Pension Industry

Lord Evans of Rainow Excerpts

Tuesday 21st February 2012 Commons Chamber

[David Mowat (Warrington South) (Con)]

I am delighted to have this opportunity to raise a number of emerging cost structure issues within the UK pension market. This is an area in which I continue to receive a high number of representations from constituents, and the recent debate over public sector pensions has highlighted yet again the vast disparity that continues to exist between public and private sector provision. My view is that we should now stop talking about public sector pensions and ensure that the vast majority of the work force who make up the private sector get a better deal. The prognosis is not good, however, because of the endemic mistrust within the industry. Indeed, a recent National Association of Pension Funds survey found that 48% of the population did not believe that pension provision was a suitable form of investment.

The timing of this debate is important for two reasons. The first is the imminent introduction of auto-enrolment which, for the first time, will introduce many millions of new and relatively unsophisticated consumers into the market. The second is the emerging evidence of a serious market failure in both the investment and annuity provision segments of the industry. That market failure is robbing ordinary families of tens of thousands of pounds and of their chance of a decent retirement.

Before we investigate the causes of the problems, I should like to indentify the three distinct segments of the market. The first involves those in the public sector, about whom we have talked many times in this place. They are well catered for in comparison to others. An illustration of that is the fact that a £10,000 pension taken at the age of 65, would, in the free market, require a pension pot of about £250,000 a year. That is what the private sector is competing with.

The second segment of the industry involves those in the private sector who have made some attempt to provide for themselves, either because they are in a final salary scheme or—more likely, given that nearly all final salary schemes are now closed—a money purchase scheme.

[Graham Evans (Weaver Vale) (Con)]

I congratulate my hon. Friend on securing this important debate. The strivers in this country who work hard and do the right thing in providing for their own pension in retirement are finding that their private sector final salary pensions disappeared 10 or 15 years ago, and that their endowment policies—remember those, from the 1980s?—are delivering half of what was promised. In the light of that, and of the Equitable Life scandal, does my hon. Friend agree that it is a 21st century scandal that the fund managers in the City are still getting paid and receiving bonuses?

[David Mowat]

I thank my colleague for that intervention. I was just about to say that the average pension pot for the people in the sector I mentioned is of the order of £35,000 a year. That is enough for a pension of about £1,500 a year.

The third segment of potential pensioners are those for whom no provision whatever has yet been made. The Government are correctly trying to reach them through auto-enrolment. This segment contains the most unsophisticated consumers who need the most protection.

It is right, as the industry says, for people to save more, but when their funds are eroded by unnecessary costs and when annuities provide such poor value, many people in these groups say, “why bother?”. Up to a point, they are right, but this is the tragedy: we must save more, yet the Government have not put in place the environment that is necessary for effective saving. What that means in policy terms is that the Government are inheriting under-pensioned retirees, with all that that means for social security, despite the fact that the Government spend £33 billion a year in pension tax relief. This tax relief that should be subsidising retirement prosperity is, frankly, being siphoned off to fund managers through investment and annuity overcharging. I shall talk first about the fund management industry and then about annuities.

The Financial Services Authority has recently published statistics estimating that 31% of pension pots go in charges or fees. Clearly, the decision on which pension to purchase is, along with buying a house and buying a car, one of biggest decisions in people’s lives, yet they do it from a position of ignorance. The reason why the market does not work is that there is a massive asymmetry of information between providers and buyers and therefore of buyer confidence.

The area is complex, but the whole problem is compounded by an opaque fee structure, which is indicated by the types of charges relating to pensions—entrance charges, platform charges, annual charges, exit charges and, indeed, churn charges. Some of these appear in published overall cost figures and some do not. For example, the churn charge is not included by pension fund managers in the cost structure of what they call the TCR—transitional corresponding relief—ratio of a fund. This can be responsible, according to Money Management, for changing a 31% figure into a staggering 53%. That means that 53% of the money going into pension funds goes in charges. If we examine the average degree of churn in a pension fund, we find a rate of 128%, meaning that every equity in it is churned every seven months. Warren Buffett takes the view that equity should be held for a lot longer than that. Frankly, holding it for something like seven months is simply not right.