Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013

Lord McKenzie of Luton Excerpts

Wednesday 24th July 2013 Grand Committee

[Lord McKenzie of Luton]

My Lords, in thanking the Minister for introducing these regulations, let me make it clear that they have our strong support, as the Committee will have gathered from my noble friend Lady Drake.

At the start of her presentation, the Minister made reference to the progress that has been made with auto-enrolment. That is indeed heartening. I think the figure was more than 1 million people already enrolled—I was not quite sure whether that was gross or net of opt-outs. I understand from my noble friend that, thankfully, the level of opt-outs has been quite small.

It was a particular delight to hear from my noble friend Lady Drake in this short debate because she was there at the heart of the creation of auto-enrolment as one of the three members of the Turner commission. We always endeavour to follow her wise words.

We particularly endorse the analysis which points up the misalignment, which the Minister referred to, between the interests of the primary consumer—the employer—and the end customer—that is, the member. As my honourable friend the shadow Pensions Minister Gregg McClymont has made clear, the workplace pensions market is not made up of fully informed consumers. The inertia that this phenomenon fostered is, in part, to be addressed by auto-enrolment. A lack of informed consumers is not sufficiently balanced by good governance arrangements, particularly for contract-based DC schemes.

We see the issue of the complexity of charging as inextricably tied up with the wider issues of governance, especially for defined contribution schemes. My honourable friend has gone further and challenged whether the Financial Conduct Authority’s regulation offers sufficient safeguards for the workplace pensions market, and has proposed an extension of trust-based governance, a widening of fiduciary obligations and bigger schemes to improve the bargaining power of members. He argues that full disclosure of costs and charges is not a sufficient improvement to the current situation but it is a necessary one. We welcome the call for evidence around some of these matters.

As we have heard, in April 2013 the Work and Pensions Committee covered a number of these issues and made the point, with which we agree, that auto-enrolment will mean that many more people in the UK will be saving for their retirement. But given that most will be auto-enrolled into DC schemes, hence bearing most pension-saving risks themselves, the issue of good governance is of heightened importance. The committee says:

“Decisions made by contract-based scheme providers, and the employers who enrol their employees into them, may not always be made in the best interests of the scheme member. Trust-based schemes generally offer members greater protection, as scheme trustees have a fiduciary responsibility to act in the interests of scheme members”.

The committee also pointed out that:

“A confusing array of costs and charges is applied to pension pots by pension providers … and these costs and charges can have a serious negative impact on an individual’s retirement income”.

My noble friend’s comments about the need to maintain and build on the broad popular support for pensions saving that auto-enrolment has thus far engendered are very important.

Like the Minister, the Work and Pensions Committee was particularly concerned about members bearing consultancy charges. As the committee sets out:

“The provision of pensions advice to employers is currently an unregulated activity”,

and it would seem that the Government have no plans to change this, so tackling consultancy charges, which end up being paid by scheme members, has to be seen in this context. We consider that the Government are right to ban these arrangements rather than seek to ameliorate them by capping or strictures from the regulator. As the Minister has explained, such charges can have a particularly pernicious impact on the low-paid and transitory job holders, as the Explanatory Note makes clear.

I have a few brief questions. In fact, I think the Minister has pre-empted two of them. I am not sure whether that is foresight or I am getting predictable. Have the Government considered the risk of trading down in circumstances where employer contributions would be above the statutory threshold but could be reduced to the statutory threshold, with the savings covering the consultancy charges that would otherwise be on-charged to scheme members? I was going to ask what assessment has been made of the ramifications of the cut-off point where an employer has entered into an agreement before 10 May 2013. Those agreements presumably will run for some time in the future. Can the Minister say something about the nature of these contracts and whether they tend to be short or long term? If they can be terminated by notice, there does not seem to be an obligation on an employer to do that under these arrangements. However, the Minister in her opening remarks said that there seem to be just a few of them, so it does not seem to be a particularly big issue.

The Minister has covered my final question, which was to get an update on auto-enrolment. That is encouraging news. We are thoroughly supportive of the impact of these regulations.

[Baroness Stowell of Beeston]

My Lords, I first thank the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for their support for these regulations. I am grateful to them for that.

In response to the comments of the noble Baroness, Lady Drake, in particular, I will say a little more about the market study into workplace pensions that the Office of Fair Trading launched in January. The aim of the study is to examine whether DC pensions are set up to deliver the best value for money for savers and to take a forward look at the impact of auto-enrolment. On 11 July, the OFT published an update on its progress. This included several areas it wishes to explore further, including the current level of governance over the performance of some schemes, which the noble Lord, Lord McKenzie, raised; schemes with two-tier charging structures in which deferred members pay higher charges; and schemes that do not have a realistic prospect of reaching sufficient scale to generate value for their members. The OFT is also concerned about the way that charges are currently presented and about charges in older schemes that may not represent value for money.

The Government intend to publish a consultation in the autumn, following the publication of the OFT’s report and recommendations. Our consultation will cover a number of issues including a charge cap, active member discounts and extending the prohibition on consultancy charges to all qualifying schemes. These regulations are a first step in a wider move towards addressing the whole area of consultancy charges and their potential effect.

The noble Baroness, Lady Drake, stressed the importance of the FCA and TPR working together. The regulators have already set out how they will co-ordinate and exchange information. The FCA and TPR will jointly publish a document which sets out how regulation of work-based pensions operates in the autumn. This will better articulate the existing regulatory framework. The FCA is updating its pensions strategy and this will inform its business plan, to be published in the spring of 2014.