence received. We will be publishing our response to this consultation shortly. In fact, Steve Webb, the Minister for Pensions, will be updating the other place on his response to the issue of a cap on charges on Thursday this week. I know how the machinery of government works; that does not quite deliver what we want before us in Grand Committee as we consider the amendment. But that information will be in the public domain, and I am sure will be a source of debate for others to draw upon on Report. I will offer some reassurances in the interim.
Lord Browne of Ladyton
Before the Minister moves off that point, I am conscious that if the FT report of Friday 17 January was based on information that should not have been in the public domain, the Minister will be constrained in what he can say. Those of us who have been in that position understand that. However, does the expected update from the Pensions Minister, Steve Webb, relate to the very consultation that has been reported in the FT as being postponed—I think it says shelved for at least a year—potentially indefinitely? Is the Minister prepared to address the specific piece of evidence which suggests that officials briefed members of the industry that that was the case—last week, it is said, which presumably was the week before last?
Lord Bates
The noble Lord was a very experienced Minister and a much more senior one than I will ever be.
Lord Browne of Ladyton
My Lords, I thank the Minister for his reply to this short debate and for the answers he has given to questions. I am grateful—and noble Lords will be grateful—for his acceptance that transparency and disclosure are a necessary part of the reform that we are engaged in; for his confirmation that he and the Government share the concerns that have been expressed in this debate; and, in particular, for his assurances, in so far as they are assurances, that the response to the consultation can be expected shortly but that we will receive from the Pensions Minister Steve Webb on Thursday in the House of Commons an update on the Government’s response to the consultation.
I feel that we now have to wait until Thursday to see whether this response is adequate and, in terms of what it allows us to expect or anticipate, whether it puts a timeous set of potential actions in place that will meet the challenges of the continued rollout of auto-enrolment and the increasing numbers of people who are being engaged by default in individual pension schemes. I will come back to that in my peroration.
I thank all noble Lords who have contributed to this debate. First, I thank the noble Lord, Lord Lawson, for his engagement. I can confirm that there was some stimulus from the fact that he tabled Amendments 63 and 67. Of course, the fact that he did so first in your Lordships’ House does not detract from the fact that an almost identical amendment was tabled in the name of the Labour Party in the House of Commons by my honourable friend Gregg McClymont before Committee there. I make this point not to in any sense undermine our common interpretation of this problem or our substantially common approach, but to point out that but for the slight difference of wording between the amendment my honourable friend tabled in the Commons and the one we tabled in your Lordships’ House, our amendment would probably have been tabled about the same time as the noble Lord’s amendment. The question of timing does not detract from the fact that we have been engaged with this issue for some significant time.
I am very grateful to the right reverend Prelate the Bishop of Chester for two things: first, for his identifying that the approach of the Labour Front Bench and that of the noble Lord, Lord Lawson, are much more compatible than others who have commented on this appear to believe. These amendments proceed by way of regulation but the regulation is to define what subsequently should be disclosed. I point out to those who have contributed to this debate that we, too, are about disclosure with this amendment. We have an ambition to cap the charges on the administration of pension funds but this is not the vehicle for that policy. This is about disclosure. It is about defining what ought to be disclosed in a very precise fashion through a process of consultation and regulation, and then about disclosure for all the same reasons that the noble Lords, Lord Lawson and Lord German, the right reverend Prelate, my noble friend Lady Donaghy and indeed the Minister all seem to consistently agree with.
The second reason I am grateful to the right reverend Prelate the Bishop of Chester is that he not only put his finger on the problem for the member, or potential member, of a pension scheme but explained more fully than I did—perhaps I should have done—why value for money is so important to our reforms. It is about confidence. If there is no confidence in the market, as the right reverend Prelate pointed out—and drew the Minister to agree—this whole package of reforms will fail. This will be half a reform, if there is no confidence in the private pensions industry. Our whole thrust is to address the issues that have been successively identified by reports and analysis of the issue in a form that is designed to reform the law and to provide the confidence that will be necessary for this whole reform—which we support—to go forward.
My noble friend Lady Donaghy reminded us of the importance of trying to change the culture more broadly in the financial services industry if we are to instil the confidence in the people of this country in saving and, I suppose, the mature handling of their own resources. That is a challenge we face that goes beyond just pensions, but it is crucial to them and she is wise to remind us of that.
I thank the noble Lord, Lord German, for engaging with the debate and for encouraging the Minister to respond to some of the important questions that needed to be answered. I remind him that although regulation and a more straightforward form of disclosure are the difference between the way our Front Bench here and the noble Lord, Lord Lawson, have approached this issue, we are concerned about disclosure as well.
It comes down to this: the Minister, as his honourable friend the Pensions Minister, Steve Webb, did in the other place, rests his case on the statutory structure which is being created and a process of consultation with a promise of significant regulation following thereafter, which will be engaging and confidence building. His case depends on how his honourable friend the Pensions Minister responds to the consultation thus far, which is so important to that process. We will all listen very carefully to that statement.
I fear that there may be more in the Financial Times report than the Minister is in a position to reveal to your Lordships’ Committee today. If that proves to be correct, he will appreciate that it is almost certain that we will return to this issue on Report. Between now and then, I hope that the noble Lord, Lord Lawson, will take up my offer to have discussions about where we agree and what is the best way for us to proceed on this issue. We share an analysis and a common concern, or remedy, about how to proceed.
However, in the mean time, I thank the Minister for his response and engagement with the debate and beg leave to withdraw my amendment.
Baroness Drake (Lab)
My Lords, Amendment 62GA is designed to address shortcomings in the governance of pension schemes, particularly contract-based schemes. It would give the Secretary of State the power to set regulations that
“provide for requirements for the identification, avoidance and management of conflicts of duty and interest”.
They would require, in the event of a conflict of interest, for priority to be given to the interests of the saver and to ensure that the duties to the saver are met despite the conflict.
In his review, John Kay criticised FCA rules as falling,
“materially below the standards necessary to establish”,
trust, confidence and respect. He recommended a shift towards fiduciary standards. In an auto-enrolled world, that comment has even more resonance because, increasingly, private sector workers’ pensions will be contract based, where, as the noble Lord, Lord Turner, mentioned in debate last Wednesday, there is a,
“fundamental inefficiency of the market ... 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”.—[Official Report, 15/1/14; col. GC 161.]
My amendment seeks to capture that governance challenge. To achieve an increase in pension savings, workers are auto-enrolled into workplace pensions. There can be no caveat emptor, as the saver does not buy. The system is designed to restrict the saver to one choice—either stay in or opt out and lose the employer contribution. Current regulation of contract-based pensions is at odds with the assumptions underlying auto-enrolment. Contract-based regulation is built on informed consent and consumer choice. Auto-enrolment is designed and built on the principle of inertia, on a population of savers who do not engage with investment choice. A plethora of reports has revealed the conflicts of interest in the industry. The OFT report confirms a dysfunctional pensions market with a weak demand side and concludes that the market could not be expected to self-remedy and that there is a need for intervention.
The introduction of auto-enrolment has been a success and the Government should be pleased. Opt-out rates have been low. The Government must now secure a level of quality and governance that delivers optimal results for savers in terms of building trust so that workers persist with their savings, thereby setting the ground for increasing contributions beyond the current statutory minimum and improving savers’ chances of achieving a reasonable income in retirement. Measures to encourage savers to engage with their pension savings are important but of themselves are not sufficient. The majority of savers will not actively engage. It is that very inertia that can be used by some providers to create or sustain profitable inefficiencies. The legal framework must protect those who do not engage.
The challenge of inertia means that there is a need for efficient defaults over the life cycle of the pension saver. For example, there is a need to get people saving; to determine a minimum they should save; to determine their investment choice at different intervals in the life cycle on, for example, joining a scheme or following a quality review as they get nearer to retirement age; and, by default, to transfer and consolidate their pension pots. Over time, I suspect that we will be considering default arrangements on decumulation when a person retires. The need for defaults raises the bar on governance because someone is using their discretion on behalf of the saver.
Contract pension provision has systemic weaknesses of governance and a particular feature that constrains efficient default arrangements. For example, looking forward, an employer conducting a triennial review that decides that the current scheme is poor value will be unable to switch workers in a contract-based scheme unless they individually consent. However, the very nature of auto-enrolment means that this active consent is unlikely to be granted by many savers. On legacy schemes and pots, I am sure that any OFT-driven audit will reveal poorly performing funds and high charges, but the solutions will not be effective if they require individuals’ consent.
We have a misalignment between what contract-based provision can do and what it is necessary to deliver in the interests of the saver. How does one respond to that challenge? Recent press comments are peppered with references to making it easier to move contract-based scheme members from old to new schemes. Standard Life’s head of workplace pensions, speaking at the NAPF conference, said that contract law acted as a barrier to moving people from poor-quality schemes to good-quality schemes, and added:
“We need to learn the stuff that works in the trust-based world”.
A recent Pensions Institute report found potential for massive improvement in outcomes where poor-quality legacy schemes transferred en masse into better-quality modern schemes with lower charges. The Pensions Institute called on the Government to facilitate changes to contract law to allow such transfers to be made without the individual consent of scheme members where it is clearly in their best interests. However, there is the rub. Who decides where it is clearly in their best interests? How is the primacy of the saver’s interest protected? Governance requirements must be fit for purpose under auto-enrolment and remove a constraint in contract provision, but in a way that ensures that the interests of the saver trump the interests of others when there is a conflict. Putting the legal responsibility for the best interests of the saver on the employer will be problematic, particularly for the long tail of SMEs and micros.
The Government’s use of statutory overrides has a role to play, particularly in placing new quality and governance requirements into future, existing and legacy pension contracts. I ask the Minister to confirm whether this Bill would give the Secretary of State the power to change retrospectively the terms of existing pension contracts to embrace any new quality or governance requirements.
However, the solution must rest in major part in raising the governance in the pensions industry. Like trustees, it should carry a fiduciary responsibility in the management and provision of its pension products and investments. Conflicts of interest must be resolved in the interests of the saver. An efficient private pension system that requires the default transfer of savers’ pots to new schemes and funds simply cannot happen without that.
There is an imbalance in the duties of contract-based pension providers, compared to those placed on trustees, which challenges the success of auto-enrolment. The OFT stressed the need for stronger measures to improve governance but I fear that the independent governance committees that it has agreed with the industry—here there are shades of what the noble Lord, Lord Lawson, referred to as the fox in the hen coop—will fail to achieve the requirement of aligning scheme governance with the interests of savers.
The proposed independent governance committees have many weaknesses. At the very least, such bodies need both a duty to act in members’ best interests and the power to make decisions. The current OFT proposal fails on both points. As the Law Commission commented,
“there are many difficult questions about how these committees will work”.
They,
“will not have the power to change investment strategies or investment managers ... Furthermore, it is not clear whether ... the committees will be under explicit legal duties to act in the interests of”,
the savers. Introducing independent governance committees accountable to the boards of pension providers, without addressing any of the conflicts faced by these providers, or clarifying that decisions must prioritise the interests of policyholders over those of the shareholders, does little to solve the governance deficit.
As a comparator, the governance requirements for the Australian private pension system have been toughened up recently. It is a sad reflection on my character that I spent a significant number of days over the Christmas holidays ploughing through the regulatory requirements under the Australian system—I promised in my new year’s resolutions to get a more exciting life in future. The Australian Prudential Regulatory Authority enforces a range of prudential standards on pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests and a specific duty to deliver value for money.
The advent of auto-enrolment raises the bar on governance. I welcome the Government’s decision to impose quality and governance requirements on pension schemes, but I think that it is necessary to make it explicit that those requirements should provide for the identification, avoidance and management of conflicts of duty and interest. Conflicts of interest go to the heart of the problems in the private pension system. The regulations, when addressing governance requirements, must address the issue of conflicts of interest. Amendment 62GA, without being prescriptive, seeks to do that. I beg to move.
Lord Browne of Ladyton
My Lords, I speak to Amendments 67ZB and 67ZC in my name and that of my noble friend Lady Sherlock. It is always a pleasure to follow my noble friend Lady Drake on issues such as this. She has once again characteristically set out an informed and persuasive argument in her contribution to the debate. To a degree, I accept that it could be said to undermine Amendment 67ZC in that it approaches the same issue but in a distinctly different fashion, accepting the same principle. From my perspective, however, I am not that concerned how the Minister responds to the nature of the challenge that my noble friend set out. If he chooses to accept her amendment—I venture to suggest to him that he would invariably be wise to do so in such matters—he will find no great cavil from these Benches that our amendment fell by the way as a consequence.
Amendment 67ZB is designed to address the issue of scale by way of a new clause. It would promote good value in scheme sizes and would require trustees to consider whether the scheme had sufficient scale to deliver good value. I note that, in the Government’s consultation on quality standards in workplace defined-contribution schemes, the Government reveal that they are “interested” in the idea that trustees should have a duty, and underline their interest in the Australian approach to imposing duties on trustees.
I am glad that the Government are beginning to catch up with the Labour Party’s policy review on these issues, but I also note that they have not yet progressed sufficiently far in its investigations to recognise that the Australian Government, the policies of which have already been prayed in aid by my noble friend, also deploy the regulator in this respect. It is not clear why the Government think that trustees of very small UK schemes, which we know from the TPR surveys self-identify as not incapable of understanding investment processes, will be able to make a judgment as to whether they have sufficient scale. If these trustees fail to act, what is supposed to happen?
In Australia, those intending to supply a pension scheme have to apply to the regulator for a licence, and one of the licence conditions requires a reasoned attestation as to how the trustees of the scheme will meet best practice in terms of scale at the investment and administration layers. This process has a ratcheting effect, as the attestation must be repeated on an annual basis and, as best practice improves, this forces mergers. Failure to attest would mean a breach of the regulatory licence, and commentators believe that there will only be a sixth of the current number of schemes within 20 years. For trustees to move to scale we would need a ubiquitous requirement for trustees, a duty on them to assist scale and a mechanism to require action where they fail to act or mis-assess. That is what we seek to provide the beginnings of with this amendment.
Amendment 67ZC would provide for regulations to require any pension scheme to appoint a board of trustees which will have fiduciary duties towards the members of the pension scheme. Our view is that a minimum requirement for auto-enrolment schemes is that they must be governed in a way which legally requires the scheme to prioritise the interests of members over all other interests.
The Minister may say that they have consulted on governance for automatic transfer schemes; again, it is a good thing if he is catching up with our policy review. However, his quality standards are intended for automatic transfer schemes only. Under our approach, automatic transfer will be limited to aggregators, as the Minister is well aware. Our requirement for trustees applies to all qualifying schemes, not just to automatic transfer schemes, and, in addition, our definition of qualifying schemes includes closed-book schemes, which his does not.
As a further point, these conditions will apply to schemes that wish to operate as automatic transfer schemes, but an automatic transfer system is years away. The requirement for trustees is immediate, however, as my noble friend has pointed out. Why should we adopt a lesser principle than that adopted by the Australians? Their Cooper review found:
“Superannuation must always be for the benefit of members. The superannuation system does not exist to support intermediaries. Trustees must be relentless in seeking benefits for members”.
Thanks to my noble friend Lady Drake, we now know that that has also been translated into regulation in Australia.
Lord Bates
My Lords, ensuring that schemes deliver good value for, and are run in the best interests of, their members is a primary concern for this Government, so we welcome this discussion, which was set out with great insight and clarity by the noble Baroness, Lady Drake. We agree that the issues highlighted by these amendments—scale, fiduciary duties and conflicts of interest—are important ones to consider. However, we do not agree that simply encouraging the creation of large, trust-based schemes is the right approach to ensuring good value for members.
We are interested in testing how far scale can help schemes to deliver better quality and lower charges for members. Last year we published a call for evidence on defined contribution quality standards, in which we sought evidence about how a scheme’s size can influence outcomes for members. As noble Lords are no doubt aware, the issue of scale is not straightforward, and most responses to our call for evidence saw benefits to members in both large and small schemes. We are currently considering the responses to the call for evidence alongside the recommendations of the Office of Fair Trading, and will respond in due course.
We would have concerns about compelling schemes to merge in the way that this amendment suggests. Determining what is in all members’ best interests would be extremely challenging for the Pensions Regulator, which simply would not have the capacity or information needed to scrutinise every small scheme and consider whether it should close or merge. There could also be European Court of Human Rights issues in relation to property rights because to force a scheme merger could lead to some members losing out.
Turning to the idea that all schemes should be trust-based, in our call for evidence we set out the importance of ensuring that schemes are governed in members’ interests; of course, we recognise the vital role that trustees play in achieving this. However, we disagree that simply imposing a trust-based structure on all schemes is the way forward. Neither the presence of trustees nor fiduciary duties are a panacea for poor governance. This is shown in the findings of the OFT, which identified governance weaknesses in trust-based schemes of different sizes. The Law Commission’s current consultation on fiduciary duties notes that legal duties are,
“insufficient to ensure good outcomes for members”.
In addition, the amendment suggests that in scheme governance, trustees’ decisions should take precedence over an employer’s decisions in any circumstances. This does not provide any opportunity to balance interests, and would apply even if the trustees’ decisions are unreasonable. Such a broad requirement could lead to significant financial difficulties for employers, which would not be in anyone’s interests.
The amendment moved by the noble Baroness, Lady Drake, highlights the importance of identifying and avoiding conflicts of interest. The Government agree that this is an important area; in our call for evidence we suggested that all schemes should have a governance body that must be able to act freely in members’ interests. The noble Baroness referred to the Australian scheme, as did the noble Lord, Lord Browne. She was very dutiful in reading it over Christmas. I suggest that she would find the Australian pension code less onerous to read if she was reading it in Australia, but she was probably shivering here with the rest of us.
The Australian regulator’s new power is interesting but it is not translatable to the UK pension system. Following the Cooper review, which has been referred to, the Australian pensions regulator—APRA—has been given new powers to drive schemes to merge.
We are interested in this approach and will monitor how it is used and how effective it is, but it should be remembered that the Australian pensions landscape is significantly different from our own. It is our understanding that the APRA does not intend to use the power to target all small schemes but to focus, for example, on cases where there is a link between underperformance and an absence of scale.
The noble Lord, Lord Browne, argued that you need to drive up scale in order to increase consolidation, which has an effect on charges and therefore brings a benefit to members. Scale is not necessarily a determinant of value: bigger schemes are not always better. Consolidation is already happening. For example, in 2012 around half the active members of private occupational defined contribution schemes were in schemes with 10,000 or more members; in 2000 this figure was one in eight. The number of active members in small and medium-sized private occupational defined contribution schemes decreased from 0.3 million to 0.1 million between 2000 and 2012—a reflection of the greater regulatory requirements and burdens that are placed upon scheme managers, as well as the challenge of finding trustees who will undertake the work.
Finally, turning to the comment made by the noble Baroness, Lady Drake, about independent governance committees and whether they would have a fiduciary duty to members, the OFT has recommended a model of independent governance committees to address a number of problems that stem from weaknesses in the buyer side of the market. As part of the consultation on fiduciary duties, the Law Commission has asked about the duties that should apply to members of independent governance committees. Its tentative view is that members should be subject to legal duties to act in the interests of members. We are working with regulators and stakeholders on requirements for independent governance committees, and will respond in due course.
This has been a helpful discussion but I hope that my responses will enable the noble Baroness, Lady Drake, to consider withdrawing her amendment.
Lord Browne of Ladyton
Perhaps I might engage with the Minister on the issue of whether or not larger pension schemes provide better returns to their members. I do not intend to delay the Committee long on this issue but I have before me a page and a half of significant research that challenges the assertion made by the Minister. I will say only this: recent NAPF research shows that a person in a larger scheme will get a 28% larger pension pot than a person in a smaller scheme. Indeed, research from Australia supports the assertion that fund size has a positive impact on the performance of not-for-profit superannuation funds there. I shall arrange for the Minister to have access to this research but I could not let that assertion remain unchallenged.
Baroness Drake
I thank my noble friend Lord Browne for his supporting contributions in this debate. I thank the Minister for his response but he has not actually answered my question—I did listen; perhaps I missed it but I do not think so—which was: can the Minister confirm that this Bill will give the Secretary of State the power to retrospectively change the terms of existing pension contracts to embrace any new quality or governance requirement? It is a pretty key point because it goes to the heart of what the Government can or cannot do unless they take those powers to themselves. A lot of people are quite interested in whether the Government are taking those powers so that when they decide what the quality and governance requirements are, they have the power to retrospectively apply them to existing pension contracts.
“Decumulation
(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;(b) ensuring access to most annuity providers;(c) minimising costs; and(d) ensuring that information and support is available on alternative at-retirement products.(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.”
Lord Browne of Ladyton
My Lords, Amendment 67ZA is in my name and that of my noble friend Lady Sherlock. It proposes the addition of a simple clause to the Bill which would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. Later provisions set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed; in other words, it calls for an independent brokerage service to assist people to annuitise at the point of retirement.
This is hardly a radical proposal. It is best practice. It is what many employers with DC pension schemes already offer. The ABI code of practice says that providers should tell people who are decumulating that they can shop around and transfer their funds to another provider and that they should seek advice before so doing. But that is not enough. As Dan Hyde, in an article in the Telegraph on 10 December last year, wrote:
“The process starts with a ‘wake-up’ pack sent to savers … in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.
Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. Even a one-off appointment would be expensive, equivalent to a week’s take-home pay for workers on the average wage, even if they knew where to go.
The scandal of annuities is well known and widespread. When this amendment was debated in the House of Commons, Steve Webb, the Pensions Minister, used the same diversionary tactic as did the Minister, Mark Hoban, who responded to the later Westminster Hall debate on annuities. It is all very well to suggest that those reaching retirement age can do many things other than plan for an annuity, but it is insufficient to say that people should have many different opportunities and lots of different advice. The fact is that the variety in the kinds of annuity that are offered and the variety of deals available is considerable and an annuity is invariably the default position of most of those retiring. They need independent support at that time.
The need for that independent support at this point may be obvious but the reasons for it are worth repeating. The first is the complexity of choosing the right annuity option. Annuities are complex products and decumulation is a complex process. Comparison between providers is very difficult. I saw a recent quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life; level escalation; anticipated bonus rates and required smooth return rates, all without explanation. It offered four alternatives to a conventional lifetime quotation, annuity was described as income choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most about £1,200. With this complexity no one should exercise a choice without independent support, so no wonder more than 50% of people—according to the Telegraph—go with their existing provider.
I understand that the first comparator website has been launched, and I suppose that is a step in the right direction, but Ros Altmann, the independent pensions consultant who gave evidence to the Commons committee, did not think that it was particularly simple. She said that it was disappointing and not easy to use. Annuities are complex products with multiple options and it may be that there never can be a simple comparison website. Does the Minister accept that annuities are complex and people need independent brokerage support at the point of decision-making? Does he accept that obtaining that support is beyond the grasp of most people, particularly those with no knowledge of investments? If he does accept that, how does he suggest that those who need that support can be guaranteed to get it?
The variety in the kinds of annuity that are offered and the deals that people can get is just bewildering. The NAPF and others have said that annuitising with some pensions scheme providers pays on average 20% less than shopping around. Ros Altmann said on “Newsnight” that if you had an annuity with the worst performers you would have to live until you were 100 to get back the money that you paid in. In effect, inertia or, alternatively, being overwhelmed by the complexity of making a choice, is exploited by pensions providers. Insurers are making excessive profits from purchasers failing to shop around. Inertia is a powerful force that results in excess profits for insurers. They penalise, not reward you, for loyalty. Perhaps it was that which drove the Pensions Minister, Steve Webb, to make his announcement on portable annuities last week—a Statement, by the way, that went down like a lead balloon in the industry. Well, it would, wouldn’t it?
The current system is a lovely little earner, as they say in my new adopted home in the East End of London. The FSCP report published in December made many points. To assist my analysis of it, I have drawn the following points from the report which states that the tactics used by insurance companies and brokers are “tantamount to burglary” of old age pensioners, and that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies make 20 times more profits on annuities than on any other financial product. There are poor returns: on a pot of £100,000, Clerical Medical offered £4,664 per annum, while Reliance Mutual offered £6,111. Over their expected lifetime, the pensioners would have been just over £36,000 worse off with one rather than the other.
Lord Browne of Ladyton
My Lords, I am grateful to the Minister for his response. I am disappointed, although not surprised, that his speaking notes sought to deploy what I would call a diversionary tactic in addressing the issue that this amendment seeks to address, and that clearly concerns a number of Members of this Committee. I am grateful to my noble friend Lady Hollis for her intervention and for the detail that she extracted from the Minister. I am also grateful for the intervention of the right reverend Prelate the Bishop of Chester, who encapsulated in a couple of sentences the fact that the Minister had compounded the complexity and the difficulty of the challenge facing those approaching retirement in such pension schemes, rather than giving them any comfort.
Of course, we must all accept what the Minister says about the variety of choices facing those who reach this point before or at the same time as they engage with the issue of annuity. However, the fact is that the level of understanding of the vast majority of those retiring is such that significant numbers—400,000 a year—are entering into annuities. They are taking out these complex insurance policies at the point of retirement and the results that they are achieving, even within the annuities themselves, suggest that they are not making the best choices for their own futures. This amendment seeks, within the confines of this Bill and in the context of other work that must be done in relation to annuities, to provide at least a step in the right direction now, demonstrating that Parliament understands and engages with this issue and wishes to prevent it from becoming the next mis-selling scandal of the financial services industry.
With respect to the Minister, it is no answer to say that, of course, the answers can be bewildering but that these same people should engage with a whole other set of bewildering choices in order to avoid the bewildering nature of the choices in relation to annuities. That is hardly a way to move forward. This is a relatively simple initiative. It is not perfect but it seeks, within the body of the clause as drafted, to address the very issue that was the target of the Minister’s principal criticism. It seeks to establish a method of ensuring that best practice is adopted by those brokerage services and gives the regulator a role in defining what best practice is. Surely this is acceptable, if only as a place marker while we go on to deal with the much more difficult issues that have been revealed, through the reports and the information that I have shared, and that the Minister knows exist in the annuities market. There is something fundamentally wrong with the market and it is driven by exactly the same motives as we have engaged with in other parts of the private pensions industry and in our debates in this Committee.
I understand why the Minister gives this disappointing reply to this amendment. I understand why his Government are reluctant at this point to engage with this initiative. However, I am determined that, at some stage, your Lordships’ House will have an opportunity to consider whether or not this is something that it wishes to engage with. I predict with some confidence that this matter will come back on Report but, given where we are in these proceedings, I will look forward to the debate on this issue in the Chamber and to discovering how much those who hear that debate will be reassured when the Minister or others put forward the arguments that we have heard this afternoon. At this stage, I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Baroness Harris of Richmond) (LD)
My Lords, if Amendment 68 is agreed to, I cannot call Amendment 68ZA by reason of pre-emption.
Lord Browne of Ladyton
My Lords, I speak to government Amendments 68 and 69, and to Amendment 68ZA, for what that is now worth, and Amendment 68ZB in the name of my noble friend Lady Sherlock and myself. As the Minister pointed out, Amendment 68ZA is now unnecessary in the light of government Amendment 68.
We welcome the government amendments in this group. As the Minister explained, they have been tabled in response to some of the recommendations made by the DPRRC. I am pleased to see that the Government have come to accept the DPRRC’s recommendation that Clause 17 powers relating to the effect of pensioners postponing or suspending state pensions should be affirmative; that was the purpose of our Amendment 68ZA.
Amendment 68ZB is purely a probing amendment, and has been remarkably successful in drawing from the Minister an extensive explanation of the regulation-making power under Clause 42, and why the Government felt that it was appropriate that it should proceed by the negative resolution procedure. I am extremely grateful to the Minister for that detailed explanation and, in the light of his full explanation, which is now on the record, I will not press that amendment.