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Quality Workplace Pensions

Volume 578: debated on Thursday 27 March 2014

With permission, Mr Deputy Speaker, I will make a statement setting out the actions that this Government are taking to ensure that the pension schemes into which workers are enrolled are of high quality and provide value for money. The steps I shall outline today are the latest in a sequence of groundbreaking changes that are revolutionising the pensions landscape.

As we move towards our goal of enrolling 10 million workers into pension saving, we need to ensure that those savings are invested in value-for-money schemes that are well-governed. So today, I can announce that this Government will introduce a package of measures to protect people against high and unfair charges; ensure schemes are well-run; and turn our pensions market into a world leader for disclosure and transparency. Through the new measures, this Government will be the first to get an iron grip on the issue of pension charges. We are going to put charges in a vice; and we will tighten the pressure year after year.

In our pre-Christmas consultation, we consulted on three options for capping pension scheme charges: an across-the-board cap of 0.75%; a comply-or-explain cap, allowing schemes to go up to 1%; or a simple 1% cap. You may be aware, Mr Deputy Speaker, that there were those who, to use a technical term, suggested that we might wimp out on these choices—that we might give in to the vested interests of the pensions industry. I hope that the announcements of my right hon. Friend the Chancellor last week show that the Government are without fear or favour when it comes to the financial services industry. I can tell the House today that of the three options, we have decided to go with the toughest of the three.

At the heart of our plan is a charge cap of 0.75% for the default funds of all qualifying schemes, with equivalent caps for schemes with combination charge structures. The cap will apply from April 2015, and it will apply to all schemes used for automatic enrolment. That means that we will deliver on the timetable in our consultation document to have a full cap in place by April 2015.

I can also confirm that we are today publishing a full impact assessment of these changes, which has received a green fit-for-purpose rating from the Regulatory Policy Committee. Over the next 10 years, the new charge cap will transfer around £200 million from the profits of the pensions industry to the pockets of savers. After the charge cap is implemented, we will make further changes, year after year, to tighten further our grip on unfair charges.

As well as meeting the 0.75% cap, from April 2016 schemes will be prohibited from taking money from people's pension schemes to pay for sales commission. Schemes will have to end the practice of increasing the charges of people who are no longer employed by the sponsoring employer of the scheme—so-called active member discounts or more accurately deferred member charges. That is in line with the recommendations both of the Work and Pensions Committee and the Office of Fair Trading. It is not right that people should pay more in charges simply because they have moved employer and consequently stop contributing to a scheme. These charges are particularly unfair in the context of an increasingly flexible labour market, where people change jobs more regularly and are therefore more likely to become deferred members.

On transparency, the Office of Fair Trading uncovered 18 different names for and configurations of charges. The charges are often hidden and complex. Today, I can confirm that in a further measure to shine some light into the dark recesses of the pensions industry, we will introduce full standardised disclosure of all costs and charges that will make scheme comparisons a reality for the first time. The transaction costs hidden in complex and opaque investment chains will be exposed, giving new clarity about where members’ money is really going.

From April 2015, trustees and those who represent members’ interests in pension schemes will have a duty to obtain information on all scheme charges. We will start work straight away with the Financial Conduct Authority to develop standardised measures of transaction costs. We will use that information to consider whether another turn of the vice is needed in 2017 to take our reforms even further, potentially by including transaction costs within the default fund charge. In addition, in 2017 we will consider whether the base charge cap of 0.75% is to be reduced further.

As well as focusing on charges, we are strengthening the way in which schemes are governed. Our governance reforms will ensure that there are people running schemes in members’ interests and that they scrutinise the costs and charges that affect their members’ pots.

We want members of so-called legacy schemes as well as those people enrolled into schemes being sold today to receive good value for money. The OFT identified that charges are currently a quarter to a third higher in schemes that were sold before 2001. Those schemes have gone unscrutinised for too long. We therefore welcome the independent audit of legacy and other high-cost schemes put in place following the OFT’s recommendation, in which my Department is involved. The audit is scheduled to be completed by the end of this year and we will take any further action necessary in the light of those findings to address the poor value that has been allowed to persist in some of the older pension schemes.

The pension system we inherited was broken. The coverage of workplace pensions was declining. The value of the state pension was declining. The only growth area in pensions was the mass means-testing introduced by the previous Government as a last-ditch attempt to prop up a failing system. Through our bold and innovative changes, we will reverse that spiral of decline. We are following up our radical reforms to the state pension, the successful implementation of automatic enrolment and last week’s bold Budget announcements with another measure that will help to put pension provision back on its feet.

This is a full-frontal assault on poor value for money from a Government on the side of people who save. These changes are a major step in our wider programme of pensions reform, safeguarding the hard-earned savings of those who work hard and do the right thing. This truly is another landmark day for pensions policy and I commend our plans to the House.

I thank the Minister for notice of the statement.

Rare is the day when the Government appear to adopt an Opposition policy lock, stock and barrel. Rarer still is the day when the Government appear to adopt two of the Opposition’s policies lock, stock and barrel. Today, the two broken markets identified by my right hon. Friend the Member for Doncaster North (Edward Miliband)—energy and pensions—have been accepted by the Government, who have made concessions in that regard. They are two big wins for the Opposition.

We welcome those concessions. We welcome the Prime Minister’s announcement on Wednesday that an energy freeze from SSE is a good thing. Perhaps we will finally see the Government reversing their tax cut for millionaires, although that might damage the Minister’s new-found interest in the market in Lamborghinis. The Government have belatedly accepted that the market in pensions, as in energy, is not working for consumers. We welcome this historic change of Conservative and Liberal heart. It is a retreat from free-market dogma.

This is the second time—the Minister alluded to this—that I have welcomed a Government proposal to cap pension charges. The Minister refers in his statement to delivering on his timetable, but what he does not say is that it is a new timetable. In October, the Minister rushed into a four-week consultation with a view to capping pension charges from April 2014, five days from now, but his impact assessment was condemned as not fit for purpose by the Regulatory Policy Committee. Today, the Minister has confirmed that no charge cap will be in place until 2015, a year from now. That matters because in the Government’s own figures, someone who has worked hard to save £100,000 in their pension pot for retirement and is charged 1.5% for the next 12 months will pay a hefty £1,500 in charges, so why the delay, given the difference that will be made by a cap set at the level the Labour party suggested and given what the Minister has recommended today? Why the delay in not introducing it today? That £1,500 might not be enough to purchase a Lamborghini, but it could well amount to a deposit on the two-door Corsa that the whole world now knows the Minister drives.

This is so important because pensions market failure has significant consequences for millions of savers. The Minister knows that, by 2017, 11 million people will be auto-enrolled—3 million now and 4.5 million by the election. That is why it is so urgent. The Minister promised a full-frontal assault on pension charges in October. Whoever has heard of a full-frontal assault that comes with a 12-month notice period?

The Minister and I both know that governance is the key to better pensions, so when will the independent governance committees that the Labour party has called for be implemented? Will he give us clarity on that? In his review for the Business Secretary, another Liberal Democrat, Professor Kay concluded that excessive churning by fund managers was reducing the value of pension assets. Will the Minister pledge to the House today that all fund management costs, as set down in Labour’s amendment to the Pensions Bill, will be disclosed as part of the policy? Furthermore, to whom will the fund manager costs be disclosed? The statement mentions trustees and others, but who are these others?

Let me finish on a note of consensus: an Opposition are always delighted when a Government adopt their policy. To have two significant Opposition policies adopted in one day is truly a success for my right hon. Friend the Leader of the Opposition, and for the Labour party. We welcome the Government’s endorsement of our policy. It matters so much because of the difference it makes to pension savings, but we will continue to scrutinise the detail of the proposals as it emerges, because in pensions the devil is always in the detail, and this Government certainly have form on that point. We welcome this endorsement of Labour policy and we will look further at the detail.

I understand why the hon. Gentleman wants to talk about energy and income tax rather than pensions: he has nothing to say on the pensions announcement.

The hon. Gentleman said that we have adopted Labour’s policy. I thought he might say that, so I thought I would have a little look at what Labour’s policy was. The first evidence we have is their record in office, when they had 13 years to cap charges and did precisely nothing. But we do have more recent evidence—he mentioned the leader of the Labour party and his views on the subject, so I have a done a bit of research. Clearly, The Guardian was briefed by Labour, and the leader of the Labour party called it an “all-out attack” on rip-off pension charges, so that is good. Patrick Wintour said in September 2012:

“Ed Miliband will promise to end rip-offs in the pensions industry”—

that is good, is it not?

—by putting a 1% cap on pension charges”.

I wonder whether he has moved a bit because he saw what we were doing. I get a slight sense that might be the case.

The hon. Gentleman asked about the timetable. Our consultation document made it clear that every scheme would have a cap in place by April 2015. We are today delivering on that timetable. [Interruption.] The hon. Member for Leeds West (Rachel Reeves) says, “What about April 2014?” If they are seriously suggesting that we should apply a charge cap with a few days’ notice, it shows how little they understand about how employers work and how the pensions industry works. Unless they are calling for us to announce a cap at a few days’ notice, which would be pretty irresponsible, we are delivering on the timetable that we set out.

The hon. Gentleman asked me some specific questions. The independent governance committees will have to be in place by April 2015, but the Association of British Insurers and the Office of Fair Trading have agreed that they will put them in place before that date. The legal requirement is April 2015, but we expect to see them in place before that.

The hon. Gentleman asked who the costs have to be revealed to. The trustees or the independent governance committees, who will act on behalf of the members and will have the technical expertise to understand all the detail, get the information, but they will form a judgment about the format in which they pass it on to scheme members. Scheme members need to understand about charges, but probably not in the full gory detail that trustees and governance committees would. The point is that for the first time there will be people in every pension scheme acting on behalf of the scheme member, and that is a radical step forward.

I welcome the statement, which is good news for the savers of Suffolk Coastal. Will my hon. Friend say a little more about how he is tackling the unfair active member discounts in workplace pension schemes?

I certain will, and it was very much the savers of Suffolk Coastal we had in mind. Active member discounts have been going on far too long. They are one of the hidden charges, and people are ignorant enough already of the charges in their pension schemes, through no fault of their own, even when they are active members, but when they move on to a new firm and a new scheme they probably have no clue what the charges are in the scheme they have left. Therefore, from April 2015 even schemes that retain active member discounts will be unable to go above 0.75%, which will stop many of them, and by April 2016 they will have to have been worked out of the system altogether.

The shadow Minister failed to persuade the Minister that the Opposition might have been responsible for some of these changes, but I wonder whether he will acknowledge that many of the measures he has announced today were recommended by the Work and Pensions Committee. In particular, we hope that we have played some part in ensuring that costs and charges are capped and transparent. He said that transaction costs will not be part of the cap but that there is some action on them. How likely is it that transaction charges will be part of the cap at some time in the future?

I am grateful to the hon. Lady and hope that I acknowledged in my statement the contribution her Committee has made to some of the measures. On transaction costs, from this time next year trustees and governance committees will have a legal duty to obtain information about all costs and charges; we will be working with the Financial Conduct Authority, staring immediately, to try to define them all. The shadow Minister came up with a list the other day, but there will be things missing from it. As soon as a phrase appears in an Act of Parliament, the industry will change the name of it. We must therefore ensure that we are as comprehensive as possible. We are certainly open to the possibility that that should go in a charge cap. We would not want to do that in a way that discourages transactions that are in the interests of members, but clearly we want to avoid gratuitous transactions intended only to generate charge income, rather than to further the interests of members. It is certainly something we will return to, particularly in the light of the transparent information that will become available for the first time because of these measures.

I welcome the charge cap, which shows how far we have come from the days of stakeholder pensions and the level of charging that was allowed. Will the Minister update the House on some of the other ideas for reform that are out there, such as defined ambition schemes and large aggregator schemes, which might also give savers a better deal?

I am grateful to my hon. Friend. Stakeholder pensions were the previous Government’s one attempt to limit charges. He will recall that they initially introduced a 1% cap—again, we have seen the colour of their money—before going back on that and allowing 1.5% for 10 years. I have always wanted to say that we will take no lectures from the Labour party, and he has now given me the chance. On defined ambition schemes, we will be taking that agenda forward, and I hope to have more to say about that when we publish our response to the consultation document. With regard to large-scale pension schemes, the command paper we are publishing today included a section on scale that I think he will find interesting. We think that the pot-follow-member model is the best way of ensuring that people build significant pension pots with the person they are currently saving with.

Why is the Minister waiting a year to introduce the full cap and a further year to ban people taking money from pension schemes to pay for sales commission? Why is he not acting much sooner?

There is a perfectly straightforward answer to the hon. Lady’s question. When we asked firms to enrol their staff automatically, we asked them to plan 12 months ahead, because it takes a long time to set up a pension scheme, to choose a pension scheme and to communicate with scheme members. A firm sitting down today to plan for April 2015 knows the rules of the game today so that it can choose its scheme in an informed way. She asked why we have allowed a further year for commission and active member discounts. Clearly, if either of those takes a scheme above 0.75%, which many do, they will have to comply immediately in April 2015, but many of those are based on complicated contractual arrangements in pension schemes. We have to strike a balance between unpicking all those and focusing the pensions industry on delivering automatic enrolment, which is a key priority for the next 12 months.

Whether the Select Committee or the shadow Pensions Minister wish to claim credit is of secondary importance to my constituents, who today can feel a little more confident that they are not being ripped off. I thank the Minister for actually doing something about this, rather than just claiming credit. One of the most important things is that people can easily see what charges will be imposed in future. How will his proposals help to make that clearer for people?

I am grateful to my hon. Friend for his kind comments. The challenge with this market is that the people buying the pensions are essentially the employers of the firm, not the staff. We need to ensure that when firms are shopping around for pensions for their workers they get clear and straightforward information about what the charges will be and that they will be capped. Scheme members clearly need to be able to access information about charges in a straightforward and transparent way. It is a slightly odd market, because people are buying on their behalf and, because of automatic enrolment, scheme members cannot negotiate a different price; they just have to take the price they are given. Our focus is therefore very much on ensuring that the people who make the choices on pensions—in this context, the employers—have clear advice and the cap to ensure that they and their members cannot be ripped off.

The Minister has indicated that further work will be done to try to tackle the whole ecosystem of charges and combinations of charges. What does he believe will actually trigger a decision in 2017 to capture some of those charges in the cap?

I am grateful to the hon. Gentleman. Our central interest in all this is the well-being and welfare of scheme members. We would not put transaction costs, for example, into a cap if we thought that might result in certain transactions that would benefit scheme members not taking place. On the other hand, if we thought that there was overtrading or that people’s money was being invested in a way that generated income that did not benefit them, we would need to take account of those issues. One of the challenges we face in making policy in this area is that so little is known about what is going on. Step one is therefore to get transparency so that we know the scale of what is going on and what sorts of charges there are out there, and then we can make an informed decision.

I warmly welcome the statement. Strong, quality workplace pensions are critical to dignity and security in old age. Who does the Minister think will be the big beneficiary of these changes?

I am grateful to my hon. Friend. As I have said, we estimate that around £200 million over the next 10 years will go from the pensions industry to savers, which we think will cover around 2 million pension savers, many of whom will work for smaller firms, because we know that the biggest firms have been able to negotiate good deals with providers. That is good news for people who work for Britain’s small firms, in particular, who might not otherwise have got good value for money in their pensions.

I am grateful to the Minister for coming to the House to make a statement, unlike some of his colleagues who have slipped out an important announcement in a written ministerial statement today rather than coming to the House. Will he give us a little more detail on the changes he proposes to make to governance and say when we can expect to see them introduced, because they will be very important in allowing people to be confident that some other form of charging is not emerging to replace it?

I am grateful to the hon. Lady. The principal change, although not the only one, is the introduction of the requirement for independent governance committees. With trust-based governance there are member-nominated trustees and a fiduciary duty on trustees, but with contract-based pension schemes provided by insurance companies there is a question, as has often been argued, of who is acting on the members’ behalf. The IGCs will have to be in place by April 2015 and they will have various duties. The way in which they are set up is described more fully in the document—I know she will not yet have had a chance to read it. I think that she will welcome the changes, which mean that whatever sort of pension scheme someone is in, there is somebody there looking out for them.

Residents of Kettering will welcome these measures to improve the quality of workplace pensions. The reason for automatic enrolment in the first place is that a lot of people are either frightened by pensions or do not understand them, or they might be young people who think that pensions are irrelevant. Under the quality scheme that the Minister has announced, may we have a stamp of quality on the documentation to reassure workplace employees? May we also have a common-sense, plain-English helpline that people can phone without any difficulty so that they can have the complexities of their pension arrangements explained? Can we also ensure maximum transparency of portability of pensions between workplaces?

My hon. Friend raises a number of important points. On kitemarks and the like, we are placing a legal duty on firms to use for auto-enrolment only schemes of a requisite quality, so it will not be a matter of individual employees wondering whether their scheme is good enough—they will know it is good enough because their employer will not be allowed to enrol them into a scheme that is not so. All schemes will be of the requisite standard. He is right that people need places to go for advice in amongst the complexity. Our Department sponsors a body called the Pensions Advisory Service. I encourage all Members of the House to refer their constituents to TPAS, which is a free, expert and very good service. I must confess that I occasionally ring it myself.

I welcome this move. The Minister said, in effect, “We are going to put charges in a vice and we will tighten the pressure.” That sounds as though it might bring tears to the eyes of some of the pension providers, which may be no bad thing. He also talked about shining “sunlight into the dark recesses”. Those are good clichés and this is a good, progressive move forward. However, what is he going to do to ensure that instead of the eyes of people who are enrolling, and will enrol in future, glazing over whenever they think about pensions, they know there is transparency and know what is the likely outcome whenever they come to retire?

I assure the hon. Gentleman that so far the response to automatic enrolment has been excellent. Despite predictions to the contrary, nine out of 10 of those who have been enrolled have stayed enrolled, which is a tremendous vote of confidence. In general, people have more trust in their employer than in financial services providers or even—dare I say it?—politicians, so we are using the employer route such that employers will ensure that the schemes they are using for their workers are of requisite quality. I also assure him that the language I used in the statement, though designed to be colourful, is also backed up by some hard reality.

Many will welcome the overdue cap and the possibility of lowering it further. On the pre-2001 schemes, may I press the Minister to act as soon as possible, because far too many people have lost too much money already to countenance much further delay?

The hon. Gentleman is right. One of the problems, as with transparency, is that we do not know enough about the nature of these schemes and what the charges are. In some cases, they are high-charging but come with guarantees, so people are getting something for their money. An audit is going on at the moment. The pensions industry is having to produce a lot of information about all these schemes. That is often very difficult because pension companies have been bought, sold and merged; just getting the data is the first challenge. As soon as we know exactly what is going on and what further measures we can take to improve the welfare of consumers, I assure him we will do so.

We have heard today that the independent audit on legacy and older pension schemes is still in hand. When will the further reforms that the Minister is talking about be brought forward, because there are some very high costs in these schemes?

I agree. I have already met the chair of the new audit committee, and one of my senior officials serves on it. This work is now under way. Providers are being asked for data. That represents a significant cost to them, but we need those data. The deadline for that work is the end of this year. I have talked about some measures being taken years down the track, but this work will be completed this year. We will not just sit and wait until a letter arrives on my desk on Christmas day, or whatever. We are keeping close to the review, and as we learn from it and decide what action we can take, we will do so as soon as possible.

The Minister spoke of the “bold” pension proposals in last week’s Budget. Now that the Chancellor has allowed people to cash in their pension pot instead of purchasing an annuity, can the Minister confirm that, under his Department’s rules on care costs, local authorities will now be able to insist that they do cash them in, thereby pushing them over the threshold where they have to contribute to their own care costs?

The hon. Gentleman raises an important point, which is that these changes have a number of knock-on effects within our Department and the Department of Health. Of course, we will make sure that the spirit of the Chancellor’s announcement is carefully reflected in the way Departments carry on. These flexibilities do not come in for another year, so we still have time to work through detail of the sort that he properly raises.

Thank you, Mr Deputy Speaker.

I find the Minister’s statement fascinating given that he said only recently that putting a cap on pensions was like trying to put

“a price cap on a tin of baked beans”.

I wonder whether he read this in yesterday’s Financial Times:

“Labour led the way with criticism of the annuities market and high opaque fees on pensions, long before the coalition took action.”

Would he care to comment on that very good article?

I would. It is no coincidence that that newspaper is printed on pink paper. It has run stories about our plans for a price cap which, now that we have made our announcement, will be shown to have been wholly inaccurate. Those who have subscriptions to that newspaper might wonder whether they can always believe what they read in it.