Motion made, and Question proposed, That this House do now adjourn.—(Greg Hands.)
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.
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?
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.
I am coming on to stakeholders and to caps. I want to ask the Minister some questions about those issues.
The industry defends itself by saying that active funds are worth paying for, claiming that higher charges are fair enough if better returns are secured, but the reality is that no correlation has ever been published to show a relationship between charges and returns. The consultants Lane Clark and Peacock recently issued a report to demonstrate that. Even if there were such a correlation, the fact that the charging regime is so opaque means that the punters could not get to grips with it in the first place. One of the many consequences is that this industry has failed to consolidate. I looked at a platform provider this morning and found that I could have bought 5,000 funds. There is no reason for that other than the fact that this industry has not been exposed to market forces.
Does the hon. Gentleman accept that one problem in the private pension sector is the lack of transparency when someone in public sector employment on a low salary decides to take out a little private pension to help them along? When it comes to the day of reckoning—when people want to cash the pension in—they realise that it prevents them from enjoying the benefits system because it just puts them over the threshold that would have allowed them to receive the benefits to which perhaps other family members or their colleagues are entitled. There should be transparency about what people get from their pension and how it affects them in the welfare system.
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.
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?
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.
I congratulate my hon. Friend the Member for Warrington South (David Mowat) on securing this important debate. He made some thoughtful comments about an issue that affects a large number of not only his constituents, but those of all hon. Members. He has raised issues that are central in tackling the challenges of increasing longevity and an ageing society, and are crucial to the success of our strategy to increase pensions savings. He has raised many issues and we have taken careful note of what he has said tonight. I will try to address as many of them as I can in the time available to me, but we will also be very open to an ongoing dialogue with him about his concerns.
My hon. Friend rightly says that automatic enrolment in workplace pensions begins this year, and it represents a once-in-a-generation opportunity to transform our savings culture. Millions of new savers will enter the pensions market, and that market will have to evolve to accommodate them with a new generation of pensions products that will come into being. There are already signs that competition in the industry is strong, is driving higher standards and, importantly, is keeping downward pressure on charges. That is welcome but, as he rightly says, it is essential that the Government ensure that all schemes, particularly those that target unengaged and financially unsophisticated savers, are fit for purpose. As he rightly set out, that is especially important when it comes to charges, costs and annuities.
On the costs and charges, individuals who perceive their charges to be excessively high or unfair will be less inclined to save. For those who do save, as my hon. Friend has highlighted, even relatively small differences in charge levels can have a dramatic effect on retirement income. So excessive charges cannot be allowed to become an obstacle to achieving the levels of pension saving that individuals, and we collectively as a nation, need in order to ensure security and dignity in retirement for future generations of pensioners. We as a nation invest about £33 billion a year in the pensions industry, but we really do need individuals to be putting aside money for their retirement as well.
We should acknowledge the positive impact of NEST. Evidence presented last month to the Select Committee on Work and Pensions recognised that NEST is helping to lead best practice in promoting high standards of governance, responsible investment and effective communications. My hon. Friend is right to say that low charges are important. They matter most for the many people newly enrolled into pension savings. Encouragingly, departmental research suggests that charges for default funds are already unlikely to be excessive, with the average annual management charge in default funds between 0.4% and 0.6%. That is a really important element in what is happening, but he is right to express concern about charging and its impact.
The truth is that pensions charges have been decreasing for several years. The introduction of stakeholder pensions, with their 1% charge cap, continued a trend away from the high initial costs of personal pensions in the 1980s and 1990s. Today, a 1% charge is perceived as more of a maximum than a benchmark for basic schemes, and the pensions market is responding rapidly to the challenges of automatic enrolment and the presence of NEST. New schemes, such as NOW: Pensions, with its £18 administration charge and 0.3% annual management charge, and B&CE’s proposed scheme with a basic 0.5% AMC, show that automatic enrolment and NEST are helping to continue downward pressure on charges and maintaining price competition.
We understand that automatic enrolment means that many more individuals who are not engaged with saving or who might be daunted by pensions information will be enrolled, so we need to ensure that providers are properly disciplined by the market and consumers can hold them to account.
The Pensions Act 2011 extended the Government’s powers to set a cap on pensions charges and there are certainly arguments to say that charge capping is the right approach, but it is easier said than done. Should we decide to introduce a cap, we must identify an appropriate level and consider different charging structures in a way that compares them and ensures that there is no room for non-compliance. Those are all issues of some complexity; it is not a straightforward exercise in which we simply say that there will be a one-size-fits-all cap. I can assure hon. Members, however, that the Government will not hesitate to deploy a charge cap if it proves necessary to ensure that individuals’ pensions saving are not at risk from excessive charging.
To help build public confidence in saving, we must also help people to understand how much they are paying for their pensions, by which I mean both the employer who is choosing a workplace scheme for his or her employees and the scheme members themselves. There is still a long way to go in opening up real transparency about how much a member pays and for what and about how their pension is managed. Transparency, as my hon. Friend rightly says, is of fundamental importance.
My hon. Friend raises the question of whether the contribution and transfer restrictions put in place to focus NEST on its target market should remain. That question is being looked into by the Select Committee’s current inquiry. There are arguments both ways, but I assure my hon. Friend that the Government will be considering the Select Committee’s evidence and recommendations very carefully when it reports next month.
In the time I have left, I shall touch on the question of annuities because, as my hon. Friend rightly says, they are at the heart of the debate about how we will make good provision through private schemes. For the majority of people, annuitisation is still the most effective way to provide an income in retirement, but as he points out annuity rates have been falling for several reasons. Increased longevity and people spending longer in retirement are significant issues, and there are wider policy areas, such as the state pension age and extending working lives, that mean that we cannot simply see annuitisation in isolation.
I want to focus on two critical points that my hon. Friend has raised: the importance of consumers understanding their options and their shopping around to compare offers when they come to make decisions about annuitisation. On those two points, he has the full support of both the Financial Secretary to the Treasury and the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), who is the Minister responsible for pensions.
That is why the DWP and the Treasury have been working with consumer groups, industry representatives and other Government bodies to bolster the current right to the open market option by developing a default option. The intention is to ensure that consumers are not pushed through the transition from saver to annuitant in such a way that they end up with unsuitable products and to make certain that the consumer does not simply sign an application form without fully exploring their options.
The Association of British Insurers has recently consulted on a new draft code of conduct that sets out new requirements on all its members. As we announced in September, we believe the code is an important step in changing the dynamics in the annuitisation process. The draft proposals are a condition of ABI membership and state that consumers must be directed to the open market option and that packs issued by providers must not include an application form. They also propose a clear three-step customer journey to help consumers with the decision-making process and is a key step in addressing the asymmetry of information. My hon. Friend the Financial Secretary will make an announcement on the work of the open market option review group in the near future, so I hope that my hon. Friend the Member for Warrington South will understand it if I do not go into more detail at this time and that he will be present in the Chamber for that statement when it comes.
These initiatives represent a wholesale improvement across the pensions landscape, but that landscape is ever fluid; we need to make sure that we take advantage of the potential opportunities presented by auto-enrolment. We should therefore consider the role Government can play in determining scale, and ask ourselves whether the high fragmentation of the UK pensions market offers good value, or whether a smaller number of larger schemes could offer lower charges and better governance, to the advantage of members.
My hon. Friend has made a series of points that I regard as a valuable contribution to the debate. We shall read his remarks carefully and think about the implications of his suggestions. I feel confident that the impact of NEST, the downward trend of charge levels across the market and the steps we and the industry are taking to increase transparency all serve to advance member engagement and improve the annuitisation process. They all point to a world where consumers can feel more informed and more secure about how much they are paying and what they receive in return.
I assure all hon. Members who have contributed to the debate that the Government will be watching closely as the pensions landscape, under automatic enrolment, continues to evolve.
Question put and agreed to.